Advertisement
Advertisement
Banking & finance
Get more with myNEWS
A personalised news feed of stories that matter to you
Learn more
Shanghai’s financial district. Another trend that could play an important role in deals in the region this year is the proliferation of SPACs. Photo: EPA-EFE

China is among ‘most active’ markets for mergers, Deutsche Bank top banker says

  • Transaction sizes are smaller, but the number of deals has picked up significantly compared with start of 2020, according to Deutsche Bank’s Mayooran Elalingam
  • Chinese companies are focusing on regional, local outbound targets
Just over a year into the coronavirus pandemic, China has become one of the “most active” markets for mergers and acquisitions (M&A), as mainland buyers scoop up deals in Asia and buy local operations from multinational companies seeking to exit the region, according to one of Deutsche Bank’s top bankers in the region.

Activity is probably the “busiest” it has been in a number of years to begin 2021, in terms of the number of deals in the region, even as the sizes of transactions are a little smaller, according to Mayooran Elalingam, Deutsche Bank’s Asia-Pacific head of investment banking coverage and advisory.

“Even if the rest of the year is much more normal, we should have a very, very good year in M&A, probably the best in awhile,” Elalingam said. “We had a good year at the end of 2020 for announcements. That will carry through.”

Domestically, there were 825 deals in China worth a combined US$75.7 billion through March 5, the biggest number of transactions since 2018, according to data from Refinitiv.

03:26

Two sessions: How China's environmental policies are giving a boost to green industries

Two sessions: How China's environmental policies are giving a boost to green industries

There were 51 announced outbound deals by Chinese buyers worth a combined US$5.8 billion to begin the year, compared with 79 outbound transactions worth a combined US$1.6 billion in the same period in 2020, according to Refinitiv.

Deal making is being driven by a variety of factors this year, Elalingam said. A number of companies raised a lot of cash in 2020 as they wanted to be flush to navigate the pandemic and are now looking for ways to deploy it, he said.

“There are new buyers in town. There are the SPAC buyers. There is private equity, infra and core plus funds, and also insurance and yield seeking funds, which in cases can be single-digit return hurdles,” Elalingam said. “There’s a lot of new buyers for assets that didn’t exist before. That’s a good thing.”

Other firms are looking to dispose of assets as they seek to decrease their debt, he said.

Activists have returned following a quieter year because of the pandemic, and are again pushing for asset sales to unlock value in companies, Elalingam said.

Environmental, social and governance (ESG) concerns have also become a more prominent part of the discussion in deals, he said. The higher profile of ESG concerns comes on the back of China and other governments in the region announcing plans last year to be carbon-neutral by 2060.

“ESG has now become a very significant theme in M&A. It’s not just that people raise a green bond,” Elalingam said. “Is my business ESG compliant? Should I be changing my business? Selling some businesses that are less ESG friendly and moving into new areas that are much more relevant to the new era?”

Green bonds are fixed-income products designed to fund projects that are environmentally friendly.
Mayooran Elalingam, Deutsche Bank’s Asia-Pacific head of investment banking coverage and advisory. Photo: Handout

As US-China relations remain strained, Chinese buyers are focusing on more local and regional targets for outbound transactions, rather than the United States, Elalingam said. They are also pursuing deals where multinational companies are looking to sell some assets as they exit the region, he said.

Outbound activity had been on the decline in recent years, as China pushes to reduce corporate debt following the world’s biggest shopping spree in 2016, and the Trump administration pursued a trade war with Beijing.

“Inbound into China is still a little tricky and who the buyer is matters,” Elalingam said. “Generally, for our multinational clients, we’re seeing more outbound flow than inbound at the moment.”

Prominent exits in recent months included Nestle agreeing to sell its water business in China to Tsingtao Brewery Group in August and its Yinlu peanut milk and canned rice porridge business to Food Wise Company in November.

Another trend that could play an important role in deals in the region this year is the proliferation of special-purpose acquisition vehicles (SPACs). These so-called blank-cheque companies raised more than US$60 billion in initial public offerings in the first two months of the year, including a record US$34.6 billion in February, according to Refinitiv. It is the fastest pace for fundraising by SPACs in the past two decades.

These investment vehicles are not currently allowed to list in Asia, but bourses in Hong Kong, Singapore and Indonesia are considering whether to make rule changes to allow them to do so.
Some of Hong Kong’s wealthiest families are jumping on the trend as well and forming their own SPACs, including Richard Li, the younger son of Hong Kong’s richest man Li Ka-shing, and Adrian Cheng Chi-kong, the third-generation scion of New World Development.

“Two things matter for a successful SPAC market in APAC – investors and regulatory framework. We have large investor appetite in this region to support SPACs, as evidenced by Asian demand in overseas SPACs,” Elalingam said. “However, the regulatory framework needs to be thought through, as this is a complex product that probably suits more sophisticated investors.”

Post