Local Spotlight: Deal Drivers in Greater China – Expert Insights

By Yiqing Wang, China Editor and Head of APAC Editorial Operations, Mergermarket

Part 2 of a two-part blog series featuring insights from the Deal Drivers: Greater China – M&A in H1 2020 and beyond webinar hosted by Datasite and Mergermarket

 

Mainland China and Hong Kong SAR, having been the earliest regions to be impacted by COVID-19, saw initial signs of deal recovery in 2Q and further recovery is expected in 2021, according to industry experts speaking at a webinar hosted by Datasite and Mergermarket last month.

China and Hong Kong SAR deal activity declined 17.8% in value to US$122.9bn in 1H20, with 65 fewer transactions compared with the same period the year before.

Despite recording the lowest deal volumes and value in 1Q since 2013, mainland China was able to rebound by 57% in terms of deal volume in 2Q and by 20% in terms of deal value.

Inbound transactions rose by 110.3% year-on-year in 1H20 (US$15.8bn; 69 deals), while outbound dealmaking recorded the lowest 1H value since 2005.

Private equity buyouts increased by 71.5% in value and 3.2% in deal count (US$24.4bn; 64 deals) in 1H20. Technology was the most active sector in terms of deal value over the same period, rising by 214.2% year-on-year. 

M&A insights from the experts

Samson Lo, UBS Asia managing director & head of mergers and acquisitions, pointed out that the return of mega deals such as PetroChina’s US$38bn sale of major pipeline assets to PipeChina and the merger of Hong Kong-listed Haier Electronics and parent Haier Smart Home to create a US$22bn pro forma market cap company indicates that appetite for M&A has returned. 

There could be significant recovery ahead in 2021 when the US election is behind us and once the virus situation is contained, Lo noted. Cross-border M&A, China inbound, and the continued privatization of HK and US-listed companies is expected, he said, adding that geopolitical tension appears to be generating more M&A opportunities.  

Meanwhile, Bagrin Angelov, head of China cross-border M&A and executive director at CICC, noted that one of the most interesting data points was that inbound M&A into China for the first time has exceeded outbound transactions in 1H20. In 2016, around 90% of deals were outbound but this year the picture has been very much reversed. “However, outbound M&A is where big deals happen,” Angelov said. “Given the regulatory environment in Europe and the US, we will probably see much more minority deals with corporates, and with European businesses in particular.”

China has been relaxing foreign ownership restrictions in many sectors that were previously off limits, such as financial services, oil and gas exploration and development, automotive industry, parts of agriculture, parts of aviation, and medical devices among others, according to James Parker, partner at Norton Rose Fulbright Hong Kong.

The foreign investment law that came into effect at the beginning of 2020 also levelled the playing field. “Putting politics and trade wars to one side, the China market is simply too big to ignore and the possibilities are simply too great to ignore,” Parker added. 

Eric Xin, senior managing director and managing partner at CITIC Capital, pointed out that the deal volume for strategic buyouts are on the decline. “This is the time to take advantage of cheap valuations in the public markets, which will drive the privatization boom. But for pure financial investors, valuation remains a challenge when evaluating businesses. For private equity, it is an opportune time to sell but difficult to pull the trigger on acquisitions. With cheap financing, there is a lot of liquidity which will lead to more transactions next year,” Xin explained. 

1H20 was like a “semi blindfolded roller coaster ride,” Jacey Paik, co-head of Greater China and head of South Korea at Datasite noted. The M&A landscape has shifted over the past few months from when sellers and buyers were on the defensive right after the pandemic struck in Greater China.

“There are various strategies being taken this year. Restructuring-led deals, bilateral or private transactions with selective buyers, and an increase in financing and refinancing transactions are taking place. There is also a growing need for pre-IPO due diligence as Hong Kong IPOs remained resilient throughout 1Q despite all of the uncertainties,” Paik said.

Sectors riding out the COVID-19 wave(s)

CITIC Capital’s Xin flagged that the entire technology sector, from semiconductor to B2B sales service companies all the way to small struggling domestic players are seeing tremendous growth opportunities. Healthcare is also seeing opportunities from the pandemic, while the real challenge is building up innovation capability. “Innovative drugs and the therapies, and IT digitization of healthcare services are getting a lot of capital,” he added.

Biotech is also a prominent and favorable sector in Hong Kong amid the introduction of Chapter 18A, strong IP protection, and a pool of talented and qualified individuals in the Asian financial and legal services field, Datasite’s Park said. It also fits in with the ESG agenda, which gained momentum during the COVID-19 crisis and is probably set to dominate discussions at board level for the next five years or so, she noted. 

UBS’ Lo added that in Hong Kong, where COVID-19 uncertainties combined with the effects of the social unrest from last year, are adversely affecting retail and select real estate companies, valuations are becoming increasingly conducive for take-private transactions. “Hong Kong family-controlled businesses directly hit by the COVID-19 pandemic and US-China trade tensions are the areas dealmakers should focus on,” he noted. 

CICC’s Angelov suggested that the concept of “new economy” should be more broadly explored. Even oil and gas companies are looking into new economy, such as the new materials and energy storage companies, which enhances energy transmission. He explained, “being in the industrial production side and with no process and production optimization, value chain related technology is beating the software side.”

Datasite’s Paik pointed out there are slightly different trends in the M&A and IPO environments in Hong Kong. “Life sciences obviously is among the core drivers for Hong Kong IPOs, with a mix of industrials and other related deals. For M&A, take privates and financing deals remain robust in Hong Kong especially in consumer retail and financial services, including fintech.”

Regulatory changes and impacts

CICC’s Angelov said the one thing that needs to be flagged to overseas investors is a new rule entitled Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors. This new rule introduced relaxations in lock-up periods while reducing minimum investment thresholds.  

Registration-based IPO reform on A-share stock exchanges will encourage overseas-listed companies to shift their listing to A-share to improve liquidity and valuation. “The door has just opened a little bit now, but what if that becomes the norm?” CITIC Capital’s Xin added. 

UBS’ Lo emphasized that CFIUS risk remains among the primary concerns, as well as CFIUS-equivalent scrutiny in certain sensitive industries across European countries. “Chinese corporate clients initiate discussions about CFIUS and mitigation risks a lot earlier in the process. This remains the case if it is buying a company and carving out the US business to US incumbents or to the original seller, or seeking to establish what constitutes a sensitive industry,” he said. 

 
Technologies enabling deals in the new normal

Datasite’s Paik noted efficiency, maintaining productivity, and finding the right tools when deals get extended are crucial. Given that many more deals are being extended as of late, dealmaking has become more costly due to increased efforts and resources.

CITIC Capital’s Xin agreed and added that his firm has been trying to leverage technology and tools such as Zoom as much as possible but fundamentally, private equity investors need to see the management team, particularly in person.

Deals are still getting done despite a few minor delays on the regulatory side, Norton Rose Fulbright’s Parker said. CICC’s Angelov also provided an example of where his firm was advising a major Chinese state-owned enterprise on an overseas acquisition and it was very astonishing to see that SOE fully mark up and sign the purchase agreement and final offer without setting foot in that country. 

 

This webinar coverage article was originally published by Mergermarket on September 8, 2020; it has been republished with permission.

Pulse of the Market

Dealmakers across Greater China share their views about the market, the types of deals that will be prevalent in coming months, and the technologies that would help them the most to get deals done.

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Deal Drivers: Greater China Webinar Recording

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