Dealmakers in China have adopted a ‘wait and see’ attitude towards mergers and acquisitions (M&A) activity as the leadership transition, changes in policy direction, tightening credit conditions and a slowing economy have led to a decline in the number of deals in China in the first half of 2013.
Deals by volume and value have declined by 5% and 6% respectively compared with the second half of 2012. The number of deals stands at 2,118 and the value of these deals has fallen to US$119.5 billion. However, deals numbers and values increased by 13% and 60%, respectively, compared with the first half of 2012.
China domestic strategic M&A remains the largest part of overall China M&A, with 65% of overall activity, but deal volume, at 1,375 transactions, remains below previous highs. However, there have been a number of larger-sized transactions and deal values were up 17% from the previous six months to US$68.5 billion.
“Strategic buyers have remained cautious and we have not seen a rebound in activity in the second quarter after the leadership changes took effect,” says David Brown, PwC China and Hong Kong Transaction Services Leader. “With new policy direction erring towards de-leveraging and slower growth, both domestic and inbound strategic buyers have been more selective and focused in their investment activities.”
“In due course, we expect that there will be more consolidation in industry sectors in China with a resulting upturn in domestic strategic M&A,” says David Brown. “We also anticipate an increase in domestic debt-restructuring situations as non-performing borrowers are unable to refinance or roll over their loans. These trends, both of which will be encouraged by policymakers as a means of squeezing excess capacity out of the economy, may be more visible into 2014.”
Outbound deals decline
China mainland outbound M&A declined in the first half of 2013 with only 78 transactions, compared with 95 in the previous six months. State owned enterprise (SOE) investments in materials and resources were the big drivers of outbound deal values, whereas privately owned enterprises (POEs) looked to consumer products, brands, know-how and technologies that can be brought back and put to use in China.
Despite the slowdown, developed markets such as North America and Europe were still the most popular destinations for Chinese POEs.
Nevertheless, POEs were much more cautious than anticipated in the previous six months. Many of them focused on addressing challenges in the difficult domestic market, with local debt financing for M&A becoming more difficult to obtain.
However, steady growth, from what is still a relatively low base overall, should resume in the rest of 2013 and into 2014.
Private equity market streamlines
Private equity (PE) new fund raising declined by 46% in the first half of 2013 compared with the second half of 2012. This followed some sizeable new fund raises in 2012, and the PE industry focusing on spending existing funds and on exiting previous investments.
“A predicted rebound in PE investment activity failed to materialise with PE funds remaining cautious on policy direction and the softening of China’s economy in general, as well as dealing with the transition from growth capital to buy out,” says David Brown. “However, the apparent step-down in PE deal activity since 2011 is partly due to the exit from the market of the profusion of opportunistic renminbi funds, leaving a core cadre of higher-quality PE funds – a development that is likely to be favourable to the market overall.”
Looking at PE exits, with A-share markets effectively closed, and overseas bourses unreceptive, IPO exits have slowed to a trickle. M&A sales by PE funds to strategic investors are expected to grow, although exiting minority stakes through M&A may not be a viable option in many cases. The cumulative overhang of investments to exits remains the number one challenge for the PE industry as many funds near the end of their contracted lives.