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Momentum in M&A builds up

Sharanya Pillai
Sharanya Pillai • 12 min read
Momentum in M&A builds up
(Nov 13): At least one new deal has been announced every day over the last week, with the largest being COSCO Shipping International (Singapore)’s $488 million offer for logistics services provider Cogent Holdings on Nov 3. Shareholders of Cogent are no
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(Nov 13): At least one new deal has been announced every day over the last week, with the largest being COSCO Shipping International (Singapore)’s $488 million offer for logistics services provider Cogent Holdings on Nov 3. Shareholders of Cogent are not too happy about the offer price, which at $1.02 a share is just 5.2% more than Cogent’s last transacted price of 97 cents on Nov 2. Even so, quite a few of them will register a tidy profit from selling their shares. Cogent is part of The Edge Singapore’s Singapore Market Portfolio and has gained 49.3% since it was added on Jan 24.

In fact, a pickup in M&A deal values is making quite a few investors richer this year. Singapore- targeted M&A activity this year reached US$44.97 billion ($61.2 billion) as at Nov 2, according to data from Dealogic. This marks a 95.8% increase from the total deal value for the same period last year. The total number of deals has remained fairly constant for both years, hovering around 400.

Much of the increase in deal value stems from the announced US$16 billion acquisition of Mainboard-listed Global Logistic Properties (GLP), the largest warehouse operator in Asia, by a Chinese private-equity consortium. But there have also been quite a few deals that resulted in upward revaluations of local stocks. Among them: an offer for United Engineers (UE) by a consortium including Yanlord Land Group and Perennial Real Estate Holdings; and a buyout of automotive components maker Fischer Tech.

What is driving the surge in deals? And where has the money been concentrated? Could there be more opportunities for investors to cash in?

Pankaj Goel, co-head of Southeast Asia investment banking and capital markets at Credit Suisse, tells The Edge Singapore that he has seen more M&A activity and strategic dialogue on the corporate side. “This is driven by a combination of reasonably healthy corporate balance sheets, the positive backdrop of Singapore and global GDP growth as well as strong capital markets performance,” he says.

Goh Sze-Hui, partner at law firm Eversheds Harry Elias, has a similar observation. “Despite the perceptions of instability, key stock market indicators around the world are all showing gains compared with a year ago. Investor sentiment is positive and companies are sitting on cash piles that were not utilised in 2016,” she says, adding that this has spurred M&A activity across the region.

Private-equity firms, with plenty of “dry powder that they need to deploy”, are joining the fray too, says Chunshek Chan, global head of M&A and financial sponsor research at Dealogic. “They have been sitting on top of billions of dollars of committed but undeployed capital for years,” he says. “And it seems like this year, everyone has decided that they can’t wait anymore.”

Meanwhile, the underperformance of local equities over the last few years has depressed valuations. Kristy Fong, senior investment manager, Asia equities, at Aberdeen Standard Investments, says: “Singapore has been an overlooked market for some years and some of the privatisation deals, for example, simply reflect how undervalued certain stocks were.”

Cue the Chinese contenders
A major theme in M&A deals this year is the sustained interest from Chinese companies and private equity, says Choe Tse Wei, head of strategic advisory at DBS Bank. In the real estate sector, the blockbuster proposed buyout of GLP is one example. DBS had advised the winning consortium in the deal.

On July 14, GLP announced that a special committee overseeing a strategic review had recommended a bid submitted by China’s Hopu Investment Management, the country’s second-largest homebuilder China Vanke Co, Hillhouse Capital Group and the Bank of China Group Investment. In a seven-month-long auction process, the consortium edged out competition from a rival group led by private-equity firm Warburg Pincus. The Chinese bidders made an attractive offer price of $3.38 in cash per share, which represented an 81% premium over the company’s 12-month volume weighted average price per share until Nov 30, 2016.

Another real estate deal linked to a Chinabased entity was the acquisition of UE. The Yanlord- and Perennial-led consortium announced the acquisition of a stake in UE from Oversea-Chinese Banking Corp and its insurance arm Great Eastern Holdings on July 13. UE was widely seen as undervalued relative to the commercial property on its books. Not long after the acquiring consortium made a mandatory general offer for the remaining shares of UE, Oxley Holdings became a substantial shareholder of UE.

According to Choo Oi Yee, head of corporate client solutions for Singapore at UBS Investment Bank, Singapore’s real estate companies “trade at a big discount to net book value”. This discount has made them attractive targets for foreign buyers. “We do see a lot of Chinese property companies wanting to diversify outside of China, and Singapore is an obvious place for them to consider,” she says.

Beyond real estate, Chinese buyers have shown interest in Singapore’s logistics and infrastructure space. The recent sale of logistics company CWT to Chinese conglomerate HNA Holding Group Co is a prime example, with state news agency Xinhua calling it a “small but beautiful” deal.

Interestingly, these deals have happened amid the Chinese central government’s clampdown on excessive overseas M&A to rein in capital flight. The Chinese government has been wary of “potential abuse of outbound M&A as a means of moving money out of China”, says DBS’s Choe. Such transactions had involved the purchase of assets such as film studios, hotels and even football clubs, he adds. HNA, for one, has been one of the most aggressive private Chinese companies making overseas acquisitions, with more than US$40 billion spent on buying stakes in assets, ranging from Deutsche Bank to Hilton Worldwide Holdings.

Unnerved, Chinese regulators tightened the screws on deals that threatened the health of the country’s foreign exchange reserves. The impact of this has been felt worldwide, Choe notes. On Aug 16, the Financial Times reported that the total year-to-date value of outbound M&A deals by Chinese companies was down 42% from 2016.

But Choe says the government’s clampdown has simultaneously spurred “the rise of the sophisticated Chinese buyers”. “Remember that China does not mind growth overseas, as long as it is consistent with the OBOR initiative,” he says, in reference to Beijing’s multi-trillion dollar One Belt, One Road grand plan. Also known as the Belt and Road Initiative, it includes an expansion of China’s trade infrastructure into Europe and Central and Southeast Asia. “It’s about creating a network of ports, warehouses and rail and road infrastructure,” he says.

In this climate, Singapore companies have become attractive targets for Chinese buyers. “Our markets are very open and transparent. A lot of companies are listed and, even for the unlisted ones, you can deal directly with the owners. It’s a mindset that we are prepared to consider M&A. Second, Singapore’s economy has developed to a point where its companies have sufficient scale. The Chinese don’t want to waste time on smallish deals,” Choe says. “If they are going to spend all those hours on negotiation, they might as well spend it on a deal that makes a difference to their size in China. It must move their needle.” Indeed, COSCO is understood to have kicked the tyres of a smaller locally listed logistics play before eventually deciding to make the offer for Cogent.

Growth in healthcare and tech M&A
Beyond real estate, infrastructure and logistics, M&A activity has also grown in several other key sectors that are witnessing healthy economic conditions. The healthcare sector, for instance, has seen 25 deals year-to-date worth nearly US$2 billion, according to Dealogic. Notably, real estate and investment firm Rowsley announced that it would acquire $1.9 billion worth of healthcare assets from its controlling shareholder, Peter Lim. Under the deal, Lim will inject 100% of Thomson Medical and 70.36% of Malaysia-listed TMC Life Sciences into Rowsley.

While the relatively large size of the Rowsley deal skews the data on healthcare, UBS’s Choo says the sector is otherwise seeing a healthy level of activity. “Healthcare has always had an active M&A pipeline of the clinics and medical groups, which are relatively smaller in size,” she says. “For example, Fullerton Healthcare and the Singapore Medical Group [have done] a few deals, buying up smaller businesses either in Singapore or the region. So, healthcare remains busy.”

Ee-Ching Tay, head of Southeast Asia M&A at JP Morgan, says healthcare is a popular sector, with “both strategic players and private- equity funds looking to acquire assets in the high-growth Southeast Asia markets.” She adds, however, that “the challenge lies in finding assets of scale that are available for sale and at valuations that work for both sides”.

Another sector in which bankers have been seeing growing activity is the technology space. Some of this year’s deals involving locally listed tech-linked companies include the $331.4 million acquisition of precision components maker Innovalues by a private-equity firm and a proposed acquisition by Artivision Technologies of Mobile Credit Payment for no less than $80 million.

The deals in Singapore’s private space have been much larger. For instance, Chinese technology giant Alibaba Group Holding has invested US$2 billion this year to raise its stake in Singapore e-commerce platform Lazada Southeast Asia. In July, on-demand transportation platform Grab announced that it had secured US$2 billion in funding from Japanese telecommunications company SoftBank Group Corp and Chinese ride-hailing platform Didi Chuxing.

“These deals are not the traditional private- equity deals that involve mature companies, which are already proven. These are deals that involve investor money taking somewhat of a high-risk stake in businesses that are not yet profitable, or barely profitable,” DBS’s Choe notes. He believes that M&A targeting technology start-ups will continue to be one of the “emergent trends” as acquirers ride the stable economic outlook.

Credit Suisse’s Goel too sees more interest in the tech sector. He cites strong investor interest in the recent IPO of homegrown tech firm Sea and the impending IPO of gaming peripherals manufacturer Razer. “Southeast Asian tech companies have achieved size and scale, and we expect that there will be more M&A activity.”

Fair weather conditions ahead
All this corporate activity bodes well for Singapore’s overall outlook, says a spokesman for the Singapore Exchange. “The robust deal flow in this region is a positive trend that reinforces Singapore as a global financial hub, and adds to the vibrancy of both private and public capital markets. The rising interest in Southeast Asian companies underscores the opportunities and value that international investors see in this region,” the spokesman says.

The bourse also believes there will be spillover benefits for those invested in the local market: “Equity investors can benefit from the current pickup in activity, whether it is in M&A, corporate restructuring or secondary fundraising.”

Moving ahead, industry players are generally confident about continued momentum of M&A activity for 2018. JP Morgan’s Tay says deals on the scale of those of GLP and Equis Energy are rare in this part of the world. On Oct 24, investment fund Global Infrastructure Partners agreed to buy renewable energy player Equis for US$5 billion — a record sum in the renewable space. Tay is optimistic, however, that favourable macroeconomic trends — “companies seeking growth, low debt funding costs and abundance of capital to be deployed” — will continue to fuel M&A activities.

Meanwhile, UBS’s Choo is hopeful that more local companies will venture abroad — raising outbound M&A activity. “We have a lot of conversations with Singapore companies that are in search of better returns or growth. So, we hope there will be more to come from that. It’ll be good to see Singapore companies venture beyond [their home market],” she says.

While many of those companies currently looking to expand overseas are in the real estate and consumer products sectors, Choo adds: “Actually, almost all the companies in Singapore have to look outside of Singapore to grow. It’s sector-agnostic.”

Winston Seow, partner at Withers KhattarWong, observes this trend among family businesses. “We have seen how firms, such as the Tolaram Group, set up their family office and are now ready to expand to a multi-family office to ride opportunities in the region and globally,” he says. Seow predicts more M&A in the hospitality, technology and real estate industries next year. “There may be more megamergers in the global hotel industry, which will undoubtedly spill over into the Asia region, given its growth,” he says. “Within the technology sector, private equity and funding will continue to spur more M&A activities as some companies broaden their platforms/offerings and acquire market share to gain scale and sustain the growth expectations of investors. We can also expect heightened M&A activities in the property market, driven by competition in commercial real estate, the growth and potential of co-working spaces, inexpensive financing and improved sentiment in the sector.”

With the exception of geopolitical risks, DBS’s Choe believes the current stable economic outlook will continue into 2018. “Even the rate hikes by the US Federal Reserve and the Bank of England have been priced in by the market already. No one’s very upset about them, and the markets have absorbed that impact already… And then in oil and gas, we have seen a recovery in recent weeks. That could bring relief in the sector, finally. In a way, all factors point to very benign conditions for M&A.”

And, perhaps more fundamentally, there has been a mindset shift that will continue to drive M&A activity. As the business environment changes more quickly than before, M&A is often the sure way for companies to adapt and grow. “We have entered an era in which change seems to have become the new norm,” says Eversheds’ Goh. “Companies, markets and investors have adjusted relatively quickly to this new reality.” — With additional reporting by Chan Chao Peh

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