This article originally appeared in the NZ Herald.

It hasn’t been a great week for the NZX, with the delisting of Trilogy International, Happy Valley Milk’s decision to list on the ASX and Icebreaker’s confirmed purchase price by US apparel giant VF Corp when an NZX listing was a potential alternative.

In addition, the NZX released relatively feeble proposals regarding its liquidity problems, while small exchanges around the world continue to sell out to larger entities.

At the end of last month the Irish Stock Exchange (ISE) was acquired by Euronext for €137 million ($228.84m) while the Tel Aviv Stock Exchange is expected to announce the sale of 71.7 per cent of its shares to a large global bourse within the next few weeks.

All three bourses are relatively small, with the NZX having a total market capitalisation of US$99 billion ($185.63b), the ISE US$154b and Tel-Aviv US$243b.

Can the NZX survive as a standalone entity while other small stock exchanges are being bought up by large global companies?

On March 14, more than 99 per cent of Trilogy shareholders voted in favour of the sale of the company to CITIC Capital China Partners for $203m or $2.90 a share.

CITIC Capital is a leading global alternative asset manager with around US$22b of assets under management. Its private equity arm, which has US$4.7b of committed capital, was the acquirer.

Trilogy chairman Grant Baker strongly recommended shareholders vote in favour of the proposal as the price represented a 28 per cent premium to the market price and it was in the upper end of Grant Samuel’s independent valuation of between $2.59 and $2.94 a share.

The company delisted yesterday, ending New Zealand ownership of a company that first listed as Ecoya in 2004.

On Monday, Happy Valley Milk announced it would backdoor list on the ASX through Longreach Oil.

The NZ company has land use consents from Otorohanga District Council to establish and operate a $230m fully integrated milk processing, blending and packaging plant on a site near Hamilton.

Once built, Happy Valley Milk intends to specialise in consumer-ready infant milk formula and other nutritional milk powder formulas using A2 and organic milk.

The ASX has a much more orderly approach towards backdoor listings than the NZX as Longreach/Happy Valley shares won’t start trading again until Longreach shareholder approval is obtained and the company complies with ASX requirements.

By contrast, NZX listed TRS Investments has continued to trade through numerous backdoor listing proposals, none of which have been completed.

Meanwhile, Wellington based Trans-Tasman Resources, which has been established to mine ironsands off the Taranaki coast, intends to backdoor list on the ASX through Manhattan Corporation.

This week, Manhattan announced that the parties had extended the end date of the merger implementation agreement from May 31 to June 30 but in all other aspects the agreement remains unchanged.

However, Maori, fisheries and environmental groups have lodged appeals against the Environmental Protection Agency’s decision to allow Trans-Tasman Resources to mine offshore.

This appeal will be heard in the High Court at Wellington next week.

Early in the week, the Overseas Investment Office released information regarding the sale of Icebreaker to the North Carolina based VF Corporation for $288m.

VF, which has a sharemarket value of US$31b, owns The North Face, Timberland, Lee, Nautica and Wrangler clothing brands.

Icebreaker was founded in 1995 by 24-year-old Jeremy Moon to provide garments which had a limited reliance on synthetic petrochemical based fibres.

In 2003 it established a manufacturing hub in Shanghai and two years later opened its first retail outlet in Wellington.

In 2014 former Air New Zealand chief executive Rob Fyfe was appointed CEO while Moon became chairman. Three years later Fyfe was appointed chairman and Greg Smith CEO.

No profit figures are available but Icebreaker’s Transparency Report 2017 showed that it had 418 direct employees with 17 stores in North America, three in Europe, five in Asia and 21 in Australasia.

The company has global sales of $211m and its products are sold in more than 4500 stores in 47 countries.

The major beneficiaries of the Icebreaker sale have been Moon, Pencarrow Private Equity and Stephen Tindall’s K One W One.

But one of the most interesting questions is why didn’t Icebreaker list on the NZX?

Was it because the company has been more interested in brand development than profitability or because it is extremely difficult to find good independent directors for listed entities?

Private equity funds offer company founders higher value than a stock exchange listing because a company governed by founder/private equity directors should perform much better than a listed company dominated by ageing directors with legal and accounting backgrounds, particularly when they have little or no skin in the game.

In other words, the difficulty in finding good independent directors for listed companies makes it less and less attractive for founder shareholders to take the listing option. This is an issue facing many of the world’s smaller stock exchanges.

A final blow this week was Vodafone NZ chief executive Russell Stanners’ comment that any NZX listing for his company will be sometime away.

But one of the NZX’s major problems is its two-market structure. The largest market, in dollar terms, is where brokers facilitate trades off-market without offering these deals to on-market participants.

The other market is through the exchange, where offers and bids are available to all participants.

This two-tier market structure can lead to price manipulation, a lack of transparency, low liquidity and limited broker competition. Numerous large international investors are reluctant to trade through the NZX’s two-tier structure and this was an important contributor to Xero’s decision to delist from the NZX.

The NZX is fully aware of these issues and a consultation paper was released this week with the proposal to require all trades of $50,000 or less to go through the official exchange. This compares with an ASX threshold of A$1m for Tier 1 Equity Market Products, A$500,000 for Tier 2 and $200,000 for Tier 3 products.

The key sentence in the NZX’s consultation paper is: “we understand it is important to balance the competing needs of improving price transparency for the market and participants (brokers) meeting their fiduciary duties to clients”.

Price transparency should be a major NZX objective yet the exchange is prepared to compromise this objective to facilitate off-market trading by brokers.

This indicates that the NZX will continue to struggle because increased price transparency and far more on-market trading is vitally important to its long-term growth and prosperity.

The NZX’s $50,000 threshold is too low. The exchange should start with a $50,000 threshold but then raise it by an additional $50,000 each year until it reaches $250,000.

The effectiveness of the threshold can be assessed again at that stage.

The NZX has three long-term options: it can either remain a stand-alone company; be fully absorbed into the ASX; or sell out to a Euronext type structure.

NZX chairman James Miller told yesterday’s annual meeting “that the fortress or local exchange model, does not provide high value opportunities for long term shareholder wealth creation”. Thus, the Euronext model looks like an attractive alternative.

Euronext is a European stock exchange that owns and operates the Amsterdam, Brussels, London, Lisbon, Dublin and Paris exchanges under a federal business model.

The federal model allows exchanges to remain independent but gain the benefits of shared IT infrastructure and lower costs while maintaining their own distinctive characteristics.

In other words, Euronext operates under a horizontal business model instead of the more traditional vertical model.

As Euronext is unlikely to expand into this part of the world, the NZX needs to find or help create a federal model structure in the western Pacific area.

The ASX is unlikely to be a catalyst for this because Australian businesses prefer the more autocratic, vertical business model.

The NZX has signed mutual recognition agreements with the Singapore, Hong Kong and Toronto exchanges but it has a long, long way to go before it can join or sell out to a Euronext type model.