IFLR Asia M&A Forum: Day 1 highlights

Author: | Published: 25 Feb 2014
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How take-private transactions have advanced China’s M&A landscape

  • Although US valuations are going up, take-private dealflow is not expected to completely stop;
  • Panellists disagreed on whether smaller deals or large marquee take-privates would be more common going forward;
  • Few of the recent deals are contested. Only a small number include go-shop clauses or market checks, and if they are done, other buyers usually aren’t interested because the chairperson and management are so entrenched;
  • To-date all take-privates have been completed via merger. But Delaware-incorporated companies might want to consider tender offers, which are faster and require lower fiduciary standards for directors.

Opportunities in natural resources

  • Liquefied natural gas (LNG) is seen as one of the most globalised energy subsectors. It’s also an effective way to link countries that are resource-poor and capital-rich with countries that are capital-rich and resource-poor;
  • Opportunities in natural resources are becoming harder to find, and buyers are becoming more cautious;
  • The discovery of US shale gas has heavily impacted the Asian natural resources market as gas will be exported to Asia as LNG;
  • International players that are buying into US shale gas want to learn the unconventional business. Advantages of the US include extensive services and infrastructure, which would require significant research and development to set up elsewhere.

The next steps in private equity

  • The private equity (PE) market in China is becoming more sophisticated, although it’s still dominated by minority stakes and growth capital;
  • China’s investment environment has become more challenging, but recent economic stress might provide more opportunities for the sector;
  • Diligence remains key. PE funds still wonder if what they see is what they are getting;
  • While control is needed in China’s mid-cap market, minority stakes in the large-cap space are also important opportunities for private equity funds. This shows that the market is evolving and that there are now different angles to investing in Chinese companies.

Anti-corruption regimes and governance requirements

  • Expect to see more action on anti-corruption in China - President Xi Jinping’s platform for his legacy seems to be cleaning up Chinese society. It’s also easier for the government to go after foreign entities because that won’t upset important political constituencies;
  • Regarding acquisitions, the integration process is extremely important to ensure compliance. Corporate governance and accounting controls must be part of that conversation;
  • It’s essential to identify and focus on improving the top three to five risks in each jurisdiction in which a company or client has operations;
  • There are so-called Stockholm syndrome-like concerns when doing business in Asia – it’s sometimes unclear whether something is considered market practice or whether it’s actually unacceptable.

What’s new in India’s M&A pipeline

  • The upcoming elections are key to determining what India’s investment environment will look like in the next few years;
  • Expect to see significant M&A following the election if it goes well. That will involve both investing in distressed corporates and other corporates looking outbound;
  • But the definition of 'control’ is difficult as regulators have not been able to agree on one definition;
  • Regulatory uncertainty is an issue. While there is no one regulator that can approve a transaction, many can kill a transaction. The stars must align for a deal to close.

Due diligence

  • Due diligence best practice has developed in jurisdictions across Asia, particularly in China. Documentation – or a lack thereof – that might have been acceptable 10 years ago no longer reaches market standards;
  • In-house counsel must participate at an early stage of M&A deals to identify risks and problems;
  • However due diligence in Asia is still not as structured and methodical as what might be seen in the US or Europe;
  • Aside from the in-house legal team, compliance teams and post-deal integration teams must also be involved throughout the transaction to flag all issues that might come up.

Financing: where are we now?

  • Global factors that have affected financing include the general withdrawal of liquidity from the banking system due to Basel III capital requirements, as well as other regulatory pressures. Another issue is the tapering of the US Federal Reserve’s quantitative easing policy;
  • Expect to see more activity in the distressed debt space, as the global economy has done well since 2009 and another crisis will come down the pipeline at that point. Activity is particularly likely in China and Indonesia;
  • Offshore financing is increasingly popular for Chinese companies, which utilise BVI and Cayman holdcos to use their capital efficiently;
  • But local currency bond markets are also developing, which helps companies avoid local currency risk and take advantage of their relationships with local lenders.