Mergers and acquisitions in Asia to continue as companies, deal makers seek to make up for a year of Covid-19 disruptions
- Financial markets remain strong and companies have capital to deploy, according to Deutsche Bank’s head of investment banking coverage for Asia-Pacific
- First-half M&A activity off to its fastest start since 2015, according to Refinitiv
Companies and private equity companies have raised a lot of cash in the past year and refinanced debt as interest rates remain at historic lows and central banks pumped vast amounts of liquidity into financial markets to restart economies worldwide.
There is not likely to be much of a slowdown, particularly in North Asia, as financial markets seem fairly strong, capital is there to deploy and China’s economy is doing fairly well, according to Mayooran Elalingam, Deutsche Bank’s head of investment banking coverage and advisory for Asia-Pacific. Interest rates also are not likely to rise in the near term.
“We’ll see some bumps along the way,” Elalingam said. “[Private equity] deployed aggressively last year when things were turbulent. If they continue to do that, they’ll keep the market moving even if corporates sit out until they have some volatility or the stock price falls off.”
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M&A activity is off to its fastest start since 2015, with companies engaging in more than 7,300 transactions worth US$570.8 billion in Asia-Pacific, excluding Japan, through June 15, according to data from Refinitiv. That compared with more than 6,800 deals worth US$350.8 billion in the first half of 2020.
“I’ve been doing this for a while. I’ve not seen so many buyer sets look at assets at these valuations,” Elalingam said. “In the old days in Asia, people didn’t like auctions and it was bilateral. Now people are saying get me the best price, let’s go broad and let’s do it quickly.”
“The SPACs are there in every deal that we pitch, sell sides in particular. SPACs are one buyer set. There is a lot more capital outside the SPACs that are faster, bigger and easier solutions,” Elalingam said.
Blank-cheque companies are finding more success outside auctions, with deals that take longer time frames, he said.
“They’re here to stay,” Elalingam said. “People have a good understanding they don’t work for every scenario.”
In addition to SPACs seeking targets, private-equity firms remain very active, he said.
“At least half of deals, there’s a PE [private equity] somewhere. They’re either selling or buying the asset or investing together with somebody,” Elalingam said.
As a result, Deutsche Bank has made several strategic hires to expand its coverage, with about two-thirds of its hires this year in Hong Kong, according to Elalingam.
Debt capital markets also have had a solid start this year as a rebound in issuance in the second half of 2020 continued into the first half of this year, according to Haitham Ghattas, Deutsche Bank’s head of capital markets for Asia-Pacific.
“The first half of 2021 has seen steady [year-on-year] growth,” Ghattas said. “These are healthy year-on-year growth levels, they’re not stratospheric.”
“A lot of corporates regionally are being quite conservative around making sure they’ve got sufficient funding on hand,” Ghattas said. “I don’t think that completely goes away in 2021. I think clients will still need to look at their liquidity position. They will probably need to continue to fund liquidity shortfalls.”
At the same time, some highly leveraged sectors, such as Chinese real estate, have pulled back somewhat on issuance.
“The sector as a whole has built up an awful lot of leverage. The business models are based on utilising a lot of leverage,” Ghattas said. “I think that clearly the actions we’ve seen from the central authorities in China are aimed at reducing risks in the sector.”
Earlier this year, Deutsche Bank was involved in several deals with Chinese real estate borrowers to issue longer tenure debut – five to seven years – to derisk their balance sheet and extend their maturity profile, he said.
However, several big names have chosen to list in the US over Hong Kong, at least initially.
There is a pipeline of companies waiting in the wings to go public, particularly as there has been demand in the consumer, health care and technology, media and telecoms (TMT) sectors in the past year, Elalingham said.
“In Hong Kong and China, if you just go through the portfolio of VCs [venture capital] and private equity, they’ve still got a lot of companies coming through,” he said. “It won’t just be a mad rush.”
There remains a desire for companies in the region to issue equity and longer-term valuations remain robust, Ghattas said.
“As you’re coming out of a Covid world, we’re clearly seeing a big pick up in M&A activity,” he said. “This in turn stimulates increased equity activity to fund that M&A or to fund refinancing as well as deleveraging requirements.”
