China, Brazil Are Left Out of M&A Boom That's Sweeping the Globeby
Buyers in developed economies pull back from emerging markets
Overall dealmaking still on track to break 2007 records
In a year of potentially record global dealmaking, executives are turning a cold shoulder to buying companies in China, Brazil and other emerging markets.
The culprits: geopolitical uncertainties, market and currency volatility and a slump in commodity prices. Deals to buy companies in emerging markets are headed for their quietest year since 2009 -- at a time when the dollar amount of global transactions this year is poised to surpass the $4.2 trillion achieved in 2007, according to data compiled by Bloomberg.
“People are really worried about instability in emerging markets and they’re turning their eyes to established economies,” said David Avery-Gee, a corporate partner at law firm Linklaters in London. “For the first time in many years, Western companies are thinking twice before expanding into emerging markets via mergers and acquisitions.”
After jumping last year, acquisitions in developing countries are down almost 10 percent in 2015, according to the data. By contrast, more than 70 percent of the $3.5 trillion in deals announced this year involve both a buyer and target based in North America, western Europe or the developed Asia economies, the data show, a rise of 34 percent from last year.
In Brazil, where economists predict the economic downturn will turn into the nation’s longest recession since the Great Depression, inbound deals are down 27 percent year-on-year. There has also been only one initial public offering in the country, raising just $229 million, compared with 2013 when companies raised more than $8 billion.
Concerns about a slowdown in China have stifled acquirers’ interest in the country. Deals from developed countries are down 17 percent to $9.8 billion, Bloomberg data shows. IPOs worth about $1.76 billion have been canceled or postponed, more than double last year’s number.
“Companies that invest in China are being challenged by shareholders that worry about the country’s growth prospects,” said Sophie Javary, head of corporate finance for Europe, Middle East and Africa at BNP Paribas SA.
Those deals that do happen in emerging markets are sometimes driven by favorable currency rates that translate to a lower purchase price. In March, British American Tobacco Plc bid about $3.5 billion for the stake it doesn’t already own in Souza Cruz SA, Brazil’s biggest cigarette maker, taking advantage of a plunging real to expand in Latin America.
And some companies are still willing to take the risk in less stable economies, as shown by Anheuser-Busch InBev NV’s $107 billion purchase of brewer SABMiller Plc. The Belgian brewer could benefit from access to emerging markets in Latin America and Africa, where its target derives about 80 percent of its revenue.
Beyond the consumer sector, telecommunications firms have also shown an interest to expand in emerging markets. John Malone’s Liberty Global Plc agreed to buy Cable & Wireless Communications Plc on Monday in a cash-and-stock transaction valued at 3.5 billion pounds ($5.3 billion), extending the U.S. billionaire’s cable empire deeper into Latin America.
Meanwhile, some companies based in an emerging market aren’t sitting still awaiting a buyer. They’re starting to look outwards, and expanding into more stable, developed economies.
State-owned China National Chemical Corp. is in talks to buy the Swiss pesticide maker Syngenta, people familiar with the matter said last week. If a deal goes ahead it would be the biggest Chinese acquisition ever -- and give the country a major position in the global agriculture industry.
In March, Li Ka-shing’s Hutchison Whampoa Ltd. agreed to acquire Telefonica SA’s O2 unit, creating Britain’s biggest wireless provider by customers and marking a milestone in the billionaire’s efforts to remake the Hong Kong conglomerate.
“Chinese businesses have been particularly aggressive in buying European assets with a foothold in China,” said Javary, citing deals such as ChemChina’s 7.1 billion-euro ($7.6 billion) purchase of a stake in Italian tire maker Pirelli & C. SpA.
African companies are also seeking access to consumers and investors in developed countries.
Brait SE, an investment company controlled by South African billionaire Christo Wiese, has increased its exposure to the U.K. high street this year by acquiring stakes in health-club provider Virgin Active, women’s clothing retailer New Look and budget supermarket chain Iceland Foods for a combined 1.7 billion pounds.
Vikas Seth, head of emerging markets for investment banking and capital markets at Credit Suisse Group AG, said he is expecting more deals to take place in 2016. But for this year, he said, “Emerging markets have experienced a perfect storm.”