As companies desert, NZX questions future
It may be inevitable that the NZ Stock Exchange merges with the ASX, writes Matt O’Sullivan.
AS IF losses on the rugby field weren’t bad enough, the Kiwis are now facing more pressing problems at home the likely loss of more blue-chip companies from its sharemarket.
After Carter Holt Harvey departed the New Zealand market last year following billionaire Graeme Hart’s privatisation of the forest products giant, the prospect of a partial takeover of Auckland International Airport and full buyout of Sky City Entertainment leaves the Kiwis facing a familiar scenario: a lack of local listed companies in which to invest.
The Kiwis haven’t always been quick to put their hands up for closer ties with their neighbours on this side of the Tasman the on-off talks about a common currency is just one glaring example.
But the likely changes to the ownership of the country’s fourth and fifth-largest listed companies gives credence to claims that a single trans-Tasman sharemarket is in NZ’s best interests. That’s because advocates of a merged bourse believe the disappearance of large companies from the NZ Stock Exchange (NZX) will make the Shakey Isles a more marginal destination for foreign capital.
“If these deals go through, the benchmark is going to become very skewed to one stock and NZ super funds are likely to steer away from NZ- only share mandates,” says Paul Fiani, a leading Australian fund manager who left UBS in May, soon after resisting an $11 billion private equity bid for Qantas. “The benchmark would begin to look quite ludicrous. If you are a fund manager that solely invested in NZ shares it would be a big issue.”
Fiani is no stranger to investing in NZ, given his tenure at UBS, the Swiss investment bank which has held large stakes in Auckland Airport, Sky City and Telecom.
NZ companies have had difficulties accessing capital before because foreign investors have overlooked the country due to Telecom’s domination of the benchmark index.
“Foreign investors will pretty much just stop looking; that will be a real challenge for NZ companies which are trying to access capital,” says Fiani, who recently set up the boutique fund manager Integrity Investment Management. “NZ needs access to capital and if their market becomes further marginalised that becomes hard for them.”
The NZ market’s capitalisation has grown at just 1 to 2 per cent a year over the past decade, partly because of companies exiting the bourse.
Apart from Sky City and Auckland Airport, the bourse could lose NZ’s biggest general merchandise and apparel retailer, The Warehouse, should Woolworths’ takeover bid succeed. Then there’s a smaller Telecom NZ after it sold its directories business to a private equity consortium this year.
The incumbent telephone company makes up more than 15 per cent of the benchmark NZSE 50 index (at one point it had a weighting of more than 30 per cent), compared with its counterpart in Australia, Telstra, which comprises just 2 per cent of the Australian market’s benchmark index.
Furthermore, New Zealand’s top-three listed companies make up nearly two fifths of the NZSE 50 while, this side of the Tasman, BHP Billiton, the Commonwealth Bank and National Australia Bank comprise just over a fifth of the ASX’s benchmark.
“I have been investing in New Zealand for over 10 years and in that time I have seen many foreign investors give up on the NZ market because of the lack of market depth and over-reliance on Telecom,” Fiani says. “As an economy you need access to capital. Many New Zealand firms have dual listings now, which helps them access foreign capital.”
He believes that if the Europeans can successfully merge their currencies and stock exchanges it should be “pretty easy for Australia and New Zealand to have a common capital market”.
Since 2005, exchanges worldwide have announced at least $US64 billion ($71 billion) of acquisitions and joint ventures, data compiled by Bloomberg shows. The largest was NYSE’s $US14 billion purchase in April of Paris-based Euronext, which was formed in 2000 after a merger of exchanges in Belgium, France and the Netherlands.
Kiwi fund managers concede the exodus of companies from the bourse is worrying, but are not so quick to advocate a merged trans-Tasman exchange. “It’s been a problem for a long time. If you contrast the performance of the NZX and the ASX it’s a very sorry story for the NZX that looks like persisting,” says Simon Botherway, a fund manager at Brook Asset Management in Auckland.
“At some point there are going to be more and more stocks that are going to be subject to M&A. We would like to see more listing in New Zealand but we are very much Australasian focused, so we don’t really mind whether the stock is listed in New Zealand or Australia.”
The NZX is in the throes of expanding into Australia via the launch of an electronic trading platform, in which it holds a 50 per cent stake. But delays to gaining an Australian market licence from the federal Treasurer in order to become a market for ASX listed securities means it is unlikely to begin trading until at least February.
Back home, the NZX faces the prospect of dairy giant Fonterra making a partial listing. However, fund managers are not convinced this is an inevitability given it will need the approval of three-quarters of its farmer shareholders, who are notoriously suspicious about the need to list.
An analyst for New Zealand investment bank Forsyth Barr, Guy Hallwright, says the local exchange is working hard to graduate start-up companies to the bourse. But he concedes a merger with the ASX is a possibility in the longer term because of the global trend towards bourses amalgamating.
“The New Zealand market has not been growing in the same way that the Australian market has it’s the kind of market from which a very successful company will graduate at some stage.”
But, just like on the rugby field, emotion enters the equation in any debate about a merger.
Tyndall Investment Management’s domestic equities manager, Rickey Ward, doubts a merger of the New Zealand and Australian bourses will eventuate because it becomes wrapped in politics. As he puts it: “Everyone wants to retain their identity. That is the problem.”
