Hong Kong M&A activity slumped in 2018

Mergers and acquisitions deals fell to 1,050 transactions with a combined value of US$87.93b in 2018, down from 1,252 transactions with a combined value of US$108.28b in 2017.

M&A activity in Hong Kong suffered both in volume and value as geopolitical and regulatory headwinds weighed on dealmaking interest. Mergers and acquisitions where Hong Kong financial firms were targets fell to 1,050 transactions with a combined value of US$87.93b in the first eight months of 2018, from 1,252 transactions with a combined value of US$108.28b in 2017, according to Thomson Reuters data .

However, analysts have ruled out a steeper decline in 2019 and instead forecast a mostly steady performance as private equity interest, amongst other factors, look to provide a substantial lift in the coming year. The megadeals in the telecoms sector that bolstered dealmaking value in 2017 may have dissipated, but China’s technology giants have gone on an acquisition spree and sectors such as real estate have seen greater activity which has mitigated the slowdown as firms and investors adopted a more careful approach.

“In the private sector, as boardrooms contemplate sky high multiples and a possible correction in the global markets, nervousness is translating into fewer strategic deals. Deal volumes have slightly declined this year as compared to 2017,” said Bryan Koo, partner at Clifford Chance. “That said, this year we saw a more stable flow of M&A activities across the year and, from the third quarter of 2018 onwards, we are seeing more activity in the Hong Kong public M&A space, including takeovers of Hong Kong-listed companies,” he added, citing GuoLine Overseas Limited’s proposed privatisation of Hong Kong-listed Gupco Group Ltd and Swire Pacific’s $9.4b privatisation of HAECO, Swire Pacific’s subsidiary that operates an aircraft maintenance business.

Most notable deals

Some of the most notable M&A deals in the Hong Kong market in 2018 included various venture capitalstyle pre-IPO investments dominated by or linked to Chinese technology giants Baidu, Alibaba and Tencent, according to Koo. GIC, Temasek, Warburg Pincus, Khazanah Nasional Berhad, Carlyle, Canada Pension Plan Investment Board and others have acquired an undisclosed stake in a subsidiary of Ant Financial, in a funding round estimated at US$14b, valuing Ant Financial at US$150b.

Meanwhile, Tencent-led group comprising Chinese banks, Chinese private equity and venture capital firms acquired an undisclosed stake in UBTECH Robotics, the China-based humanoid robots manufacturer, for US$820m. There was also Ant Financial’s strategic partnership with and 20% stake investment into OpenRice, Hong Kong’s most popular online restaurant database and review service, for an undisclosed amount.

“These deals demonstrate that investors remain willing to deploy into the Chinese tech and fintech sectors,” said Koo, further noting that private equity investors have been increasingly banding together in deploying their capital.

A couple of notable deals tracking this trend include a private equity consortium comprising Goldman Sachs, Sequoia Capital and Boyu Capital that acquired Hong Kong-based travel and tour booking services provider Klook Travel Technology for $200m, and a consortium led by Hong Kong-based Gaw Capital Partners that acquired a property portfolio that includes 17 Hong Kong shopping centres for $23b from Link REIT.

Koo also highlighted a reorganisation drive amongst state-owned enterprises as a key driver for M&A transactions in 2018, as seen in COFCO Property’s proposed acquisition of a 64.18% stake in Joy Hong Kongbased listed City Property from COFCO Corporation, as well as Shenzhen Chiwan Wharf Holdings’ proposed acquisition of 38.72% of Hong Kong-based listed port operator and investor China Merchants Port Holdings from China Merchants Investment Development.

The most active sectors in 2018 have been telecommunication, media and technology, property and construction, and transportation and logistics, according to Koo, with such deals as Lai Sun Development’s voluntary general cash offer to acquire eSun Holdings, JD.com’s investment in China-based warehousing infrastructure and facilities development solutions provider ESR, and Carlyle and Tiger Group’s disposal from Greater China Intermodal Investment to Seaspan.

“In terms of industry sectors, we have seen strong interests in power and utilities, natural resources such as petroleum and natural gas and, consumer products” in the first nine months of 2018, said Bernard Poon, transaction advisory services leader, Hong Kong & Macau Region at EY. He reckoned investors spent the year focusing on companies with strong technology capabilities, such as in analytics, artificial intelligence and instantaneous data gathering, to improve decision making and boost company performance. “We observed that the transactions activities in the Hong Kong financial services sector has been very active in 2018, with a number of M&A deals covering areas such as asset management, banks, alternative financial investments, credit institutions, insurance companies,” he said, adding that for investors from Greater China, Europe was the most popular investment destination, in terms of investment amount. There has also been significant growth in investment activities in Australasia.

Domestic and cross-border deals

Domestic M&A deal activity fell during the period, with deal volume sliding to 331 transactions with a combined value of US$21.85b from 417 transactions with a combined value of US$29.77b. Cross-border M&A deal activity also declined, with deal volume dropping to 719 transactions with a combined value of US$66.08b from 835 transactions with a combined value of US$78.51b.

Cross-border inbound M&A deal activity, which includes targets in Hong Kong and acquirers outside the island, fell to 235 transactions with a combined value of US$20.76b in the first eight months from the same period last year. The financials sector saw the highest number and value of cross-border inbound M&A deals at 55 transactions with a combined value of US$4.52b, after the same period last year saw six telecommunications deals with a combined value of US$13.12b dominate the category. Acquirers from Mainland China continued to lead the pack, accounting for 136 deals with a combined value of US$12.51b, although down from 161 deals with a combined value of US$20.84b the prior-year period, according to Thomson Reuters data.

The top cross-border inbound M&A transaction so far was the Netherlands’ L’Arche Green NV’s pending acquisition of CRH (Beer) Ltd with a value of US$3.10b inclusive of net debt, followed by China’s Shanghai RAAS Blood Products’ pending acquisition of Tiancheng International Investment Ltd with a value of US$2.52b.

Cross-border outbound M&A deal activity, which includes acquirers from Hong Kong and targets outside the island, likewise decreased to 484 transactions with a combined value of US$45.32b in January to October from the same period in 2017. The real estate sector saw the highest number of transactions by volume at 72, while the energy and power sector recorded the largest value at US$18.40b across 57 deals. Transactions targeting Mainland Chinese firms continued to represent the lion’s share in terms of volume at 280 with a combined value of US$14.99b, but deals targeting Australian firms accounted for the highest combined value of US$18.61b, more than doubling from the year-ago period, Thomson Reuters data showed.

The top cross-border outbound M&A transaction was the Investor Group’s pending acquisition of Australia’s APA Group with a value of US$16.83b, by far the largest in the first eight months of 2018. The next biggest deal was CK Hutchison Holdings Ltd’s acquisition Italy’s Wind Tre SpA with a value of US$2.85b.
“The escalating US-China trade tension and heightened regulatory scrutiny is weighing down on deal making. Given such economic uncertainty, it is no surprise that there has been a general slowdown in deal activities,” said Tracy Wut, an M&A partner in Baker McKenzie’s Hong Kong office.

Analysts expects risks on both geopolitical and regulatory fronts to persist in 2019, with the former constraining Hong Kong’s economic growth and consequently curb dealmaking activity. However, Mainland China and private equity should lead the charge in firing up deals, helping offset such headwinds. “Investment sentiment will be cautious in light of the trade war between China and the U.S., the uncertainty and geopolitical tensions and we expect M&A activities in HK to remain at a steady level in 2019,” said Poon.

Koo, meanwhile, expects big data and solutions to continue being a key driver for M&A deals, after a year which saw large deals in the space such as Tencent’s acquisition of New Classics, HKBN’s acquisition of Hong Kong-based cloudpowered solutions provider I-Consulting, and CITIC Capital’s acquisition of CEIC Data.

“As the competitive pricing in the public market continues, we are seeing a lot of privatisation and takeovers of listed companies in the pipelines and growing interest of private equity players on listed assets,” added Koo, citing PAG’s hostile conditional voluntary general offer for all the outstanding units in Hong Kong-listed Spring REIT and the proposed merger between WTT HK and HKBN.

M&A dealmakers in Hong Kong will also have to navigate tightening regulation. Koo cited the Hong Kong Stock Exchange’s intent to clamp down on what it perceives as abuses related to reverse takeovers, or RTOs, to circumvent requirements for new applicants under the bourse’s listing rules. He said the exchange will look to consolidate and fortify the RTO rules to prevent backdoor listings, with modifications to enhance the anti-avoidance effect as well as to tighten the continuing listing criteria for listed issuers to deter the manufacturing and maintenance of listed shells.

Another key regulatory challenge is compliance with the General Data Protection Regulation, or GDPR, which came into force May 25 and covers all firms with establishments in Europe or provide goods and services to individuals in the region. “Its extraterritorial application means that Asia Pacific-based companies with no presence in the EU will be caught by the GDPR if they provide services into the EU or where personal data is obtained in the EU and transferred outside.” He noted recent studies which show many companies within the GDPR’s scope will not be compliant by the end of 2018, and reckoned “the compliant aspects of M&A targets and any integration will need to be thoroughly considered.”

Koo also flagged the potential impact of U.S. export controls on M&A targets which historically export to the U.S. “Any such impact on valuation of the business may slow down M&A deals involving such targets,” he said, noting that the U.S. enacting the Foreign Investment Risk Review Modernisation Act will require mandatory declarations of transactions of certain nature and increased compliance risks, especially for companies dealing with leading-edge technology. “Regulations in China such as the restrictions of funds coming out from the mainland had a negative impact on the M&A activities in HK. In addition, it has become more difficult for investors from the mainland to identify investment opportunities in HK given the size of the market and the relatively smaller scale of operations of the potential target companies in HK when compare to the western countries,” said Poon.