Total M&A activity in China fell to US$283 billion in the first six months of 2017 – down from US$355 bn in the second half of 2016.
The total value of deals was down across the three main sub-sectors (strategic, financial and outbound), according to PwC’s M&A Mid-Year Review and Outlook 2017. But while outbound deals fell 13% in value terms, the number of transactions actually increased by 8%.
“The absence of high profile mega-deals has clearly affected the overall value of M&A activity,” says David Brown, Transaction Services Leader for PwC China and Hong Kong. “But the fact that the volume of outbound transactions is now at a record high indicates that deals with a sound strategic rationale are still encouraged.”
Domestic strategic M&A declined by around 15%. There were only ten deals in excess of US$1 bn, compared to fifteen in the previous six months. Foreign inbound investment – though much smaller by comparison – was at its highest level in two years due to some larger-sized deals and a step-up in investment from Japan.
Real estate M&A hits three-year high
Looking at strategic deals by industry sector, Real Estate M&A hit a three-year high – though this was mainly because of two mega-deals worth a combined US$18 bn involving China Vanke. Technology also bounced back slightly.
“Private Equity and financial buyer activity has fallen from a significant peak in the second half of 2016, but activity overall remains robust,” says Waikay Eik, PwC’s Deals Advisory leader for South China and Hong Kong. “Outbound deals are an increasingly important part of that trend. They represented a quarter of PE deals in the first six months of this year.”
The first half of the year also saw an upturn in exit activity, as financial sponsors took advantage of high valuations and bullish equity markets. There were 161 IPO exits for PE/VC-backed deals during this period – up from 131 in the previous six months. The mainland A-share market was the preferred exit route.
Under widely publicized curbs, outbound M&A fell 13% in value terms. This was the result of there being fewer mega-deals – 15 in the first half of 2017, compared to 23 in the previous period. However, the volume of transactions was maintained or increased across the three main outbound sub-sectors – SOEs, POEs and financial buyers.
Deals with a clear strategic rationale continued to win support: Technology was the leading sector in terms of volume of deals.
Looking forward, PwC expects a slight slowing in the second half of 2017. This is partly because the 19th National Congress in November may encourage a ‘wait and see’ attitude.
However, overall activity remains robust and there should be further growth in 2018. New regulations announced on 18 August give guidance on ‘encouraged’, ‘restricted’ and ‘banned’ outbound investments. But generally speaking, investors that are not entirely reliant on RMB funding will be at an advantage.