New Zealand lawyers have finally found something to agree on: things can only get better from here. They explain to ALB’s Renu Prasad why 2011 will be a turning point for the nation’s fortunes.
Cautious optimism may be one of the great clichés of the post GFC era, but New Zealanders have managed to elevate this delicate balance into an art form. Last year they were more cautious than optimistic; this year they are more optimistic than cautious. No one, however, is feeling especially exuberant about the prognosis for 2011 and it is easy to see why: this is a nation that has endured the trauma of two devastating earthquakes and the continuing disappointment of a slow economic recovery.
In addition to the human impact, the earthquakes have had an inevitable economic cost. Confidence took a hit; the IMF has scaled back its growth projections for the NZ economy in 2011 from 3% to 1%. The 2011 fiscal deficit is forecast to reach 9% of GDP and the post-earthquake rebuild on the South Island is estimated to increase public expenditure by NZ$6.5bn this year. The IMF estimated the overall earthquake damage bill at around NZ$15bn or 7.5% of GDP.
Paradoxically, rebuilding activity has been cited as one of the factors behind a general expectation that the NZ economy will recover in 2012. The IMF projects that the economy will reach 4% growth next year as the rebuild commences and confidence returns to pre-earthquake levels. Law firms therefore have their sights set on 2012, with no particularly high expectations for the current year – however, they are generally in agreement that positive signs are already emerging.
“Things are definitely better than they were in September,” says Chapman Tripp managing partner Andrew Poole. “There’s definitely been an uptick in M&A.” Russell McVeagh CEO Gary McDiarmid is of the same view: “Yes, it is more positive than a year ago - there are more people sniffing around deals and there are less distressed people selling,” he says. Bell Gully chairman Roger Partridge agrees that there has been a lift in business activity, but warns that nothing can be taken for granted in the current climate. Will Tipping, partner at corporate and finance specialist Mayne Wetherell, says that workflow is “not humming, but there is a lot coming up.”
But Simpson Grierson chairman Kevin Jaffe says that he hasn’t seen any significant improvement. “The environment is not a lot different from last year,” he says. “There is probably a bit more happening, but not enough to say that there’s been a significant change.”
Around the firms
Comparative data on law firm revenues is notoriously difficult to obtain in New Zealand, but managing partners generally indicated that 2010 revenues were “flat”. Two exceptions were Buddle Findlay and Minter Ellison Rudd Watts, which both experienced growth in the range of 10%, a record which both are keen to maintain. “The trick will be to hang onto that growth,” observes Buddle Findlay chairman Peter Chemis.
Traditionally the combined revenues of Bell Gully, Chapman Tripp and Russell McVeagh have been significantly higher than the combined revenues of the next three highest earning firms: Buddle Findlay, Simpson Grierson and Minter Ellison Rudd Watts. Some lawyers believe that this gap is narrowing rapidly, an inference which is supported by the growth results at the “chasing” firms. However, not everyone is in agreement. “We don’t see a closing of the gap between the top three and the next three,” says Roger Partridge. “Also, we think the market draws more of a distinction between the top three and the next tier on quality and depth of expertise than on revenue.”
Minter Ellison Rudd Watts has been active in the hiring market of late and there has been some suggestion that the firm has been dropping its rates in order to secure work for its new recruits. Managing partner Mark Weenink is amused by these claims and says that he has no idea where this “low ball” perception is originating from. He says that the firm has not dropped its rates, other than in situations where a distressed client is involved. “But our charge out rates have always been lower than the top three - they always have been,” he observed. Weenink says that the firm has not won a great deal of new work through pitches and has had more success in relationship-based referrals.
Another firm which has been the subject of some ironic comment over rates is Bell Gully, which won a prized role advising the government on its national broadband initiative. Roger Partridge says that the firm’s pricing for this job was in line with the standard discounting offered to public service clients. “I don’t expect we are alone in [offering a discount],” he added. “I believe it was the quality of our team that won us the work.”
The integration of DLA Phillips Fox in Australia with global firm DLA Piper has by-passed New Zealand. The NZ office of DLA Phillips Fox de-integrated from its Australian counterparts last year and is now positioning itself as “an independent New Zealand law firm closely allied to DLA Piper.” New Zealand chairman Martin Wiseman said that the firm’s operations in Auckland and Wellington would remain unchanged. “For now there is no change to our name or visual identity,” he added.
The firm has since announced the appointment of six new partners, bringing it to a total of 26 partners, an increase of 26% over the previous tally. The new partners are all internal promotions. The firm preferred not to disclose whether the partners were equity or salaried partners.
There have also been some senior movements in the past year. Former Chapman Tripp CEO Alastair Carruthers has left the firm to establish a consultancy. His responsibilities will be split between managing partners Andrew Poole and Mark Reese, with Poole taking responsibility for the firm’s stewardship nationally. Meanwhile, construction & infrastructure partner Paul Buetow is the new managing partner at Kensington Swan, while former CEO Chris Heilbronn has become a director at a management consulting firm. Interestingly, the common pattern here is that both Chapman Tripp and Kensington Swan have opted to return to a partner-led management team rather than seeking a new CEO.
Cashed up election scrum
One of the reasons why Gary McDiarmid is feeling more optimistic is a recent pattern of deleveraging across the economy. “Everyone is deleveraging,” says McDiarmid. “Anyone who has got spare cash is using it to reduce their debt - to the extent there’s a definite tipping point here. There are very strong indications that financial institutions are increasingly flush with money and when there’s money around, people start buying and selling things and that creates momentum for an economy. It’s just on the edge of that cycle now - we’re not going to take off with a big rush but it’s certainly picking up.”
New Zealanders will have two landmark events towards the end of the year – a national election and also the Rugby World Cup. The conventional interpretation of the World Cup is that it will deliver a welcome boost to the economy, but Kevin Jaffe has his doubts. His concern is that the two events will have the cumulative effect of a national hiatus from business activity.
“An election usually stops people from doing things and people are going to be pretty focussed on the World Cup for six weeks,” he says. “So you’ll have the World Cup, then the election straight after and then Christmas after that - so business wise, the last quarter could be challenge.”
Transactions
M&A activity still seems to be patchy, but there is a more positive feel to the market. “There is less opportunism and more constructive planning for the future,” says Andrew Poole. Buddle Findlay’s Peter Chemis says that his firm has more deals in the pipeline than it had 12 months ago – however, he is not waxing lyrical just yet. “It is one thing to have deals in the pipeline, another thing to be able to get it up and running and across the line,” he says. “It’s stopping and restarting again – more activity overall, but not sure about the end result yet.” Kevin Jaffe is another to comment on the cautious mood. “Even if there is interest, there is a lot of caution and due diligence - so we’re not seeing the quick, decisive completion of transactions,” he says. “That is the nature of the beast at the moment.”
Mayne Wetherell partner Dave Wetherell says that he has seen definite signs of life. “Private equity assets are reaching that stage where it’s time to do something with them – you’d expect some churn of assets,” he says. Will Tipping agrees that more private equity activity is likely. “The [private equity firms] were a bit gun shy after the GFC, but they’re slowly coming back,” he says. “They’re back; the banks are back open for business – but everyone is slightly more realistic than they were in 2007.” New Zealand was particularly well represented in private equity activity prior to the GFC and there is a view that many investors who were burnt in the GFC aftermath are only now beginning to re-enter the market.
While the Australian market has been preoccupied with new international entrants from the Magic Cirlce, New Zealand may already have a giant slumbering in its own ranks. Minters has been active on some major deals of late, and it is possible that increased investment from Asia will play to the strengths of this firm and its regional connections through the Minter Ellison group. Mark Weenink says that his lawyers are spending increasing amounts of time at the Minters offices in Beijing and Shanghai. Minters is, of course, one of the few New Zealand firms to enjoy access to such a network and Weenink says that it has become increasingly important. “If you have an office in China, you have a tacit seal of approval from Chinese investors,” he says. “You’re seen as someone who has had some sort of tick of approval from the Chinese government, which gives you a foot in the door and greater brand awareness.” Weenink says this fact is “directly relevant” to the number of deals his firm has advised on this year. However, the Rudd Watts affiliation with Minters is also unlikely to endear the firm to other Australian top tier firms looking to refer work to New Zealand – a vital source of work for NZ firms.
Restructuring and privatisation
The New Zealand government has recently implemented a plan to improve competition within the electricity sector. The plan has involved virtual asset swaps between the three state-owned electricity generator-retailers: Genesis Energy, Meridian Energy, and Mighty River Power. The ultimate purpose of the redistribution of assets was to enhance competition by evening out the geographical spread of each entity: previously, Genesis Energy and Mighty River Power had no generation capacity in the South Island and Meridian Energy had little generation in the North Island.
The asset swap has been facilitated by several law firms including Russell McVeagh (Meridian), Harmos Horton Lusk and Minter Ellison Rudd Watts (both advising Genesis) and Chapman Tripp (Mighty River Power). A small Wellington-based firm, Franks & Ogilvie, advised the NZ government.
That is only one part of the overall restructure programme, which also involves the physical exchange of assets. “It’s a complex process,” says Gary McDiarmid, citing the number of generator and reticulation companies and other stakeholders involved in the negotiations. “It is big work and it does create work for law firms.”
But the biggest job of them all may be yet to come. Depending on the outcome of the next NZ national election in November, this restructuring of the state-owned entities may be a precursor to their privatisation or a partial sell-down with the government retaining majority control. Roger Partridge says that the latter option is more likely and for this reason, mixed ownership rather than privatisation is the theme du jour. “The government has indicated it will campaign on partial privatisation,” he says. “We are watching with interest - this offers a good prospect of interesting and challenging work both on the Crown side and the private sector side.”
PPPs and infrastructure
The PPP model has been gathering traction in New Zealand over the past year. The government’s National Infrastructure Unit has, under the advice of lawyers from Bell Gully, developed a model form of project agreement for use in PPP projects. Bell Gully also advised on the first PPP under the agreement, a prison at Wiri in South Auckland.
“We drew together international best practice and worked with Australian and English law firms to develop a framework which was the best of what was done around the world and suitable for PPPs here,” says Roger Partridge. “If the [Wiri project] is successful there is an expectation it will be a model that the Crown will continue to follow.”
Another major government project has been the implementation of what is known as the Ultra-Fast Broadband Initiative, which involves the roll-out of ultra-fast broadband to 75% of New Zealanders over ten years. The negotiations and regulatory issues and of course the bidding process for involvement in the initiative is generating substantial legal work. Bell Gully is advising Crown Fibre Holdings, the Crown entity established to manage the government's NZ$1.5bn investment in the scheme, while many other firms are advising the various bidders – Russell McVeagh, for example, is advising long standing client Telecom New Zealand. While Bell Gully’s role as Crown advisor ensures the firm’s continuing involvement in this project, the fate of other firms is tied with the fortunes of their respective clients in the bidding process. At the time of writing, the first of the regional partnerships had been announced but the major participants were yet to be advised.
The broadband scheme is part of a broader suite of infrastructure initiatives announced last year, which included NZ$7bn on roads and NZ$3.3bn on the electricity grid. However, NZ Prime Minister John Key has foreshadowed cuts to spending in order to rein in a budget deficit swollen by the costs of the Christchurch earthquake. It will be interesting to see what form these will take as there are clear implications for legal advisors on these matters. For example, a reduction in road spending will have a flow on effect for Kensington Swan, Chapman Tripp and Buddle Findlay, the panel appointees to the New Zealand Transport Agency. However, Buddle Findlay’s Peter Chemis says that he has not seen any indication that the government is applying the brakes on road infrastructure. “The big government expenditure on roading hasn’t slowed down – they’re committed,” he says. “ If you work for the NZTA there’s a long pipeline of really good work in that regard. It’s not as though the government can pull the plug – these are huge projects that, when you commit to them, take ten years to complete – once they’re in play, they’re in play.”
Andrew Poole agrees that there is no sign yet of a major reversal of the government’s plans and points out that these projects are vital for national productivity and development. “I think the government understands the importance of these projects and that message has also been very clearly conveyed by the business community,” he says. This raises questions about where the government will find the funds to pay for both the Christchurch rebuild and other infrastructure projects slated for the future. Poole suggests that Asia will hold the key. “We are capital constrained and China is awash with capital looking for a home,” he observed.
Auckland Supercity
November 2010 saw the implementation of a plan to merge eight existing local authorities in the Auckland region into the "supercity" Auckland Council. The new structure also establishes seven CCOs (council controlled organisations) which manage particular functions such as transport or regional facilities on behalf of the new council.
The whole process has been a mammoth task for the Auckland Transition Agency, the body charged with implementing the merger, and its external advisors. The Transition Agency ceased to exist upon the establishment of the new Auckland Council and GC Rob Fisher has moved onto a new role as GC of Watercare, one of the new CCOs. Meanwhile Wendy Brandon, formerly legal counsel for the Ministry of Health, has been appointed as GC of the new Auckland Council.
Simpson Grierson acted as lead legal advisor to the Auckland Transition Agency as it negotiated this merger. There were also transitional funding issues and two of the constituent councils made bond issuances of US$260m each to raise the requisite funds. Simpson Grierson was also the lead advisor on these transactions.
The merger was perhaps a bittersweet moment for this firm, which has acted for the majority of the old councils and was the most prolific supplier of legal advice to the largest council of the group, the Auckland City Council. The firm must now be pondering the implications of what this merger will mean in practice for this stream of local government work. At present, it appears that incumbent legal advisors are continuing to provide advice for their respective clients in the new structure – for example, Bell Gully is continuing to provide advice to the Auckland Waterfront Development Agency and Auckland Transport, two of the new CCOs. However, this is likely to be a transitional arrangement only and firms are eyeing the possibility of a rationalisation of external advisors down the track. In the meantime, it is business as usual. “If you had a presence [in local government], you’re probably getting some work,” observes Peter Chemis. “I don’t know if any new providers are in there but there’s no wholesale change or panel yet set in stone.”
This merger was arguably the largest M&A deal in NZ history – the new organisation has an asset base of NZ$29.5bn and annual capital expenditure of approximately NZ$3bn. However, there are some corporate lawyers who question whether this deal could be described as an M&A transaction. “It has more of a local government feel to it than a corporate transaction,” one lawyer explained to ALB.
Kevin Jaffe has no doubt that his firm can claim the honour of advising on the largest corporate restructure in New Zealand history. “All the same issues of amalgamation that you have with corporates apply – they don’t disappear just because the parties are local authorities,” he says. “In fact it was more complex than most M&A deals because in addition to the normal issues you have the legislative overlay as well. These are huge businesses with a massive asset base – this is no different from having something owned by a trust and not a company – well it’s still an [M&A] transaction, just a different ownership vehicle.”
Without doubt the process has been a unique and highly complicated on any number of levels and it will be interesting to see how the deal fares at the 2011 ALB Law Awards, where it has been nominated for several awards.
Christchurch
The Canterbury region earthquake in September 2010 and its severe aftershock in February this year were a traumatic event for New Zealanders and indeed Australasia at large. In the aftermath, a mood of uncertainty has descended as engineers take stock of damaged buildings and long term decisions about the city’s future are debated.
For many law firms in Christchurch, there has been no return to “business as usual.” For example Clarendon Tower, which is home to Duncan Cotterill and Anderson Lloyd, remains at risk of collapse in event of an aftershock and it is estimated that rectification works will take up to ten months to complete. CEO Janice Fredic told ALB in February that the firm was unlikely to return to the tower for staff welfare reasons – many of the firm’s staff faced the ordeal of being trapped in the building in the immediate aftermath of the quake because emergency stairs had collapsed . “We made the decision we would not be asking our staff to go back to Clarendon Tower because it would not be fair,” she told ALB.
The immediate challenge is to find suitable alternative office space, although as Peter Chemis points out, the definition of “suitable” is a function of availability. “No one knows what suitable is,” he says. “There’s a mad scramble for medium term space - any space. Well there’s not a lot of space and what kind of space is appropriate - where should you be? You’ve got the CBD – that’s gone. So that leaves the suburbs and the airport and places like that. And how long should you be there for - how long should you commit? It would be ideal to get something suitable for a couple of years but if you find some space, it’s a landlords’ market.”
Given the difficulties facing the city, one might expect national firms to be having second thoughts about their presence there but this does not appear to be the case. “The thought of leaving has not entered our minds,” says Andrew Poole. “We are very overt in our support of Christchurch. It is important that it remain a strong city – it is a large commercial hub and there is no reason for that to change.” Similarly, Peter Chemis says Buddle Findlay is “absolutely committed” to Christchurch. “We’re confident that it will be a vibrant and exciting place over the next ten years. There will continue to be a lot of work down there,” he says.
Early reports have suggested that the rebuilding of Christchurch could cost in the vicinity of NZ$20bn. The New Zealand government has estimated that it will spend $NZ7.5bn over the next few years to rebuild Christchurch. The list of other parties responsible for bearing the remainder of the rebuild cost will inevitably include insurers, reinsurers and private individuals. The money flowing into NZ from reinsurers offshore will be a timely boost, although likely to send shudders through the insurance industry globally.
As with all natural disasters, a discussion of the economic impact is a highly sensitive issue and firms made it clear that their first concern was for the human impact, not the ramifications for workflow. However, it is also clear that the rebuild will have a significant impact on the national economy and inevitably this will be felt, in one way or another, by law firms.
As was the case with the January Queensland floods, there is likely to be a spike in demand for certain areas of legal advice, such as insurance and construction. However, given the scale of the damage to the city this is not expected to be felt this year. The remainder of 2011 is expected to be devoted to the process of demolishing condemned buildings and starting anew. “I don’t see [the rebuilid] having any impact this year,” says Peter Chemis. “There will be a lot of activity this year that lawyers may or may not be involved in, such as assisting councils getting things geared up but in terms of the full on rebuild and what that might provide – that remains to be seen.”
There is also a question of the nature of the legal work which the rebuild will generate and whether this will necessarily be the type of work that is suitable for large commercial law firms.”We do not expect [the earthquake] to give rise to a significant lift in legal work, as the rebuilding will not involve large scale infrastructure projects,” says Roger Partridge. However, Andrew Poole disagrees. “Change inevitably drives legal work and this is one of the most significant urban renewal projects in New Zealand history,” he says.
Counter-cycle
Firms continue to describe their litigation and insolvency practices as being active although, for what it is worth, there are variations between firms. Peter Chemis describes these practices as being “still very busy” in his firm and Roger Partridge describes them as being “active”. However, Gary McDiarmid says he has detected a change in the level of disputes. “Litigation is still steady, but it’s not booming like it was a year ago – but still steady,” he observes. Mark Weenink thought that insolvency work was likely to tail off over the next 12 to 18 months. All of this is fairly anecdotal evidence, but is consistent with the narrative of an economy which is improving but still not completely out of the woods.
As far as Kevin Jaffe is concerned, the counter cycle still has some way to run. “There’s still a lot of companies in trouble – there’s no way that cycle has ended,” he says. “These things take a while to work through – there’s no suggestion that we are seeing the tail end of it.” Jaffe says that his firm’s litigation team still remains busy, although he says that it never reached boom levels. “It is solid, not full on,” he says. “Litigation is a very expensive business so clients are thinking long and hard about alternative ways to deal with disputes.”
Inevitably, the earthquake is playing its part in the counter-cycle. Christchurch-based AMI Insurance is New Zealand’s second-largest residential insurer and required a NZ$500m government support package to ensure certainty for policy holders. Chapman Tripp advised the government on that package. “So there’s still some turmoil – no one would say that we’re out of the back end yet,” says Andrew Poole. One might suspect that other insurance companies might be in similar strife, but the Finance Minister Bill English has been reported as saying that there were “no indications” that this was the case.
New Zealand is also home to one of the more remarkable restructuring deals of recent times which has drawn attention from lawyers worldwide. This particular story has its origins back in 2007, when NZ Telecom offloaded its Yellow Pages directories business. It was Australasia’s largest ever leveraged buyout, a NZ$2.2bn sale to a consortium comprising Asia-based CCMP Capital and an arm of the Ontario Teachers Pension Plan. The debt funded component of the purchase price represented more than 10 times EBITDA.
As at January this year, the company was valued at approximately NZ$750m. Yellow Pages has since been through a restructuring which saw the group’s senior lenders take ownership of the company, a process which has required much innovation and ingenuity from the lawyers in the process: corporate boutique Mayne Wetherell (advisors to the senior banking syndicate), Bell Gully (advisors to Yellow Pages) and also Buddle Findlay and Russell McVeagh.
Lawyers at Mayne Wetherell are particularly proud of this restructuring and believe it to be a world first in many important respects. The structure was implemented without court involvement or the involvement of an insolvency official and with approval from only two thirds of the bank syndicate. Will Tipping says that the advantages of this arrangement were speed and the substantial cost savings involved in avoiding lengthy court proceedings. “We believe there are other candidates out there for this kind of structure – there’s been a lot of interest,” he observed.