Asian M&A: Opportunity in Crisis
CLSA's head of M&A, Chris Brooks, remains optimistic about outbound M&A from Asia, but isn't predicting a tidal wave of activity.
What has been the impact of the financial crisis on Asian M&A deals?
2008 was clearly a traumatic year for the markets and those in it. In that context, it was near impossible for CEOs and their teams to price an M&A deal and to fully factor in the risks. But many management teams see opportunity in crisis; and crisis doesn't make a strategic deal less strategic. So I would say that some of the deals that might have been done have instead been deferred and are likely to be reviewed as economic visibility improves. Indeed, the continued reduction in corporate valuations, and the sheer scale of last year's market turbulence, means that vendor and buyer price expectations will converge around realistic levels quicker than usual in a downturn.
Many potential acquirers are waiting for the conclusion of the year-end reporting season to see 2008 results, 2008 balance sheets and 2009 prospects—once potential acquirers have a better visibility on earnings, I think announced activity levels will pick up.
What is your outlook for Asia outbound M&A in 2009 and beyond?
I am positive about outbound M&A, and have been for the last several years, having worked with several Asian corporates on key strategic deals outside the region. This optimism is both long term and cyclical.
Long term, Asian corporates can seek to acquire companies with industrial technology, intellectual property, brands and access to markets that would take years to build.
Cyclical because (i) Asian corporates can now look to acquire critical natural resources at reduced valuations as commodity prices remain depressed; (ii) a number of western-based businesses are likely to face debt-related problems and certain transactions may become involuntary; and (iii) Asian corporates can compete now for deals without the spectre of being outbid by private equity using high leverage. Seizing the distress-driven opportunities—where a debt problem forces a sale which typically is quick—will be one of the challenges.
CLSA recently issued a series of research pieces entitled "Asian Dominators", highlighting key companies in the region that will emerge stronger—not all will do so via M&A but it is a good illustration of what some of this region's big, entrepreneurial, well-capitalised businesses are likely to achieve.
What kind of companies will be buying into Asia this year?
From outside the region, I think we will see industrial players who are seeking to access growth markets at a difficult time. A number of businesses in Asia have grown in good markets but now that times are much tougher, some will face challenges that can be aided by access to developed market technology, market access and management. So a combination of convergence of value expectations and mutual strategic opportunity should drive some exciting deals. In China for example, our joint venture, CESL is advising Sichuan Shuangma Cement on an asset injection by Lafarge Shui-On which gives Shuangma access to better industrial technology—the first such asset injection in the A-share market.
Significantly, from within the region, I think we will see family and management shareholders in listed businesses look to take those private where the markets continually fail to value the business, its cash flows and prospects, especially where it starts to impose an impediment on expansion. They are likely to find willing supporters in the private equity community.
What industries are likely to witness M&A activity?
I think it should be fairly broad based—although I am not expecting a "tidal wave" but a normal, healthy level of activity. Resources are likely to again be prominent, as commodity prices take their effect on corporate values. Financial institutions will see continued activity, especially where the aftermath of various state-sponsored bank interventions result in managements focusing on domestic businesses and looking to sell Asian assets. Industrials are likely to see inbound and outbound activity as I have highlighted. Property is likely to throw out some opportunistic deals, especially where the equity markets attribute too low a value to prime assets. Transportation is also likely to see increased activity as many areas are fragmented and ripe for consolidation. One industrial metric, the Baltic dry index was off over 95% from peak to trough with clear implications on shipping company valuations, making consolidation more achievable.
How has the cost of capital for Asian acquirers been affected by the prevailing situation?
Capital cost and accessibility have increased and declined respectively. Debt spreads are substantially increased for almost all borrowers and equity costs are increased in such a volatile period. Access to debt finance is likely to remain a key feature of 2009, with ramifications extending well beyond the impact on M&A.
What is the outlook for private equity firms as asset acquirers?
I think the outlook remains positive, especially where the firms are well established, have a clear investment focus and strong links into the markets where they seek to do business. In Asia, private equity investments are even more collaborative than elsewhere, meaning that the rapport between private equity investor and management (and often, importantly, a family co-investor) is critical.