Potential for broad-based M&A activity in 2H20

The weak regional economy will attract bargain hunters seeking strategic assets


BROADER market weakness will unlock value and drive mergers and acquisitions (M&A) activity this year, but numbers of deal could be few as investors and companies seek to train or improve cashflows.

The weak regional economy will attract bargain hunters seeking strategic assets, while investors needing cashflow will be more open to sell partial stakes or even exit their investments, Baker Tilly Malaysia stated.

“Shrewd investors, including controlling shareholders of listed entities with low trading prices, may see this as an opportunity to obtain greater control, or consider privatisation to reap the lower costs of buying shares they do not own.

Privatisation could offer salvation to shareholders both on the purchasing and selling sides, says Heng – Source: bakertilly.my

“It makes little sense for companies to maintain a listing if the benefits of higher valuations, access to public capital and brand recognition are unable to outweigh the attendant costs, as well as regulatory and public scrutiny,” Baker Tilly Malaysia group managing partner Andrew Heng told The Malaysian Reserve recently.

Based on the feedback given by private-equity (PE) firms and M&A advisors, the situation in Malaysia regarding M&A in the second half of 2020 (2H20), will continue to be domestic driven, as any major cross-border deals are unlikely to take place until the Covid-19 situation is under control and there is a clear bilateral border reopening guidelines.

Mergermarket stated for most PEs, the priority now will still be managing their existing portfolios to ensure they survive the slowdown and challenging business environment with better cashflow management and prudent capital expenditure.

But potential bolt-on acquisitions in resilient sectors such as healthcare and consumer staples remain active, while access to cheaper loans and capital in the current low-interest rate environment will support domestic M&A activities.

The boom in demand for rubber gloves for instance has attracted M&A interest as companies seek to diversify into the market space.

Other sectors such as healthcare, pharmaceutical, technology, e-commerce and logistics are most active in terms of deal flows.

Sectors in distress or with overcapacities like oil and gas (O&G) and aviation are also expected to see consolidation.

South-East Asia M&A activity slowed down in 1H20 despite having recorded the highest first-quarter (1Q) deal value on Mergermarket record (since 2001), as the impact of the Covid-19 pandemic on dealmaking fully emerged in 2Q.

After having recorded the highest 1Q in terms of deal value US$25.2 billion (RM108.36 billion) across 86 deals on Mergermarket record, regional deal-making sharply slowed down in 2Q.

M&A activity generated US$29 billion across 149 deals in 1H20, down by 12.5% in value compared to a year ago with US$33.1 billion and 186 deals).

The region accounted for 11.5% of the overall Asia Pacific value of US$250.8 billion and 1,734 deals).

Intra-regional activity remained strong and dominated the South-East Asia M&A market by deal value (US$23.9 billion across 85 deals) in 1H20, up 20.2% in terms of deal value year-on-year.

However, inbound deal-making shrunk 61.7% by deal value with US$5.1 billion and 64 deals, compared to the same period of last year worth US$13.2 billion and 88 deals).

Singapore was the largest M&A market in terms of value within the region in 1H20, with US$11.9 billion across 41 deals.

It was followed by Thailand (US$11.1 billion across 18 deals), whose value was largely driven up by the US$10.6 billion acquisition of Tesco’s Thai and Malaysia operations by Thai conglomerate CP Group — the largest deal in the Asia Pacific during 1H20.

Outbound activity remained strong despite the Covid-19 crisis as it generated US$15.1 billion across 49 deals — equal to an increase of 62% in value compared to 1H19 (US$9.3 billion with 71 deals).

South-East Asia M&A activity ground to a halt in April and May when several countries were under strict lockdown following the Covid-19 outbreak.

M&A deal-making in 2H20 could remain subdued as corporate sectors are expected to retain higher amounts of cash on their balance sheets to face uncertain economic conditions, Mergermarket said.

Inbound deal-making in South-East Asia declined both in value and volume due to the Covid-19 outbreak. Singapore topped the inbound list by value (US$2.7 billion across 27 deals), while Vietnam ranked second with an overall inbound investment of US$872 million.

PE buyouts started to pick up in 2Q20 to US$1.3 billion from US$67 million in 1Q20. Most PE investments in 1H20 headed to the real estate sector worth US$1.1 billion across three deals.

PE firms might also opt for a “wait-and-see” approach to exits as near future prospects remain uncertain.

The materialisation of a number of deals currently under negotiation could be delayed due to swings in target valuations.

Heng said companies who do take this opportunity to move forward with M&A activities or privatisation, can take this time to strategise their plans moving forward.

“Privatisation could offer salvation to shareholders both on the purchasing and selling sides. At the end of the day, it all boils down to their strategies to ride through this new normal,” he said.

In the last five years or so, Heng observed M&A transactions have seen a strong so-called “seller’s market” in which sellers have been able to generate very high prices and enforce seller-friendly contractual arrangements.

He expects this will likely change rapidly now as buyers are currently gaining the upper hand, especially when potential targets or even the sellers themselves come under pressure.

“Government-imposed quarantines and travel restrictions already have a negative impact on due diligence reviews, contract negotiations, as well as signings and closings of transactions,” he said.

“The recent dramatic price fluctuations on the domestic and international stock markets have also posed challenges for current and planned capital market transactions.”

Heng anticipates the economic crisis caused by Covid-19 will, as with the financial crisis in 2009, result in a significant concentration process in various industry segments.

It is already foreseeable that large and resilient companies, especially in the Covid-19 related sectors such as technology, telecommunications, utilities and pharmaceuticals are building cash reserves from the crisis and significantly increasing their market share at the expense of companies under pressure.

“Simultaneously, the comprehensive government bailouts that are currently taking place will presumably lead to all forms of nationalisations, including governments’ holding stakes in rescued companies,” Heng said.

As for the property sector, there have been some rumours of privatisation exercises.

“From a valuation standpoint, property-based companies are obvious targets, given the discounts at which many of them are trading at versus their book value. The controlling shareholders may feel that the market is not giving their companies a fair value for what they believe their companies are worth, seeing as some of these companies currently have market capitalisations which are lower than their intrinsic value.

“For example, if the company’s share price is trading below its audited book value per share or its realisable net asset value per share,” he said.

Another reason for potential privatisation exercises in the property sector is the poor trading liquidity in the stocks, as it defeats one of the purposes of having a company listed on any stock exchange, Heng added.