China & Hong Kong Mergermarket trend report H1 2016

In the first half of 2016 (1H16), M&A activity targeting China & Hong Kong recorded 863 deals worth US$ 204.5bn, down 27.2% by value compared to 1H15 (872 deals, US$ 280.9bn), yet still reaching the second highest first half value on Mergermarket record (since 2001). This drop can be largely explained by the lack of mega-deals valued at least US$ 10bn after a record-breaking 2015 (US$ 75.2bn, two deals).

Average deal value in 1H16 also declined from 1H15’s US$ 338.5m back to US$ 248.8m, which was close to 1H14’s US$ 259m. Chinese M&A alone (784 deals, US$ 194bn) was able to post a year-on-year (YoY) increase of 13.5% by value.

The Technology sector (150 deals, US$ 43.9bn) and Industrials & Chemical sector (238 deals, US$ 30.9bn) were the most dominant by value. These two sectors, benefited from China’s demand to upgrade industrial technologies to boost domestic economic growth and seek those targets abroad, contributed a combined 36.6% towards the total deal value in China & Hong Kong targeted M&A and 60.7% (US$ 79.5bn) of total outbound deal value by Chinese bidders.

In 1H16, the Media sector (28 deals, US$ 10.8bn) posted an impressive 80.4% YoY increase in value, reaching its all-time high for any first half amid encouraging government policy in China’s media and culture industries, a growing Chinese middle class population and the rise of new media forms such as virtual reality content.

Media also attracted substantial private equity (PE) investment and brought considerable profit to industry leaders. As a result, it was the top sector for PE exits (three deals, US$ 7.7bn) by value during 1H16. In addition, high valuations in the market pushed Chinese conglomerates to list their media assets through restructuring. The top two deals in the sector, Wanda Cinema Line’s US$ 5.7bn acquisition of Wanda Media and Leshi Internet Information and Technology’s US$1.5bn acquisition of Le Vision Pictures, both allowed the listed companies to integrate with the film production business of respective conglomerates.

By contrast, Real Estate, Consumer and Energy, Mining & Utilities sectors saw a huge YoY decline in value, due to the lack of mega restructurings and poor market conditions in the sectors. Although the Transport sector (12 deals, US$ 12.9bn) saw a significant drop in deal count compared to 1H15 (30 deals, US$ 12.9bn), it still reached the same value level as last year by hosting the top deal in the region, the US$6.8bn back-door listing of S.F. Holding, a leading courier service provider in China.

During 1H16, both PE buyouts and exits recorded their highest first-half value on Mergermarket record. A total of 57 investments worth US$ 28.3bn were recorded, representing a 126% increase in value compared to 1H15 (63 deals, US$ 12.5bn). PE exits rose 64% YoY by value to US$ 18.2bn with 25 transactions.

To-date, an upsurge of outbound investment continues to dominate the headlines. A total of 239 outbound deals were announced in 1H16 amounting to record-breaking US$ 131.1bn, exceeding 2015’s annual outbound value (US$ 88bn). Europe became the most attractive investment destination, with 102 deals worth US$ 78.7bn accounting for 60% of total outbound value.

China has shifted its focus from the US to Europe. In May, the outbound transactions targeting US companies dropped sharply to US$ 548m, below US$ 1bn for the first time since last October. It also represented an 89.6% decrease in value compared to April (US$ 5.3bn). The numbers in June (four deals, US$ 194m) decreased further. Increasing regulatory risks could be one reason for this trend, especially pressure from the Committee on Foreign Investment in the U.S. (CFIUS). Another concern centers around presidential election as the Chinese enterprisers are conservative towards anti-China propaganda during the period.

Moving into the second half of 2016, the Technology and Industrials & Chemical sectors will continue to boost domestic and outbound M&A activity within the region. The picture for outbound deal-making, however, can hardly be as thriving as the first half due to the market uncertainties caused by the UK’s referendum on its membership of the European Union (EU) and the U.S. elections.

Spotlight: Outbound M&A

China & Hong Kong outbound M&A surged to an unprecedented US$ 131.1bn (239 deals), already beating the annual record set in 2015 (360 deals, US$ 88bn) and still with six months to go. A supportive debt-financing environment and overvalued domestic assets have pushed the deal-hungry buyers seeking abroad in a bid to set aside the continuing sluggish economic growth and yuan’s depreciation.

However, the second half is expected to see a cooldown in deal-making given the uncertain global markets ahead of the U.S. presidential election, post-Brexit Europe and China’s tightening regulatory approval on cross-border M&A due to control of currency outflow.

Europe remained the most targeted region with 102 deals worth US$ 78.7bn signed in 1H 2016, nearly 50% higher than 2015’s full-year investment into the region (118 deals, US$ 52.7bn), accounting for 60% of the total outbound value.

Chinese buyers are willing to pay a higher price for quality assets, with the average premium paid for a European listed target during 1H reaching 23.5%, up from 13.5% in 2015.

However, the crashing pound and instability in European financial markets after Brexit could hold back investment from China in the short term, according to Mergermarket Intelligence.

M&A activity targeting the U.S. climbed to a record US$ 33.7bn (51 deals) in 1H 2016, 2.5 x of 2015’s total value (80 deals, US$ 13.3bn). However, the monthly deal flow sharply dropped to hundred-million level in May (eight deals, US$ 548m) and June (four deals, US$ 194m). Regulatory scrutiny of deals and uncertainty about the ultimate winner of president election could give buyers pause. Chinese insurer Anbang recently ran into regulatory trouble with Committee on Foreign Investment in the US (CFIUS) in its US$ 1.57bn bid for Fidelity & Guaranty Life. Earlier in March, Anbang also withdrew its proposed US$ 14.4bn offer for Starwood Hotels & Resorts.

Industrials & Chemicals topped all sectors M&A activities with 59 deals worth US$ 58.5bn, where the US$ 46bn Chemchina-Syngenta deal contributed a majority proportion to the total value. TMT, which was the most targeted sector in 2015 (26 deals, US$ 24.2bn), came in second with 44 deals totaling US$ 56.6bn.

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