Despite
the persistent uncertainty surrounding the global financial markets, bankers
express optimism for M&A activities involving Asian corporates in 2012.
“By all accounts, 2011 has been a horrendous
year for investment banks. But in spite of all the doom and gloom, the
underlying drivers for M&A activities in the region remain in place,”
remarks one M&A banker.
While 2011 started off quite robustly, the
deal volume dropped off in the last two quarters, dragged down by the Eurozone
debt crisis and uncertainty surrounding the global economy.
As a result, the value of overall announced
M&A deals in Asia ex Japan dropped 13% from US$677 billion in 2010 to
US$588 billion in 2011, according to data provided by Thomson Reuters. Total
cross-border deals amounted to US$322.4 billion, a drop of 11.5% from US$364.4
billion in 2010.
Inbound M&A activities totalled US$158.1
billion, while the outbound deal value reached US$164.3 billion, declining 5.9%
and 16.4% year-on-year respectively.
Domestic activity fell 15% to US$265.6 billion
from US$312.6 billion in 2010. Despite the overall slowdown in the region’s
M&A volume, private equity-backed transactions targeting companies in Asia
ex Japan grew 19.5%, totalling US$33.2 billion, from US$27.8 billion in 2010.
Robust
market in 2012
Apart from a few mega-size deals in India,
2011 did not have many blockbuster M&A transactions. Nonetheless, the year
saw some landmark and transformational deals.
In China, where most M&A activities
continue to come from material and energy sectors, Sinopec and ENN Energy are
making history with their US$3.43 billion offer to acquire China Gas – in what
would be China’s first ever domestic unsolicited takeover offer.
In another deal involving Sinopec, the
state-own oil major is paying US$3.54 billion to Portuguese oil firm Galp
(Energia) for a 30% stake in its deep-sea oil assets in Brazil. In India, UK
energy major BP Plc made a US$9 billion investment in Reliance Industries’ 23
oil and gas production sharing contracts in the country’s largest foreign direct
investment.
In another resource-related transaction in
India, London-listed Indian metal and mining firm Vedanta Resources finally
completed its US$8.67 billion acquisition of Cairn India from Edinburgh-based
Cairn Plc in one of the largest M&A transactions involving an Indian
company. The complex trade, which involved a series of different transactions,
was completed in December 2011, after more than a year of delay in the
regulatory approval process.
Southeast Asia had one of the busiest years for
M&A in 2011 with a number of interesting deals. For example, the US$1.5
billion acquisition of Malaysia’s largest bank Maybank of the Singapore-based
brokerage firm Kim Eng Holdings has filled the gap Maybank had in investment
banking, giving it possible firepower to launch a competitive jolt to the near
monopolistic dominance of CIMB in the country’s and the region’s investment
banking and brokerage business.
In another transaction involving the Malaysian
banking industry, Hong Leong Bank completed the takeover of smaller rival EON
Capital after nearly two years of twist and turns, creating the fourth largest
bank in terms of assets in Malaysia, and turning banking consolidation into a
main theme in the country.
Moving into 2012, bankers expect activities to
be relatively robust, both in domestic and cross-border M&As, although
rising cost of funding and the uncertainty around the availability of financing
could end up depressing the M&A volumes.
Generally, Asian corporates are today in
better form than they were when they were heading into 2008, as the global
financial crisis began to unravel. This put them in a much better position to
purchase assets deemed attractive.
As valuations have come down across the board
in the public market, large companies with well-capitalized balance sheets are
expected to look for good acquisition opportunities. “2012 should be a decent
year for M&A, but it also depends on how badly or quickly the equity market
recover.
At the end of the day, M&A market do track
the equity market in one way or other. Financial sponsors’ interest remains
reasonably strong in Asia. Sponsors have the funds,” comments another M&A
banker.
PE
driving M&A
In terms of domestic M&A, consolidation is
a theme that remains in place in various sectors such as the telecoms sector in
India and the banking sector in Malaysia and Indonesia.
For Asia’s outbound M&A activities, while
the ongoing financial crisis in Europe and the economic slowdown in the West
may present Asian corporates with certain assets at attractive valuations,
considering the uncertainties surrounding Western economies, Asian corporates
are less likely to be keen on acquiring businesses there. They may prefer to
focus on markets within Asia or on other emerging markets such as Latin
America, which is already a favourite investment destination for resource
companies in Asia.
In terms of inbound M&A activities and
inter-Asia trade, as valuations shake out different sectors such as in
pharmaceuticals in India, bankers expect to see inbound M&A activities.
At the same time, in some markets such as
China and India, regulations remain a major hurdle for foreign investment. For
instance, after first announcing that it would open up the retail sector to
foreign investment, the Indian government decided to suspend the plan in early
December following nationwide protests by small neighbourhood retail shops.
Initially, the government was planning to
permit a 51% foreign direct investment in the retail sector, which would have
allowed foreign supermarket chains such as Wal-Mart and Tesco to form
partnerships with Indian retail companies to cater to the burgeoning retail
market in Asia’s third largest economy.
As public markets become less accessible to
raise financing, corporates, particularly the smaller ones, are expected to
look to private equity as a source of funding, which should drive private
equity-backed M&A transactions in the region, particularly in Southeast
Asia.
“2012 could provide opportunities for private
equity houses, which will have a role in markets where the availability of
credit is an issue and where more distressed situations could exist,” believes
a third M&A banker.
But in markets such as South Korea and Taiwan,
where there are sufficient liquidity in the domestic market, the role of PE is
minor. In Asia, most bankers agree that Southeast Asia presents opportunities
for PE players, because of the smaller size of companies where PE sponsors can
typically play a controlling role among themselves or with a limited set of
partners
Leveraged
finance
Although true leveraged buyout deals in Asia
are still few and far between, leveraged finance is slowly coming back to life
in the region. While the Australian market is seeing more activities in this
space, the leveraged finance market in Asia remains rather small. The story in
2011 was no different. There was a relatively good deal flow in the first half,
underpinned by M&A deals and growth in capital investments, but the second
half was overshadowed by the Eurozone sovereign debt crisis, rising cost of
funds and regulatory constraints due to Basel III.
These same concerns as well as uncertainty
surrounding the ability of some European banks, who traditionally have been the
key takers of internationally syndicated loans in Asia, to participate in
syndicated loan market, are expected to impair the leveraged finance market in
the region.
While large companies and sponsors with
well-capitalized balance sheets will have fewer problems in accessing
financing, smaller ones may face challenges in securing financing in 2012.
Bankers forecast a cautious outlook for leveraged finance in 2012, hoping
domestic markets can compensate for the absence of liquidity in the
international market. “The local financing market is still around to support
large deals,” says a senior leveraged finance banker.
“That could fill the gap created by European
banks’ absence in some markets, but local banks tend to look at
investment-grade companies from a local standpoint. When the transactions get
into a higher leverage point involving structural type of lending, local banks
often back out as they do not understand complex structures.”
Gita Dhungana
The Asset
Business & Investment Opportunities
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