China merger and acquisitions (M&A) deal values soared to a record high in 2013 growing by 28% to US$260 billion, with 43 deals greater than US$1 billion compared to 30 deals in 2012. Deal numbers recovered strongly in the second half of 2013 from multi-year lows in the first six months, increasing by more than 40% in the second half. In this period, nearly all categories of M&A showed sustained growth.
“Strong M&A activity shows a return of market confidence and we expect these strong growth trends to continue into the first half of 2014,” says David Brown, PwC China and Hong Kong Transaction Services Leader. “Key drivers to fuel M&A growth will include further liberalisation of markets, state-owned enterprise (SOE) reforms, government support for M&A – especially outbound, and recovering equity capital markets. A-share listed companies will also be important players, driving consolidation in many industry sectors.”
Strategic buyers return
China domestic strategic M&A activity also recovered well in the second half of 2013 although full year numbers were less spectacular due to a slow first half largely due to political and economic uncertainties.
However, foreign inbound M&A was flat, with marked declines in buyers from Japan and the US.
“We do think that foreign inbound investment will grow as confidence returns in overseas markets especially in Europe and the US, and as MNC’s realign their China strategies resulting in both sale and purchase of business units and an increasing number of JVs with Chinese partners,” adds Brown.
Private equity regains footing
In the second half of last year, the number of new private equity (PE) investments showed a strong recovery with 205 transactions, an increase of 27% compared to the first half. On a full year basis, there was an uptick in deal value to US$35 billion.
PE-backed IPOs edged upwards in the second half of 2013 off a very low base, but despite this, 2013 saw a third straight year of decline for PE exits. This is almost entirely attributable to problems in China’s equity capital markets – and 2013 was the first year that IPO was not the dominant exit route.
“PE exits will rebound as IPO markets re-open, but with mounting pressure to cash out investments, sale by M&A and secondary (PE to PE) will also ramp up this year,” says Brown. “We expect the number of new investments will rise with the trend for buy-outs continuing. Although smaller in number, we will see more outbound PE deals and we expect to see some PE interest in investing in SOEs – driven by SOE reform – and in A-share listed companies.”
Outbound M&A marks half year high
China outbound M&A deals recovered strongly, with more deals announced in the second half of 2013 than any earlier half-year periods.
Privately-owned enterprises (POEs) activity was surprisingly low in the first half of 2013 but rebounded in the second half with 88 deals. SOE activity remained robust throughout the year with deals focused on energy and industrial sectors. POE money was diversified, with some focus on industrial technologies, consumer-related businesses and high-tech.
“We anticipate strong growth in China outbound, both from SOEs and POEs as more companies look for mature market targets overseas. 2014 could be a record year driven by increasing experience and sophistication of Chinese buyers underpinned by government support and direction,” concludes Mr Brown.
“In summary, PwC expects strong tail-winds for M&A in China. Based on better performance in the second half of 2013, the firm is optimistic that record trends will continue into 2014.”