Weak M&A ac­tiv­ity fore­cast un­til pol­icy out­look clears: Study

China Daily (Hong Kong) - - BUSINESS DIGEST - By WEI TIAN in Shang­hai weitian@chi­nadaily.com.cn

Merger and ac­qui­si­tion ac­tiv­ity in China re­mains sub­dued as dealmak­ers adopt a “wait and see” at­ti­tude pend­ing clearer pol­icy di­rec­tion from the govern­ment, a semi-an­nual re­port by pro­fes­sional ser­vice provider Price­wa­ter­house­Coop­ers finds.

Amid tight­en­ing credit con­di­tions and a slow­ing econ­omy, first-half M&A deals in China de­clined 5 per­cent to 2,118, com­pared with the pre­vi­ous six months. In value terms, deals fell 6 per­cent to $119.5 bil­lion.

Deal num­bers and val­ues were still higher than a year ear­lier — but be­low the peaks of re­cent years.

“Strate­gic buy­ers have re­mained cau­tious, and we did not see a re­bound in ac­tiv­ity in the sec­ond quar­ter af­ter (China’s) lead­er­ship changes took ef­fect,” said An­drew Li, PwC Cen­tral China ad­vi­sory leader, at a Shang­hai news con­fer­ence.

Do­mes­tic strate­gic M&A re­mains the largest por­tion of deals in China, ac­count­ing for nearly two-thirds by vol­ume.

With the new pol­icy di­rec­tion tend­ing “to­ward de-lever­ag­ing and slower growth, both do­mes­tic and in­bound strate­gic buy­ers have been more se­lec­tive and fo­cused in their in­vest­ment ac­tiv­i­ties”, said Li.

Ac­cord­ing to the study, for­eign in­bound strate­gic deal vol­umes were also at low lev­els in the first half. The num­ber, on par with the sec­ond half of last year at 136, stood at nearly half the lev­els recorded in 2010 and 2011.

“Dealmak­ers are gen­er­ally adopt­ing a ‘wait


and see’ at­ti­tude and deals may re­bound if the pol­icy pic­ture be­comes clearer,” Li said.

The third ple­nary ses­sion of the 18th Cen­tral Com­mit­tee of China’s rul­ing Com­mu­nist Party, which is ex­pected to re­veal the roadmap of deep­en­ing of re­form, will take place in Novem­ber, much later in the year com­pared with pre­vi­ous years.

Apart from un­cer­tainty in pol­icy di­rec­tion and tight liq­uid­ity, re­cent anti-monopoly cam­paigns by the cen­tral govern­ment are adding short-term pres­sure on the deal­mak­ing en­vi­ron­ment, Li said.

The anti-monopoly cam­paigns, which of­fi­cials with the Min­istry of Com­merce deny are in­tended to tar­get for­eign com­pa­nies, have in­volved some of the tough­est penal­ties yet on for­eign brands.

Ac­cord­ing to PwC, in­vest­ment from else­where in Asia in­clud­ing Ja­pan ex­ceeded United States and Euro­pean-sourced trans­ac­tions in the first half, but the big­gest deals came from Euro­pean buy­ers in­clud­ing car­mak­ers Volvo Car Corp and Daim­ler Mo­tor Co.

Out­bound deals from the Chi­nese main­land also de­clined in the first half, with only 78 trans­ac­tions, com­pared with 95 in the pre­vi­ous six months, ac­cord­ing to the re­port.

“Many com­pa­nies fo­cused on ad­dress­ing chal­lenges in the dif­fi­cult do­mes­tic mar­ket, with lo­cal debt fi­nanc­ing for M&A be­com­ing more dif­fi­cult to ob­tain,” Li said.

One ex­am­ple was the con­struc­tion ma­chin­ery sec­tor, where there have been some ma­jor out­bound takeovers, such as Sany Heavy In­dus­try Co Ltd buy­ing Ger­man gi­ant Putzmeis­ter Hold­ing GmbH in early 2012. Such deals have been rare this year, be­cause of the ab­sence of govern­ment sup­port.

PwC fore­cast an in­crease in do­mes­tic debt re­struc­tur­ing, as bor­row­ers with non-per­form­ing loans are un­able to re­fi­nance or roll over their loans.

Trends such as th­ese, which will be en­cour­aged by pol­i­cy­mak­ers as a means of squeez­ing ex­cess ca­pac­ity out of the econ­omy, may be more vis­i­ble into 2014, the re­port said.

“We ex­pect that there will be more con­sol­i­da­tion in in­dus­try sec­tors in China with a re­sult­ing up­turn in do­mes­tic strate­gic M&A,” said Li.

Pri­vate eq­uity funds, the most sen­si­tive dealmak­ers to pol­icy trends, saw new fundrais­ing de­cline by 46 per­cent in the first half of 2013, com­pared with the sec­ond half of 2012.

“While cau­tious on pol­icy di­rec­tion and the soften­ing of the China econ­omy in gen­eral, PEs are also deal­ing with the tran­si­tion from growth cap­i­tal to [the buy-out phase], with fewer buy-out op­por­tu­ni­ties, and mi­nor­ity deals not fa­vored be­cause of con­cerns over abil­ity to exit,” said Roger Liu, PwC’s China/HK deal PE leader.

“With A-share mar­kets ef­fec­tively closed, and over­seas bourses un­re­cep­tive, IPO ex­its have slowed to a trickle,” Liu said.

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