Asian M&A Bankers Hope For Turnaround
In the best global market for mergers and acquisitions since 2007, south-east Asia stands out for all the wrong reasons.
In the year to August 31, the region’s targeted M&A fell 16 percent to $35.76 billion from $42.45 billion in the same period the previous year, according to Dealogic data. In contrast, M&A worldwide is booming. Announced takeover activity was $3.11 trillion in the year to August 31, up 33 percent from the same period the previous year.
Senior investment bankers in south-east Asia, however, said headline M&A volumes for the region can be misleading as mega deals in previous years have skewed the figures.
In 2012 Thai agricultural conglomerate Charoen Pokphand Group paid $9.4 billion for HSBC’s stake in China’s Ping An Insurance. In 2013 Thai billionaire Charoen Sirivadhanabhakdi acquired Singapore’s Fraser and Neave in an $11.2 billion deal.
“M&A in south-east Asia has much more lumpy deal volumes than many other markets,” says Eugene Gong, head of M&A for south-east Asia at Deutsche Bank. “I see no material drop-off in our M&A pipeline but, unlike western markets that are quite structured in their M&A, south-east Asian deal discussions can take three, five, 10 years for those seeking to do a deal from outside the region. “Powerful families who control many of the businesses in the region don’t engage in auction-like transactions but want to get to know and trust any potential acquirer.”
Pankaj Goel, head of M&A south-east Asia at Credit Suisse, echoes this.
“Client dialogues are healthy,” says Mr. Goel. “Corporate balance sheets in south-east Asia are strong. Companies outside and inside the region remain in the hunt for strategic transactions.”
However, the recent plunge in the price of many commodities – oil prices had halved in the past 12 months – coupled with the weakening of both the Malaysian and Indonesian currencies have prompted many local business owners to put selling plans on hold. Both the Malaysian ringgit and the Indonesian rupiah recorded 17-year lows against the US dollar in 2015.
At the same time, the worsening political situations in several countries in the region, most notably Thailand and Malaysia, has made potential foreign investors nervous.
“Malaysia and Thailand are very resource-driven,” says Samson Lo, head of M&A, Asia at UBS. “Currency movements no longer favour deals from a Thai or Malaysian viewpoint while political instability has made people nervous.”
Still, south-east Asian stock markets, with the exception of Singapore, as of mid-August were trading at an estimated price-to-book ratio higher than that of MSCI China and Hang Seng Index’s 1.2 times, according to Bloomberg data.
Messrs Goel, Gong and Lo agree that consumer-focused businesses could prove to be the most exciting area of future M&A activity. The region’s young population and growing wealth make them attractive to global consumer brands, as well as Asian companies seeking to expand beyond their home markets.
Last year consultant McKinsey & Company estimated that 67 million households from the Association of Southeast Asian Nations (which includes Indonesia, Singapore, Malaysia, Thailand, Myanmar, Cambodia, Laos, Vietnam and the Philippines) have incomes at levels where they can “make significant discretionary purchases”.
“The sector that has proved [to be] most resilient to political and currency movements has been the consumer sector, [especially] the food and beverage companies,” says UBS’ Mr. Lo.
As a result, south-east Asian business owners demand significant premiums from buyers of their businesses.
“South-east Asia is very attractive to most of the world’s big companies because of its young demographics and low consumption per capita,” says Credit Suisse’s Mr. Goel. “As a result, consumer sector M&A involves significant premiums because of high growth and scarcity of potential takeover targets. The drop in many local south-east Asian currencies makes the sector look more attractive to outside acquirers.”
South-east Asian consumer products companies have not just been speaking to potential acquirers but also doing deals of their own. Last year, the Philippines’ snacks and drinks producer Universal Robina announced it was buying New Zealand’s Griffin’s Foods for $609 million. In late 2014, Thai Union Frozen Products said it was acquiring America’s Bumble Bee Seafoods for $1.5 billion.
South-east Asia is also home to a number of deal-hungry sovereign wealth funds: Singapore’s GIC and Temasek as well as Malaysia’s Khazanah Nasional. These soveriegn welath funds have an established record of participating as limited partners in the giant US private equity general partnerships – but they are increasingly opting to come on board as co-investors in deals instead.
Deutsche Bank’s Mr. Gong says of the three south-east Asian soveriegn wealth funds: “Their strategy is to diversify away from their home markets, mostly with minority stakes. And these funds have also evolved from being [investors in buyout funds] to deploying increasing amounts of capital as co-investors alongside the private equity firms while having a more long-term investment horizon than PE.”
In turn, US buyout firms Blackstone Group, Carlyle Group, Kohlberg Kravis Roberts and TPG, all of which have offices in Singapore, are on the hunt for deals in south-east Asia, says Credit Suisse’s Goel.
“The challenge for PE is one of valuations in south-east Asia versus the globe and north Asia,” says Mr. Gong.
The stronger US dollar enables global private equity funds, whose funds and performance are also in the US currency, to pursue larger transactions in the region in the local currency. But when they exit their south-east Asian investments, they will also have to do so in that local currency, making for no real advantage currency wise.
In fact, the strengthening of the US dollar inhibits private equity firms in terms of performance once they are invested. This means any buyout firm that invested in Indonesia two years ago is now sitting on a significant paper foreign exchange loss.
Amid concerns about M&A deal levels in south-east Asia, some investment banks have made the region less of a focus. The Wall Street Journal reported in March that Goldman Sachs had cut its Singapore investment banking team by a third since January with the departure of as many as a dozen bankers.
Deutsche Bank, UBS and Credit Suisse said their investment banking staff levels have largely remained consistent despite the downturn in M&A deal volumes this year as they hope to pick up business when deal activity returns.
South-east Asian M&A bankers also said the global boutique advisory firms are seeking to establish a presence in the region by luring experienced bankers to their firms. Axel Granger, previously head of M&A for south-east Asia at Bank of America Merrill Lynch, was hired in June by Evercore. All this manoeuvring for personnel has Deutsche Bank’s Gong optimistic about the outlook for M&A activity over the next 12 months in south-east Asia.
“There is definitely not as much activity as I would like to see. But I see a turnaround as the political situation stabilises,” says Mr. Gong.
He declines to talk about specific deals but said the firm was in the position to take advantage of any pick up in M&A activity in the region.
In contrast, UBS’s Mr. Lo struck a note of caution.
“The ability to finance a deal is not a problem,” he says. “But we remain cautious in what for the region is a down market for M&A. It’s not because of unrealistic valuations by sellers, but more the slowdown of China’s economy. The depreciation of the renminbi has also put some pressure on the rest of the region.”