The X-factor - why the NZX is thriving

BY TIM HUNTER

It's been a good few months for the stock exchange. Analysts are talking about "green shoots", the benchmark NZX50 index has rebounded from its March lows and large sums of money have been raised by listed companies.

These are encouraging signs but one startling detail stands out. Since hitting a record low in January, shares in the company that runs the exchange, NZX, have risen 70%.

It's a huge gain and it is only partly to do with economic green shoots.

The start of the run can be traced back to NZX's announcement on January 29 of a deal to sell its fledgling TZ1 carbon registry, which verifies and tracks carbon credits, for shares valued at $66 million.

The business had been set up less than two years earlier and was valued on NZX's books at a mere $2m. The buyer will be financial information group Markit, a multinational player whose private company status has led some analysts to question the $66m value on the all-scrip deal.

This apparently lucrative transaction closely followed another fast buck from the sale of NZX's 22% stake in the Bond Exchange of South Africa, acquired in October last year for 73.17 rand a share $5.58m and sold in February for 125 rand a share about $10.4m at current exchange rates.

"That's a very worthwhile gain," said investment analyst Murray Brown of Fisher Funds. "And it was achieved in a short space of time. It just shows their ability to execute."

You could say Fisher Funds is a fan - it is NZX's biggest shareholder with a stake of 9%, just shy of the shareholding cap of 10%.

Others are also pleased.

"We like the company," said analyst Greg Main of First NZ Capital. "Its strategy has been proven correct in the market downturn. Go back a number of years and it was heavily exposed to listing and trading. Look at the current mix and market information is by far its biggest revenue earner."

Putting numbers on that, information generated revenue of $12.2m for NZX last year, well ahead of listing fees of $8.2m and trading fees of $4.5m.

Five years earlier, listings were the top revenue generator on $4.4m, followed by trading on $3.3m. Information trailed a distant third on $2.3m.

The transformation has been deliberate. Its traditional business of earning fees from running the stockmarket was an unlikely prospect for growth in a small country like new Zealand, so NZX cast its eyes further afield and began sticking its finger in other pies.

After buying or building operations in agricultural information, fund management and share registry among others, the pace is only accelerating.

Latest moves are the acquisition of electricity market operator M-Co, rural publisher CountryWide and a bid for half of Australian mini-market operator NSX. The deals will require NZX to raise up to $20.5m through a rights issue.

"`A hell of a lot going on' is a pretty good description of where we're at," said NZX head of markets Geoff Brown. "If you look internationally, where exchanges have continued to have their margins whittled away are in things like trading and listing and the likes. Where the value of exchanges comes in is in the information they have or can create."

Of the three deals under way, the $5.5m purchase (plus earn-outs of up to $2m) of CountryWide Publications has attracted the most attention. Feilding-based CountryWide is a pure media business, publishing farmer-focused titles such as New Zealand Farmers Weekly and Dairy Exporter, and as such is miles away from NZX's traditional activities.

The deal has therefore provoked concerns about NZX's agenda will it use the media platform to push its own interests above those of farmers?

NZX chairman Andrew Harmos told the Sunday Star-Times to do so would be to shoot itself in the foot.

"I think the fastest way to destroy value in the publications business is to start imposing editorial requirements on your assets, and to suggest that either we would do that or the people staying on at [CountryWide], which is everybody, would accept that is really taking a bit of a stab at the integrity of both parties.

"My answer to the people who are sceptical about that is wait and see, give us the benefit of the doubt."

The rationale for buying an old-style print publisher was to strengthen links to the agricultural sector, he said.

"The rural sector is not well represented on the stockmarket. The mining sector is the core of Australia's wealth and competitive advantage and the rural sector is ours. The mining sector has required access to a lot of capital over the years and it's unashamedly benefited from access to the stockmarket. Our rural players have generally been very much real estate focused asset investors and operators.

"So we feel the rural sector isn't as well connected to the capital markets as the mining sector is to the Australian capital markets, and we see that part of our role in... educating's the wrong word... but in greater visibility to that sector."

Once a new electronic clearing house is operational in November, said Brown, NZX will be able to offer the rural sector products such as milk futures to help them hedge risk.

While farmer enthusiasm for milk futures remains uncertain Fonterra general manager of milk supply, Jason Minkhorst, said it was "an interesting idea, but at this stage I think the demand for that's unknown" Brown said the opportunity was big.

"Our view would be that New Zealand is such an important player in terms of worldwide [milk] production that New Zealand is the natural home for a derivatives product."

The clearing house is pivotal infrastructure allowing NZX to offer a whole range of derivatives hence the $13.1m purchase of Wellington-based M-Co, which runs the wholesale electricity and gas markets. Energy futures are on the cards.

Both M-Co and CountryWide are straightforward acquisitions, but NZX's tilt for control of Australian company NSX, operator of the National and Bendigo alternative stock exchanges, is opposed by some NSX shareholders despite the backing of their board.

NZX wants to buy half of NSX for $A11.8m with a view to creating a new Australian debt market and dual-listing opportunities for smaller NZX companies many Australian funds have mandates barring them from investing on this side of the Tasman.

Brown said the bid offered stark choices for NSX shareholders. "This is a business which has lost considerable amounts of money over a long period of time and is probably in a position where it will ... either have to raise additional capital itself or run the risk of losing its licences."

If the deal is approved next month, it will give NZX a foot in the Australian door its plan to create a new AXE electronic trading platform to compete with the Australian Stock Exchange is in limbo as it awaits approval from the Australian government.

Asked if there was a political tinge to the delay, Harmos was philosophical. "I've not observed any, but I don't doubt that the delay's suited ASX. It may well be contributing to it, but we can't be sure about that. We'd like to think it isn't but I guess that might be a bit naive."

Still, if its transactions go ahead as planned, NZX is set for a busy year.

Harmos was cautiously optimistic.

"I'm, gosh, touch wood, very happy with how it's going."

- © Fairfax NZ News