Samson Lo, head of M&A at UBS in Hong Kong, surveys the landscape for deals in Southeast Asia and the developments shaping transactions
Among the most significant changes impacting outbound Chinese M&A has been the tightening of capital controls in China to stem the depletion of foreign currency reserves. But Samson Lo, head of M&A at UBS in Asia, points to several positive drivers of cross-border deal growth, including sophisticated deal making and an appetite for Asia-Asia deals.
What are the key dynamics at play in the M&A market in Asia?
One of the most influential recent developments has been the establishment of capital controls out of China. These controls have not stopped the music but they have slowed it down. When Chinese buyers are looking for outbound acquisitions they are now more cautious and they are also becoming more disciplined and strategic in what they are looking for. At the same time, because of the Chinese capital controls, we are seeing that Chinese companies, as well as looking at the big deals as they did in the past, are also now looking at smaller deals. These smaller deals are in the sub $1 billion category. There has consequently been more activity in mid-cap deals this year than last year, where last year the focus was very much on large cap.
Cross-border deals have more and more consortium structures, not just consortia involving Chinese strategics but Chinese private equity firms
The capital controls have also meant that the completion time of a deal is dragged out and that as a seller, you naturally want more protection when you are dealing with Chinese buyers.
Another trend is that of Chinese companies branching out into Southeast Asia. There are several Southeast Asian markets that have attracted considerable Chinese interest. This development is especially interesting when you consider the geographical proximity of some of the markets, for example Vietnam. We are seeing more intra-regional transactions in 2017 coming out of China. With the new administration in the US, the Chinese are also more cautious about the US market and this issue can also explain why there is even more interest in looking at European assets than in the past.
Finally, in China itself, state-owned enterprise (SOE) restructuring will be making a comeback this year. About three years ago, there were a number of Chinese SOE mergers rumoured in the market and it became very busy for a period, but slowed down. But this year Chinese SOEs will return to restructuring and merger activity as part of the PRC government initiative to make the Chinese SOE more streamlined and more efficient.
Over the past 12 months were there particular milestones or turning points for the region's M&A market?
There were quite a number of milestones. At the beginning of 2016 we saw the announced ChemChina transaction with Syngenta. This transaction gave the market the confidence that Chinese corporates were doing bigger deals and that PRC regulators were not afraid of these large deals. This transaction triggered a sentimental change in the China outbound market. After the Syngenta deal we have seen a lot more corporates looking around and trying to do big deals. That was a first healthy milestone and it really broke people's psychology of thinking about doing deals.
In terms of Chinese regulatory bodies, all sorts of outbound approvals from the National Development and Reform Commission of the People's Republic of China (NDRC) are becoming more streamlined, including allowing shortcuts to approval for certain types of deals. For example, deals below a given threshold no longer need certain approvals other than a filing. That was another positive milestone.
On the other hand, there were a number of Chinese regulatory developments that do not seem very friendly to the market, such as the capital controls. One example of this was 18 months ago, when the China Securities Regulatory Commission (CSRC) came out with a host of measures to scrutinise backdoor listings because they considered these speculative and unhelpful to the market. Overall, there has been a mix of good measures that help outbound transactions but at the same time there were several attempts to try to tone down the overheated China outbound market.
How have these developments impacted how practitioners are now structuring M&A transactions?
Because of some of the restrictions on China outbound deals, especially the capital controls, it makes it more difficult for some mid-cap Chinese companies to engage in large cross-border transactions. Therefore, for them to do a large transaction they are now thinking about who they can team up with. There is a pocket of Chinese private equity funds that is willing to stand behind some of the Chinese strategics in making acquisitions, and help them with the equity cheque. Their participation reduces the size of the equity cheque that the strategics must commit to and is helpful to strategics in making an outbound acquisition.
Requesting a ten percent deposit is no longer a taboo in Chinese M&A deals
In terms of structuring outbound acquisitions, we have seen that cross-border deals have more and more consortium structures, not just consortia involving Chinese strategics but Chinese private equity firms teaming up together. Due to the capital controls and the longer regulatory process to approve the conversion of Chinese renminbi into foreign currency, a lot of western targets are asking for a sizeable break fee or deposit. Sometimes this reaches as much as ten percent. The Chinese have understood that there is a need for this, so requesting a ten percent deposit is no longer a taboo in Chinese M&A deals.
At the same time, over the last 12 months, Chinese companies, private equity firms and investors have become a lot more sophisticated. Chinese companies are now doing pre-emptive bids, trying to do deals outside an auction process, and even making unsolicited approaches for targets; these are no longer a taboo. In other words, Chinese corporates are slowly moving towards the more aggressive western buyer approach.
What impacts do these trends have on inbound Chinese investment?
The inbound market has been overshadowed by the China outbound story. We have found that inbound has become increasingly rare. Instead of straightforward inbound acquisitions we instead see more and more joint venture structures. Western counterparts are more willing to engage in a joint venture discussion than in an outright acquisition of a Chinese company. They know that the Chinese are not that interested in selling businesses.
You have noted that intra-regional deal making is on the increase. What form has this been taking?
In the Asia-Asia cross-border M&A market we are seeing a lot of minority stake acquisition deals. Some Chinese companies are looking at Southeast Asia in this way, in some cases simply because local rules do not allow foreign control of local companies and this forces acquirers into making minority acquisitions. This trend is also due to the nature of many targets, as a lot of Southeast Asian companies are pre-IPO type investments, so we are seeing Chinese companies coming in almost as a participant in a fundraising exercise rather than a more traditional acquisition or full acquisition.
The Japanese are also becoming increasingly active on an Asia Pacific level, seeking out growth opportunities in emerging markets. They are also more interested in having a minority stake, with the idea that it is better to participate a little than not at all.
Over 2016 and the start of 2017 in Southeast Asia one of the most interesting countries for M&A was Vietnam. There were a number of Vietnamese assets available and this along with its proximity to China and the improving diplomatic relations between China and Vietnam helped a lot. Another key country in the region was Myanmar. Myanmar is a new market but one with a lot of M&A opportunities, albeit on a smaller scale. In all, the M&A market across the region is more diversified than it ever has been.
|About the contributor|
Samson Lo is currently head of Asia M&A for UBS. Lo joined UBS in 2010 and is primarily responsible for M&A origination and execution in the Asia Pacific region, with a focus in Greater China across many industry sectors. From 2007-2010, Lo was a member of Merrill Lynch Asia Pacific's investment banking team for Hong Kong-based corporations and Macau-based gaming companies. From 2000-2007, Lo was a member of Lehman Brothers' M&A group in New York and led executions for transactions across many industry sectors.
Notable transactions in Asia Pacific include PAG's unsolicited offer for Yingde Gases for $2.6 billion; China Mengniu Dairy's acquisition of China Modern Dairy for up to $1.1 billion; LafargeHolcim's Fr1.1 billion ($1.1 billion) sale of a controlling stake in Sichuan Shuangma Cement to IDG Capital; and sale of Nirvana Asia to CVC for $1 billion.
Lo graduated magna cum laude from the University of Pennsylvania's management & technology programme, with joint undergraduate degrees from Wharton School and School of Engineering & Applied Sciences.