China M&A activity bouncing back from the downturn, according to PwC
Mergers and acquisitions (M&A) in China’s domestic market are bouncing back indicating that the adverse impact of the global financial crisis may have only been a temporary setback. There are also indications that foreign strategic buyers will re-emerge in greater volume and deal size starting in the second quarter of 2010, reflecting pent-up appetite for China targets.
According to a report by PricewaterhouseCoopers (PwC), in the second half of 2009, deal volumes in domestic and inbound M&A in China, including Hong Kong and Macau, are returning to their robust 2008 levels. “We already see increasing appetite for deals from both foreign and domestic buyers in our practice over the past few weeks,” says Andrew Li, PwC China transactions partner based in Shanghai.
More than 1,800 domestic transactions are likely to be recorded in the second half of 2009, for a total of about 3,200 deals for the full year. This compares to about 2,000 deals for the second half of 2008, and a total of 3,797 deals for the full year of 2008. Underscoring the return of healthy deal volumes is the number of domestic transactions, with close to 90% of all deals being intra-China or from Hong Kong to the mainland.
This is an indication that deal makers are pleased with the robustness of the Chinese economy which was evident through the global financial crisis and they are confident about its future.
“The first half of 2009 saw deal volumes fall by a quarter but the number of transactions in the second half of 2009 reveals that this has quickly recovered,” says David Brown, PwC China transactions partner based in Hong Kong.
Foreign strategic deal activity, however, continued the decline it started in 2007, with less than 400 announced deals for the full year of 2009, representing a 40% drop from 2008 levels. Foreign buyers have been sorting out problems in their home markets and this has taken the focus away from expansionary acquisitions.
Financial buyer activity is comparable to 2008, but represents only 6% of the overall intra-China and inbound deal volume, being less than 200 announced transactions. However, with 53 announced transactions in the third quarter of 2009, the domestic (as opposed to foreign) financial buyer activity reached its highest quarterly level historically. The annual deal activity levels for domestic financial buyers will also be at its all time high, with 171 deals for 2009 compared to 147 in the full year of 2008.
China Investment Corporation (CIC), which historically invested mainly in overseas companies, announced two investments in the Greater China market in 2009. These investments relate to minority stakes in the Noble Group Ltd and GCL-Poly Energy Holdings Ltd (GCL) and have a combined announced deal value of US$1.6 billion. CIC’s investment in GCL followed the latter’s announced acquisition of Jiangsu Zhongneng Polysilicon Technology Development Holding Co Ltd in June 2009 with a value over US$3 billion. These solar power transactions are aligned with the Chinese government’s plans to encourage investment into industries which reduce carbon emissions.
Foreign financial buyers were more focussed on maintaining and improving operations at their portfolio companies and found new deals harder to come by as gaps in pricing expectations between sellers and buyers continued.
Only 25 foreign financial buyer transactions were announced in 2009, making this the year with the lowest number of announced foreign financial transactions since 2006. However, some reasonably sizeable exit transactions were reported, including TPG/Newbridge’s sale of its Shenzhen Development Bank stake to Ping An; as well as 3i’s and PraxCapital’s sale of their stake in restaurant chain Little Sheep Group Ltd To Yum! Brands Inc.
“As usual, deal activity was fairly evenly spread across industry sectors, however the industrial manufacturing sectors are the most active by number of deals in the second half of 2009,” Li says. The financial services sector is the sector with the highest announced deal value in 2009, followed by the real estate sector.
Outbound activity is growing strongly, with deal volumes up by 50% in the second half of 2009 compared to each of the previous half-year periods. Outbound deal volumes for the full year 2009 are likely to be at a record level of around US$30 billion-US$35 billion, more than three times higher than 2008. The largest announced deal was the US$8.9 billion offer by Sinopec for Swiss Addax Petroleum in the first half year, and there were four other deals valued over US$1.5 billion announced in the second half of 2009 including Yanzhou Coal Mining Co Ltd’s acquisition of Australian Felix Resources; Sinochem Corporation’s bid for Australian Nufarm; PetroChina’s investment in Canadian Anthabasca’s oil sand assets; and CIC’s 15% investment in US-based AES Corporation.
“But this value of outbound deals is still only around a third of the value of domestic and inbound transactions, and it emphasizes again that the majority of outbound transactions are still in the energy and resources space. With the Chinese government's encouragement and the trend by Chinese companies wanting to expand overseas, we are expecting to see outbound transactions continue to grow next year," says Danny Po, PwC China M&A tax partner based in Hong Kong.
The stage is set for continued growth in M&A activity, supported by growing investor confidence and healthy rates of economic growth focussed on increasing domestic consumption. Domestic deal activity in the full year of 2010 is expected to grow by more than 20% compared to 2009.
Domestic PE activity is likely to grow strongly and foreign PEs remain as committed as ever to the Chinese market, with many looking to set up renminbi-denominated funds to facilitate easier deal making as well as access to a new funding source. “The PEs have got some interesting deal pipelines and we expect to see many of these coming through in 2010 with activity at least back to 2008 levels”, said Mr Brown.
Sectors which cater to domestic consumption in China are expected to be favoured targets for M&A.
The China outbound growth story will continue and year-on-year outbound M&A growth of about 40% is not an unlikely outcome. Whilst deals for energy and resources will continue to dominate, owners of the larger Chinese privately-owned enterprises are looking for know-how and access to foreign markets, and deals in other sectors can also be expected to grow strongly.