IFR Asia: Asian M&A returns to the good old days

IFR Asia, September 2009

M&A in Asia has emerged from the credit crunch in a different shape than it entered it, but no less active. True, the jumbo private equity leveraged financings of 2006 have gone – for the moment, at least – but in its place have come new trends: China seeing cheap assets to be acquired, Australian resources attracting interest from around the world, and distressed or non-core holdings changing hands.

Activity has focused on China, India and Australia, and for banks with a presence in those markets business has been good. “We are very busy right now,” says Gordon Paterson, managing director and head of M&A for Asia Pacific at Deutsche Bank. “In fact quite frankly we’re as active as we’ve ever been in M&A.” Deal volume numbers might be down, but Paterson argues that is largely a function of lower share prices. Measured by number of deals, there have been a broadly similar number of announced transactions in the first nine months of 2009 as in the same period in 2007 or 2008.

“There’s a perfect window for Asia, and particularly places like China, right now,” Paterson says. “Funding is not an issue for most of the companies in our region: they have access to capital and it is priced relatively attractively, at a time when funding is an issue for the rest of the world. So not only does China have tremendous access to capital but its major competitors, the bigger companies elsewhere in the world, aren’t out there for assets. It’s a perfect combination.”

There have been numerous recent examples of Chinese companies seeking to acquire overseas, chiefly in resources, from Chinalco’s ultimately unsuccessful tilt at a $19.5 billion deal with Rio Tinto to Sinopec’s US$7.2 billion purchase of Addax, a Swiss firm developing an oil field in Iraqi Kurdistan. Other outbound deals have included Baosteel, China Minerals and Petrochina. There’s no sign of this fading away: in September China National Petroleum (CNPC), the parent of listed PetroChina, secured a US$30 billion loan from China Development Bank to finance overseas acquisitions. “There’s clearly a theme here that this is a time to go out and acquire, especially in resources,” Paterson says.

Many of these acquisitions have involved Australian assets, making Sydney M&A bankers equally active. “The level of activity here throughout has remained reasonably solid,” says Anthony Sweetman, head of M&A for UBS in Australia. “It’s not as busy as it was in 2006 and 2007, when levels globally were driven by private equity, the quantum of debt available and the pricing of that debt. But Australia has been somewhat sheltered by a relatively strong domestic economy and banking system and activity has been driven by foreign investment into our mining and resources sector.” In the coal seam gas sector alone, Santos has sold an LNG project stake to Malaysia’s Petronas, Britain’s BG Group (having bid unsuccessfully for Origin Energy) has bought Queensland Gas Company, and Origin has sold assets to ConocoPhillips. And it’s not just in resources: Japanese buyers have found value in Australian assets, with Kirin buying out affiliate brewer Lion Nathan and Asahi Breweries buying Australian assets of Cadburys Schweppes. In the other direction National Australia Bank has picked up the Australian arm of Aviva, and two companies have shown the first hint of Australian outbound M&A, with ANZ buying many of RBS’s Asian assets and Amcor buying parts of Alcan Packaging from Rio Tinto.

This last point may herald a new direction in M&A as funding returns to Australia acquirers. “Amcor is a sign of things to come in 2010,” says Jonathan Gidney, managing director of investment banking at JP Morgan. “Australia has strong capital markets that are prepared to fund strategically sensible acquisitions by Australian companies.” Funding sources have been varied: ANZ did its deal with the proceeds of a prior rights issue, while lending and debt capital markets are also viable options. There’s not much syndicated lending yet, says Sweetman: “It’s mostly been club facilities with numerous banks taking and holding positions rather than a smaller number underwriting then syndicating.”

Both Sweetman and Gidney see a gradual re-emergence of private equity in Australia, although the takeover of MYOB by Sydney-based private equity house Archer Capital was the only major transaction in the first half of 2009. “It’s generally not big, multi-billion dollar transactions,” says Sweetman. “But a number of private equity players still have committed funds on the equity side and are looking to invest.” Gidney adds: “A number of assets are starting to be put back on the sell list again, and you’re seeing the re-emergence of sponsor interest in unloved companies like Emeco and Energy Developments.”

Deals like China Minmetals/OzMinerals (where a full takeover was nixed because of the sensitivity of a mine on Ministry of Defence land, and instead only a purchase of other assets took place) and Chinalco/Rio Tinto (not blocked politically but nevertheless controversial) have created a sense that China is impeded in its ambitions by an unwillingness of major government’s, notably Australia’s, to sell assets to it and its state-backed companies. Australians tend to find this concern overdone and those dealing with Chinese clients feel the sensitivity can be dealt with. “Politics is just one of many issues in a deal,” says Paterson. “How you structure the deals is important.” [Paterson doesn’t discuss specific deals but it’s notable that in two Deutsche-advised China-Australia deals recently, Baosteel’s purchase of a stake in Aquila and various Chinese entities in Fortescue Metals, the total shareholding was kept below 20%.]

In Asia, activity is being supported by strength of funding in local markets, chiefly bank lending. And for a sign of what can be supported, take a look at the Bharti Airtel US$23 billion merger with South Africa’s MTN Group, which appeared to be in its final stages as this article went to press: it is expected to achieve both a US$3-3.5 billion five year offshore loan and a rupee loan of US$2-2.5 billion equivalent, all of this after securing a US$5 billion underwriting commitment from Standard Chartered. If that’s illustrative, the markets are going to be vibrant for some time.