Global M&A trends in Q1 2015: Allen & Overy

Posted by Anton Murray Consulting on 15 Apr, 2015

Momentum continues to build

M&A markets remain very busy in the first quarter of 2015 as a significant number of truly transformational M&A deals announced.

Q1 2015 highlights include:  

Complex transformational deals continue

Significant strategic deals are still the order of the day. Investors have the confidence to contemplate big and often complex crossborder deals.

Banking bounces back?

Banco Sabadell’s GBP1.7 billion takeover of TSB, is the first big European cross-border banking deal since the financial crisis. Whether this is a turning point for the sector remains to be seen, for now most transactions remain relatively small and there’s a shortage of buyers for distressed assets.

Political activity continues to affect key markets

Uncertainty may explain the dip this quarter in Russia and Africa, while by contrast, growing clarity around economic policy in India is continuing to boost transactions.

Strategic combinations reshape whole sectors

Deals to unlock earnings or propel companies into faster growing market segments were prevalent in the consumer and TMT sectors.

Life sciences M&A soars to new levels

Q1 activity levels managed to rise even above last year’s heady heights. The U.S. remains at the centre of activity, with the biotech and generics market particularly lively.

Plenty of financial fire power

With cash on their books and debt financing readily available, corporates are often prepared to pay big multiples to edge out equally well-resourced PE funds and complete important strategic deals.

Infrastructure pipeline beginning to flow

Infrastructure had a busy quarter as a number of deals begun last year, notably in rail and energy, were completed, often at strong multiples.

Outlook remains optimistic

Strategic opportunities will continue to motivate buyers, but whether 2015 can sustain the pace of deal making seen last year remains to be seen.

Asia Pacific:

China powers ahead

The contrast in the number and value of deals being done in Greater China compared with the rest of the Asia Pacific region continues to be marked.

Let’s consider the spike in Chinese deal values. As China’s economy continues to grow rapidly – even if at a slightly lower rate than of old – many companies are looking to consolidate their interests in key sectors to gain a competitive advantage in the domestic market.

Often it is hard to tell whether this is driven by market forces or by government encouragement to help build businesses capable of competing on a global scale.

Another key driver for deals is a desire to simplify often sprawling interests to give investors far greater clarity. That appears to be the main motivation behind the reorganisation of Li Ka-shing’s two listed vehicles – CKI Holdings and Hutchison Whampoa – in a deal involving total assets worth around USD100bn.

Inbound investment into China was relatively quiet compared with its domestic activity, although the quarter did see the Japanese/Thai joint venture China Tai Bright take a 10% stake in Hong Kong-listed CITIC, with a further 10% to be added later this year for a total consideration of some USD10bn. It is the biggest ever foreign investment to date in a Chinese state-owned enterprise, dwarfing previous Japanese investments in China.

The outbound story continues with a notable spike in financial services deals in various markets, as well as further consolidation at home. Two of China’s internet and e-commerce giants, Alibaba and Tencent, also continue to have a voracious appetite for deals, both in China and across the globe. Much like their U.S. rivals, they are busy bolting on new businesses or seeing how best to leverage their huge customer bases (Alibaba is showing interest in expanding options for its payment services arm, for instance), as well as consolidating their current markets.

Australia has seen some interesting domestic and inbound deals. One standout transaction was the USD6.5bn acquisition of Toll Holdings by Japan’s currently state-owned, but soon to be listed, postal services provider Japan Post Holdings. The combination will create one of the world’s biggest logistics businesses.

Some read the deal as an encouraging sign that big-ticket M&A deals are coming back on the agenda. Although that’s not yet a consistent theme, some successful, highly competitive processes do lend some weight to this optimism, not least the USD6.3bn sale of General Electric’s financial services business in Australia and New Zealand.

This attracted a range of powerful consortiums, with the prize finally going to a group involving Värde Partners, KKR and Deutsche Bank.

Australia’s promised infrastructure privatisation bonanza suffered a significant setback when Queensland’s government was voted out in recent state elections. Proposed sales in that state will therefore not now go ahead. But subject to navigating the upper house, we should see a sell-off programme begin, starting with a long term lease of the New South Wales electricity transmission and distribution assets.

Reducing foreign exchange rates and a sustained dip in commodity prices could also revive M&A activity in energy and natural resources in Australia and elsewhere in the region, and we expect real estate to continue the process of consolidation that saw Federation Centres merge with Novion Property in Q1.

In Southeast Asia, Q1 was marked by a significant downturn in activity possibly due in part to banks building a pipeline for the rest of the year. There was also an extended period between Christmas and the Chinese New Year, which seemed to dampen activity.

There continue to be some deals, however, with the biggest likely being Temasek-controlled NOL’s sale of its APL Logistics arm to Japan’s Kintetsu World Express for USD1.2bn, which demonstrates the continued theme of Japanese outbound investment (although the target here was really a U.S./global business).

Generally, we continue to see cross-ASEAN dealflow and interest but the value of these deals is generally low when compared with China and other markets.

Myanmar continues to attract investor interest, primarily led by Japanese trading houses, although November’s election could slow activity this year. It was Singapore’s Rowsley and Vietnam’s HAGL that announced the most interesting Myanmar deal in Q1, agreeing a USD550m joint venture to develop real estate in Yangon, the former capital and the country’s most important commercial city.

In Indonesia, banks, insurers and other financial institutions remain hot targets for investors, although Q1 saw no big transactions completed. Insurance is also busy in Thailand, with a significant number of transactions in the pipeline. The Thai state-owned oil and gas giant, PTT, also announced the sale of a 15% stake in the refinery group, Bangchak Petroleum. Following this sale, expected to be worth over USD300m, PTT is likely to sell the remaining 12.2% of its stake to another buyer.

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