NEW YORK, Feb. 16, 2006 (PRIMEZONE) -- China's M&A deals increased 34 percent in value between 2004 and 2005 thanks to major one-off investments in the financial services sector and significant deal activity in Hong Kong, according to a PricewaterhouseCoopers analysis based on data supplied by M&A Asia. In the absence of a comparable number of financial services deals, PricewaterhouseCoopers expects gross deal values to be lower in 2006. However, an increasingly responsive regulatory environment and more private equity activity should sustain future underlying growth of deals in and into China, by domestic and foreign buyers while outbound investment activity is likely to offer excellent prospects for growth.
Chris Cooper, PricewaterhouseCoopers' Transaction Services partner, U.S. China Desk in Beijing, said, "2005 was notable for a series of major investments in the financial services sector, which boosted deal values substantially. Major deals added some US$12 billion to the year's tally for that sector, as China's Big Four state-owned commercial banks and the city commercial banks sought strategic investors prior to listing in Hong Kong."
As a result, overall M&A activity in China (including Hong Kong and Macau) grew 34 percent in 2005 to reach US$46.4 billion in value over the US$34.6 billion recorded in 2004, according to PwC's analysis of announced deals. The number of announced deals climbed 14.5 percent to 857 in 2005 compared with 749 in 2004.
Hong Kong also contributed to a strong year, with a near-doubling of disclosed deal values to US$12 billion on the back of major deals in the telecommunications and infrastructure sectors. This activity helped compensate for a general slowdown in mainland deal activity caused by regulatory uncertainty in the first half, which left many deals waiting in the pipeline.
According to David Brown, Transactions partner at PricewaterhouseCoopers Hong Kong, "As we said in mid 2005, there was an uncertain environment following a number of regulatory changes, impacting several large deals that PricewaterhouseCoopers had been advising on. While the government moved quickly to address investor concerns with the introduction of legislation in the fourth quarter, the result was a year of no growth (by value) outside the financial services sector. Looking forward, this swift regulatory response, an increasing number of private equity deals and a continued surge in outbound investment bode well for future M&A activity in China, and for Chinese companies looking to invest overseas."
Regulatory reassurance
Two major pieces of legislation helped to restore investor confidence in the fourth quarter. First, investment regulations issued by the State Administration of Foreign Exchange (SAFE) in October superseded ambiguous legislation governing investment in offshore companies that had been published in the first half (prompting the subsequent hiatus in deal flow). According to Mr. Cooper, "The significance of the legislation lay in its attention to detail, its positive tone and the fact that it was the product of high-level co-operation between the government and the deal community. Second, in respect to uncertainty created by A-share reforms, the government again moved quickly to put a framework in place with the publication in December of new measures granting foreign investors greater access to the Renminbi-denominated A-share market. The rules open a channel for long-term foreign strategic investments in A-shares -- both in newly-listed companies and in local firms which have completed shareholder reform under the ongoing share restructuring of companies listed on the stock exchanges."
Review of M&A activity in other sectors
With the exception of the landmark deals recorded in the financial services sector, China's M&A environment showed limited growth in terms of deal value in 2005. On a sector-by-sector basis, there were a number of gainers and losers. The retail sector grew 11.3 percent to US$2.7 billion, while deal volumes increased by 70 percent. The information technology (IT) sector also increased sharply in size to US$2.2 billion, thanks in part to Yahoo! Inc's acquisition of a 35 percent stake in Hangzhou-based Alibaba.com for US $1 billion in August. The telecommunications sector was boosted by three major deals in Hong Kong, including Hong Kong-listed China Netcom Corporation's US$1 billion acquisition of a 20 percent stake in PCCW and Egyptian telecom operator Orascom's US$1.3 billion purchase of a 19.3 percent stake in Hutchison Telecom. In the leisure and entertainment sector, K Wah Construction Materials Ltd of Hong Kong acquired Macau's Galaxy Casino SA for US$2.4 billion in April. However, in the transportation sector, deal values fell from US$7.2 billion (boosted by airline consolidation) to US$4.73 billion, while deal values in mining and metals and consumer products and services also declined.
Private equity houses are more confident
Private equity houses and venture capitalists gained confidence in the China market in 2005, as demonstrated by some notable acquisitions. In one of the largest private equity deals on the mainland to date, Carlyle Group announced in December that it had agreed to invest US$410 million in a 24.975 percent stake in China Pacific Life Insurance, the country's third-largest life insurance company. The announcement follows Carlyle's acquisition in October of an 85 percent stake in Xugong Group Construction for US$375 million -- one of the first direct buyouts of a Chinese State-Owned Enterprise (SOE) by a foreign fund and the largest deal of the year in the heavy manufacturing sector. In June, CVC Capital Partners announced that it had raised a US$2 billion Asian buyout fund, while other private equity heavyweights were understood to be raising large funds for investment in the region.
Outbound investment gains momentum
Although not included in our data, the headlines were grabbed by a series of unprecedented outbound investment deals by Chinese companies. In the largest cross-border deal of the year, China National Petroleum Corp (CNPC) acquired Canadian-owned PetroKazakhstan in August. While large energy deals by the state-run oil and gas giants are leading the way, the range of industries is expanding, as ambitious private companies seek value-added acquisitions to help them gain access to technology, brand and distribution networks.
Outbound investment from China totalled US$6.9 billion in 2005, showing robust growth over 2004. Xie Tao, Transactions partner at PricewaterhouseCoopers Beijing, comments, "We believe that there is tremendous growth potential in this area over the next few years."
Outlook to 2006
The massive financial services deals which underlined China's strong performance in 2005 saw foreign investors snap up stakes in most significant major domestic financial institutions. A repeat of the big deals of 2005 is unlikely, although smaller deals involving city commercial banks are expected to continue, PricewaterhouseCoopers finds. Without these unusual transactions recurring, overall deal activity in 2006 is unlikely to match 2005 (in terms of value). Sectors where the firm expects significant deal activity include: IT and electronics; general manufacturing; retail and consumer products; and transportation and distribution.
Looking ahead to 2006, Mr. Cooper says, "The fundamentals for sustained M&A activity remain strong. Deal activity will be driven more by a buoyant economy, industrial restructuring, ongoing privatization and continuing regulatory and A-share reform. Major deals can also be expected in outbound investment as Chinese companies gain greater confidence in 2006."
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Notes to Editors
-- M&A Asia compiles M&A statistics based on announced deals for
which deal values have been disclosed and of which M&A Asia
was made aware. Acquisitions and investments in both public
and private companies are included, as well as strategic
placements in privatizations and buyouts. Greenfield investments
are excluded as well as real estate, unless the asset represents
a business operation. The data collated by M&A Asia is, to the
best of their knowledge, reliable and an accurate reflection of
Asia's M&A industry. However, the data contained herein is not
guaranteed by M&A Asia to be accurate, and should not
necessarily be considered to be all-inclusive. M&A Asia contacts:
Vincent Pun/Helen Lee, Tel: (852) 2838 9626 or
research@asianfn.com.
-- Statistics contained in this press release may vary from those
contained in previous press releases. There are two reasons for
this: M&A Asia historical data is constantly updated as deals
are confirmed or disclosed; and PricewaterhouseCoopers has
excluded major asset transfers by state-owned enterprises and
their parent companies. For further details, contact:
Christopher Torrens (86 21) 6123 2807 or
christopher.torrens@cn.pwc.com.
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