Deloitte China's outbound M&A report

Singapore, 25 September 2014 – Despite volatility in the international financial markets, Chinese firms are more confident in making outbound mergers and acquisitions (M&A), evidenced by the robust M&A transaction data during the first five months of 2014, according to the 2014 edition of Deloitte China's outbound M&A report ("the Report"), which includes a survey of M&A practitioners in the Greater China region. For the first five months of 2014, there were 106 Chinese Outbound M&A transactions with a total value of US$31.7 billion. The majority of the surveyed M&A practitioners believe that the number of Chinese outbound M&A transactions will grow as much as 30 percent in the coming year.

"U.S. economic recovery and RMB internationalization may provide favorable conditions for Chinese investors seeking more premium assets and larger market share abroad. In addition, distressed assets and depressed valuations in the Euro zone will probably attract more bargain hunters from China, particularly in the Manufacturing and Technology, Media and Telecommunications sectors which are the primary beneficiaries of Chinese investments in the Euro zone, " said Patrick Yip, National Leader, Deloitte China M&A Services, adding that the number of China's outbound investment deals had grown for four consecutive quarters since the second quarter of 2013.

The report is put together based on the data from Mergermarket, the independent M&A intelligence provider, and fDi Markets, a foreign direct investment information service provider, with a detailed examination of Chinese outbound M&A and greenfield foreign direct investments (FDIs) transaction trends from 1 January 2014 to 31 May 2014. It also comprises a survey which gauges and analyzes the opinions from 100 respondents from Chinese state-owned enterprises (SOEs), privately-owned enterprises (POEs), private equities, investment banks and law firms. This on-line survey was conducted in May 2014.

When it comes to transaction size, the report said the number of small-sized M&A deals with a value of up to US$50 million grew the most (65 percent year-on-year) in the first five months of 2014. The proportion of the mid- and large-sized M&A deals with a value from US$50 million to US$1 billion dropped and the share of the mega-deals with a value of over US$1 billion had climbed gradually since 2005's 4 percent to about 8 percent in mid-2014. Surveyed respondents, however, seem to have a different view about the trends for the remainder of 2014 where they expect a higher deal volume for the mid- and large-sized M&A transactions alongside a reduction in the number of small-cap M&A transactions.

Dennis Chow, Chairman of Deloitte Global Chinese Services Group, said "The findings reflect that Chinese investors may develop an appetite for larger transactions, especially targets with higher valuations or with leading positions in their respective industries. It may indicate positive expectations as a result of easing regulations on capital transfers out from China. However, when compared with other developed countries from January 2013 to May 2014, the total value of Chinese outbound M&A transactions was comparable with that in Germany and Japan, and only reached a quarter of that of the United States and half of that of the United Kingdom."

The report also analyzed the target regions for Chinese outbound M&A and found that Western Europe superseded the United States as the most popular target market for Chinese investors in the first five months of 2014. During the period, Western Europe enticed 25 Chinese outbound M&A deals with a total value of US$9.7 billion, compared to 17 transactions in the United States with an aggregate value of US$6.1 billion. In 2014, however, 95 percent of respondents believe that Asia will attract the most Chinese outbound M&A investments.

During the same period, Chinese outbound M&A activities were the most active in the Consumer Business sector with 34 deals, followed by Manufacturing (25 deals) and Technology, Media & Telecommunications (18 deals). Worth noting is the significant drop in the number of deals in the Energy & Resources sector by 44 percent year-on-year which may indicate more judicious investor profile in the Energy & Resources transactions. However, almost all respondents voted for Energy & Resources as the most active sector for Chinese outbound M&A in the coming year, followed by Consumer Business and Manufacturing.

Group Leader for Deloitte Southeast Asia is upbeat on the growth of the Southeast Asia market that is becoming an increasingly attractive destination for Chinese firms. “Relaxing regulations for capital transfers out of China in combination with the increasing role of Chinese POEs in overseas investments would most likely have a positive impact on the inflow of Chinese investments into Southeast Asia,” said Dr Kan.

Also covered in the report is the trend for Chinese outbound greenfield FDI, which indicated a strong demand in the Manufacturing sector (41 deals) for the first five months of 2014, followed by Technology, Media & Telecommunications (35 deals). The largest Chinese outbound greenfield FDI deals worth cumulative US$10 billion were concluded in the Energy & Resources sector and particularly in accessory industries such as transport infrastructure, followed by large deals in the Real Estate sector (US$6.9 billion), especially in the United Kingdom and the United States.

Geographically, the United States attracted the majority of greenfield FDI deals during the first five months of 2014, although the largest greenfield investments valued US$5.6 billion went to the Southeast Asia market.

When it comes to M&A challenges, surveyed respondents cited the difference in management culture of European and North American targets as the major obstacle. Other issues include financial constraints, exchange controls and convertibility of the Chinese currency. More respondents found professional advice crucial, especially in due diligence, structuring, post-merger integration issues with the hope to realize higher returns from the transactions.