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Markets

Direct Investment

Highlights

Trends/Policies

Domestic deals fuel China M&As

By Yuan Yuan (China Daily)
Updated: 2007-12-19 07:20

Domestic deals continued to be the major force powering growth in China's M&A markets in the first 11 months of 2007, said a report yesterday from PricewaterhouseCoopers.

Overall deal volumes (excluding outbound transactions) increased by 18 percent by volume to more than 1,700 transactions, and 25 percent by value to over $80 billion.

The value of outbound transactions more than doubled in 2007 to $16.4 billion, although so far as acquisitions from the mainland were concerned the big numbers were all minority stakes, including the Industrial and Commercial Bank of China's $5.4 billion investment in Standard Bank; China Development Bank's $3 billion investment in Barclays; and China Investment Corp's $3 billion investment in Blackstone.

Meanwhile, domestic deal activity was twice as much as foreign-invested M&A activity.

"The predominance of domestic deal flow continues a trend that first started to emerge in 2006, prior to which foreign direct investment had been the key driver of M&A growth," said Xie Tao, PricewaterhouseCoopers transactions partner. "Opportunity, liquidity and a supportive government are the three major factors fueling the rapid growth of domestic deals."

China's strong economic growth facilitates an active market for mergers and acquisitions as companies look to restructure, grow in scale and develop new markets. Equity markets, internally generated funds and bank lending have continued to provide ample liquidity for financing deals, and the government remains supportive of domestic M&As and continues to play a role in the restructuring of State-owned enterprises, Xie explained.

According to the report, the sectors showing strongest growth were: financial services, which has been an active sector for many years; real estate, despite ongoing government attempts to curb investment; manufacturing; and the mining sector, which saw some large-sized deals.

Private equity continues to make steady progress in China, with 140 announced transactions in 2007 to date, compared with 110 in 2006.

Overall deal values rose from $5.7 billion to $10.6 billion on the back of a number of multi-million dollar transactions including Permira's $840 million acquisition of a 20 percent stake in Galaxy Entertainment's Macao casino development, and Blackstone's $600 million acquisition of a 20 percent stake in China National Bluestar. Despite the increases, private equity remains less than 15 percent of total deal values.

"Private equity is as interested in China as it has ever been," said David Brown, PricewaterhouseCoopers transactions partner in Hong Kong. "The biggest deals in 2007 have been pulled off by PE houses who are relatively new to the region, and we continue to see new funds arriving".

The US subprime-induced credit crunch, Brown believed, barely produced a pause in PE activity in China.

"PE deals in China, as compared to more developed markets in the US and Europe tend to be smaller and less aggressively geared, and local banks, including Chinese banks, are happy to step up to provide financing," he explained. "Looking at the impact of the credit crunch going into 2008, if anything, we predict an increase in PE activity as US PE funds direct money and human resources toward Asia in response to less activity in their home geographies."