PAUL MCBETH: Valuing New Zealand’s stock exchange

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years. He’s owned shares of Bremworth and NZX since January 2024.

There was much wailing and gnashing of teeth as carpetmaker Bremworth and fast-food operator Restaurant Brands New Zealand unveiled their respective takeovers this week.

A pity it was mostly crocodile tears.

Because merger and acquisition activity is actually a sign of a healthy market.

If deep-pocketed or strategic buyers aren’t willing to kick the tyres of listed firms that might be below their best, there are much deeper issues at play.

And both Restaurant Brands and Bremworth have looked cheap for quite some time.

The fast-food operator bore the brunt of New Zealand’s inflationary period a bit more than most, with its customer base not the sort that typically respond well to price hikes when the cost of ingredients goes up and its workforce are already on low wages, leaving the owner to wear skinnier margins through our never-ending recession.

I’m waiting for you

But there was a reason Mexico’s Finaccess took a controlling stake in the first place, and it’s only seven years or so since it lobbed in a $9.45 per share offer, valuing the company at $1.18 billion. That was juicy enough to receive more than 90% acceptance, which the Mexicans scaled back.

Their $5.05 per share offer to mop up the rest at a valuation of $630 million might seem like throwing good money after bad, but when you’re a patient owner with a firm conviction that there’s more to squeeze from something, you’re obviously going to back yourself.

Likewise, Bremworth has been in the doldrums for years, with the devastation wrought by Cyclone Gabrielle only compounding an increasingly tight market for the carpetmaker, which was undercut by synthetics and struggled to regain the lustre of its prime.

In saying that, the lightly traded stock’s soggy share price has typically been lower than the value of its tangible assets and discounted a major inflow of insurance proceeds, which form a large portion of the Rob Hewett-led board’s plans to return capital to shareholders.

Because while the 75 cents per share offer from rival Godfrey Hirst’s parent, Mohawk Industries, was a 27% premium to the 59 cents share price Bremworth was trading at before the deal was announced, there’s another 30-to-40 cents per share in the mix from any excess cash.

It seems Hewett’s rebels had a very clear reason for preserving that sweet insurance cash when they swept the board at the start of the year.

Pour your misery down

Yes, it’s a shame to see both depart the stock exchange, but neither has had much love from the local investment community in recent years.

Restaurant Brands struggled to stay in the NZX50 after Finaccess hoovered up most of it, and Bremworth has been in the also-ran brigade for even longer.

But the issue isn’t really that the local stock exchange is losing a couple of companies, rather it’s the fact that there hasn’t been much interest from new firms looking to join.

The fact that the very interesting e-waste recycling firm Mint Innovation is said to be eyeing up a listing on the ASX to fuel a push into Texas should be causing a few locals to give its shareholders IceHouse Ventures and Movac a call to ask if there’s hope for a secondary listing in Auckland.

Of course, the reasons for the slow state of affairs at the NZX are well-trod by now, with private money willing and able to inject capital into a broader array of firms and the regulatory impost and finicky liability regime a turn-off for the less entrepreneurial and ambitious.

That’s not to mention the light trading volumes outside the 20 biggest companies leaving investors to question whether prices are as transparent, fair and efficient as they should be.

All you had you wasted

Still, it does leave a bitter taste in the mouth when you consider how little we as a nation value our local stock exchange.

Our old brokerage networks have shown a completely rational preference to focus on wealth management where there’s big money to be made, as evidenced by the fact that the big three have all attracted overseas private equity players keen to come along for the ride.

Rocket Lab’s stunning success on the Nasdaq – where it’s regularly trading north of US$50 a share and is currently valued at US$27.18 billion – and Xero’s turbocharging on the ASX – it’s valued at A$26.62 billion – show how entrepreneurs who dream big can reap the rewards and take the public along with them.

And the opening up of international markets from investment platforms such as Sharesies, Hatch and Kernel removed the tyranny that distance once made.

That might beg the question as to why we need a domestic stock exchange, to which James Lee, filling in for his father Chris in the latest Taking Stock newsletter for Chris Lee & Partners clients, points out that the capital deployed in initial public offerings is a key cog to growing the jobs a nation needs to deliver the services and lifestyle people want to enjoy.

Bow down to me

Because a stock exchange is simply another way for people to get access to money to do interesting things.

The nation’s fixation on bank credit as being the main funding line should really be put to bed by the fact that Craigs Investment Partners, Forsyth Barr and FirstCape’s JBWere NZ alone oversee about $100 billion of client money that’s being put to work in all sorts of ways.

And while the government’s initiatives to make things easier for firms wanting to raise money from a regulated offering will go some way to removing roadblocks, they’re hardly the giddy-up of the partial privatisations during John Key’s administration.

If New Zealand really values having its own stock exchange, it’ll take a bit more than a few boo-hoos and oh-well-never-minds to get things moving.

Image from Curious News.