All China related merger and acquisition (M&A) deal activity, including domestic, inbound and outbound deals, have rebounded strongly in the first half of this year, and set the scene for expected robust deal activity for the remainder of 2010 and into 2011, reports PricewaterhouseCoopers.
The big growth has been seen in Chinese outbound M&A deal activity for the first 6 months of 2010 which has reached record levels, up by more than 50% compared to the first half of 2009. The positive sentiment in M&A activity is reflected in the value of these deals, with seven outbound deals in the first half of 2010 exceeding US$1 billion in value compared to 3 in the first half of 2009. A total of 99 outbound deals were announced, continuing a growing trend that began in the first quarter of 2008.
Natural resources is the main industry target for Chinese investors overseas. Fourteen resources deals were announced in the first half of 2010, with the largest being Sinopec's US$4.7 billion acquisition of a 9% stake in Synacrude from ConocoPhillips. Another notable investment was the China Investment Corporation's double investment in PennWest Energy which aggregated to a US$1.2 billion in total. Australia is identified as the main target destination, however Africa is growing in prominence for Chinese resources investors.
"Investors are broadening their industry interests as well as their target regions including the US, Japan and the European Union," reveals PricewaterhouseCoopers (PwC) Greater China Private Equity Group Leader David Brown.
The positive trends are not only outbound. China domestic and in-bound M&A deal activity has rebounded strongly reaching levels comparable to those seen at the peak before the financial crisis.
Deal volumes increased by 26% in the first half of 2010, compared to the three-year low point in the first half of 2009. In the first half of 2010, there were 1,884 announced deals and the number of large value transactions also grew with 22 deals each exceeding US$500 million, compared to 17 such deals in the same period last year. The largest announced transaction in the first half of 2010 was China Mobile's acquisition of a 20% stake in Shanghai Pudong Development Bank for US$5.8 billion. As in this example, most of the domestic and in-bound M&A activity is attributable to intra-China deals.
Foreign in-bound M&A activity is still below pre-financial crisis levels but is trending back towards those levels.
Financial buyer activity including private equity and venture capital has flat lined, but foreign funds remain committed and domestic PE and VC fund raising in the first half of 2010 reached record levels. Domestic and local financial buyers accounted for about 3 times as many deals as their foreign counterparts.
"We are seeing a lot of activity now from both foreign and local PE funds which should turn into announced deals in the second half of the year," adds Brown. "There is an explosion in the growth of local funds, but the number of active foreign funds is also at an all time high, and we have already seen a few transactions where the two groups are starting to team up to co-invest."
Looking ahead, domestic M&A strategic deal activity in China is expected to increase in industries previously only accessible to state-owned enterprises, following the central governments release of circular 36, which has opened these industries for private investors.
Meanwhile foreign investors are expected to re-enter the market at volumes last seen prior to the financial crisis.
As for Chinese outbound investment which has seen record growth, this trend is expected to continue and in an increased number of industries apart from natural resources including automotive, equipment, and high-technology industries.