M&A Index, Q3 2013 - Allen & Overy

A re-balancing or reversal of fortune?

M&A Index, Q3 2013 www.allenovery.com

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The Allen & Overy M&A Index | Q3 2013

Contents

© Allen & Overy LLP 2013

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Introduction – Global M&A trends in Q3 2013

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Executive summary – The global picture – Top 20 global outbound acquirers and inbound target markets

6 8

In focus – ASEAN – Tax and M&A

10 12

Regional analysis – U.S. – Latin America – Western Europe – CEE and CIS – Middle East and North Africa – India – Asia Pacific: Greater China – Asia Pacific excluding Greater China

14 16 18 20 22 24 26 28

A global snapshot – Top target markets for the world’s largest acquiring countries

30

Sector analysis – Energy – Financial services – Infrastructure & utilities – Life sciences – Private equity – Telecoms, media and technology

32 34 36 38 40 42

Top ten global outbound acquirers Q3 2013

44

Definitions

45

About the research

46

www.allenovery.com/maindex

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Global M&A trends in Q3 2013 Rebalancing or in reverse? While dealmaking remained generally quiet in most markets in Q3, there are signs that capital flows are shifting from emerging to more mature markets. This looks more like a rebalancing than a reversal of fortunes. Fired by a range of very bullish forecasts, we started the year asking what it would take to spark the recovery in global M&A transactions that so many commentators confidently predicted would occur in the course of 2013. Nine months on we are, perhaps, a little closer to answering that question as the analysis of key regions and sectors in this, our latest report on the state of global M&A markets (tracking deals worth more than USD100 million), shows. The raw data presents a confusing picture – with the volume of deals continuing to fall, but with the value of transactions climbing. In Q3 alone we saw the number of deals fall by 22% to 458 compared to the same period last year, while the total value of deals rose 13% to USD529 billion in the quarter, helped, it must be said, by one huge deal, the USD130bn sale by Vodafone of its 45% stake in Verizon Wireless. If this is a recovery, it certainly is not a clear-cut one.


But, as ever, the true state of affairs is far more subtle than the basic data appears to suggest. The global economy remains complex and unpredictable, domestic and international politics remain highly febrile as the machinations over Syria have shown, and second-guessing the course of economic policymaking remains as tricky as ever. Given all that, it is hardly surprising if investors in many markets are taking longer than expected to regain their confidence. A key focus for investors in recent months has been the U.S. Federal Reserve’s programme of bond-buying to support domestic economic recovery. Stock markets and currencies, particularly in Asia, have been under huge pressure, amid fears that any move to taper the Federal Reserve quantitative easing (QE) programme would see investment flooding out of Asia and back to more mature markets – a reversal of the capital flows we have seen since the financial crisis.

The Federal Reserve’s decision in September to continue the QE programme a while longer has settled nerves a little, but these are volatile times and caution, as we note, is still the watchword in many markets. Closer analysis of the data does show that investment in emerging economies by U.S. and European companies has fallen quite sharply, both in terms of numbers of deals and their overall value. We have seen 56 deals worth nearly USD33bn in the first nine months of 2013, compared with 76 deals worth just over USD56bn in the same period last year. But the question is: does this amount to a long-term reversal of fortunes? We doubt it. It is far more likely that this represents an effort by investors to rebalance their portfolios and target growth in recovering western economies, most notably the U.S. Few CEOs of leading multinationals would have any doubt that opportunities for significant, long-term growth still lie in emerging markets.

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13%

22%

increase in the value of deals compared to the same period last year (Q3)

34%

decrease in the volume of deals compared to the same period last year (Q3)

of global activity by volume and 54% by value was in the U.S.

USD529bn total value of deals in Q3 2013, compared to USD469bn for the same period last year

458

deals in Q3 2013, the lowest Q3 total in the last six years

Other important factors are also at play here. Asia, in general, has proved a tricky market for western corporates and international funds alike. One major problem is that there is a distinct lack of sellers at the moment – certainly those prepared to give up total control of their businesses. Learning the ropes of a market as complex as China has now been made all the harder by the new administration’s growing crack-down on corruption and governance. Flows of capital within Asia are also showing good signs of picking up, with Japanese outbound investors in the fore and often with the fast-growing ASEAN markets in sight, as our focus on this part of Asia (see page 10) shows. Take Latin America too; after a near 12-month lull in transactions, we detect strong signs of a pick-up across a range of sectors, with growing interest from international investors, particularly in Brazil, Mexico, Peru and Colombia, and now that asset prices are more attractive. Latin America’s biggest companies, squeezed for additional growth at home, are also getting bolder in assessing new overseas markets.

Deal pipelines in key European markets and across the CEE and CIS regions are looking stronger. The U.S. deal market continues to gather pace and we believe that deals as mighty as the Vodafone/ Verizon one and as strategically important as the Microsoft/Nokia transaction are proof that the American boardrooms are beginning to have faith in the benign economic fundamentals which are all so attractive for dealmaking. Previously, they were concerned that favourable conditions were a short-lived result of the Federal Reserve’s active economic support programme.

Andrew Ballheimer Global Co-Head of Corporate, Allen & Overy Tel +44 20 3088 4252

So the question we asked at the start of the year has not been answered conclusively, but events of the past three months leave us feeling quietly optimistic about future trends. Q3 was slow, but we expect activity to pick up pace in the final three months of the year and into 2014.


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Executive summary The global picture – our key observations A number of key themes emerge from the statistics and analysis contained in this report. Having reviewed each region and sector in depth, here are our key observations about the state of the global M&A market in Q3 2013. The ten-nation ASEAN group is gradually emerging as a distinct investment target within Asia. Though economic union is a long way off, exciting opportunities exist for investors from the ASEAN region itself, from elsewhere in Asia and beyond. Page 10. Aggressive tax management, however legal, is in the spotlight like never before, exposing companies to significant reputational risks. Reforms are on their way as well as greater international harmonisation, but seeking tax benefits from M&A transactions will continue for some time to come. Page 12. The Federal Reserve’s decision to continue its bond buying programme was a significant Q3 event, but it may not be the most important in terms of transactions. A number of highly strategic blockbuster deals points to a growing confidence among U.S. executives that the economic recovery is real. Page 14. The dip in transactions in Latin America finally seems to be nearing an end. Cheaper asset prices are once again attracting international investors to key markets – notably Brazil, Mexico, Peru and Colombia. Latin America’s biggest businesses are also looking overseas for opportunities. Page 16. Where economic recovery is showing through in Western Europe, deal activity is picking up. Growth in transactions remains relatively low, but the pipeline is strong, particularly in Germany and the UK.


Other economies are lagging behind, not helped, in Italy’s case, by a fresh bout of political instability. Page 18.

With the slight exception of Japan, caution is increasingly the watchword of investors here. Page 28.

Some significant deals in the still-active CIS energy market helped to hold up the value of deals in an otherwise typically quiet summer for the CEE and CIS region. But unlike last year, there is a quiet optimism among investors that the rest of the year should be increasingly busy. Page 20.

Energy transactions had their worst Q3 for four years, as companies came under pressure from shareholders to concentrate on existing operations rather than plunging into risky M&A deals. The financial services sector has been taking stock five years after the collapse of Lehman Brothers and the picture for M&A is not bright, with deal activity around 50% below its pre-crisis level. Infrastructure had a subdued quarter, with more deals, but transaction values halved. By contrast, life sciences had a buoyant period, boosted by some very significant deals. The balance of power in private equity has changed and trade buyers are once again competing in auctions, until recently almost exclusively the reserve of PE players. TMT had its biggest quarter since 2007, thanks to a number of huge deals. Overall deal values were up by 200% compared with the same quarter last year. Pages 32-43.

Deal volumes and values have continued their steady decline in the MENA region. But a pipeline of big transactions look likely to come to fruition in Q4, with both cash-rich trade buyers and PE funds active in an improving market. Page 22. Government initiatives on food poverty and company law show that the process of economic reform is continuing in India. But, amid continuing economic and political uncertainty, investors’ faith in liberalisation appears to have been shaken. Page 24. China’s new administration is using the law to clean up governance in key sectors and to achieve other political objectives. In an otherwise relatively quiet market, that presents international investors with a new set of risks. Page 26. A period of currency and stock market volatility – as nervous investors weighed up the impact of changes in U.S. monetary policy – has had an inevitable impact on transactions across the Asia Pacific region.

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GLOBAL DEAL TYPES: q1-Q3 2007-2013 Take private Public recommended acquisition Public hostile acquisition Other private M&A Merger Joint venture Divestment Demerger

Deal type (proportion of 100%)

100

Deal totals

1.48%

1.53%

1.77%

2.29%

1.56%

1.67%

3,000

3.77%

2,650

18.54%

80

21.41% 22.64% 0.38%

0.57%

2,092

22.48% 24.45%

0.53%

0.85%

19.94%

0.70%

0.54%

19.29%

2,056

2,000

1,855

60

2,500

0.64%

1,699 1,555

1,500 28.18%

40

38% 0.68%

38.81% 0.43% 0.53%

0.59% 0.25%

1,178

36.98%

36.67% 0.88% 0.35%

40.03% 1.07% 0.34%

41.40% 0.59% 0.11%

0.39% 0.45%

1,000

0.60%

20 500

0

35.71%

43.38%

36.26%

34.48% 36.33%

40.06%

0.68%

1.05%

0.76%

1.06%

1.31%

0.75%

0.51%

2007

2008

2009

2010

2011

2012

2013

33.25%

See Appendix (separate document) for large format tables. The diagram above represents the breakdown of the total number of deals in Q1-Q3 from 2007 to 2013.


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Top 20 global outbound acquirers Top 20 global inbound target markets

12

Norway

Netherlands

7 9

Ireland (Republic)

140 87

U.S.

Mexico

Colombia

GLOBAL DEAL TYPES

Outbound acquisitions

Inbound target markets

These figures represent the total number of deals for Q1-Q3 2013.


France

27

Switzerland

16

19

Spain

5 7

18

52 63

UK

33 33

Canada

11

16

9

7 7

17

Brazil

9

9

Denmark

15

8

Sweden

8

Finland

14 10

15

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Rank

Country

Volume of deals

Value of deals USDm

Rank

Country

Volume of deals

Value of deals USDm

1

U.S.

140

107,327

1

U.S.

87

86,165

2

United Kingdom

52

48,483

2

United Kingdom

63

58,533

3

China

38

38,658

3

Australia

35

19,024

4

Hong Kong

37

17,262

4

Germany

33

35,543

5

Japan

36

23,511

5

Canada

33

13,881

6

Canada

33

36,407

6

China

33

11,874

7

France

27

38,278

7

India

20

11,852

8

Singapore

17

7,408

8

Spain

19

8,205

9

Switzerland

16

8,525

9

Netherlands

18

43,594

10

Sweden

15

8,371

10

Brazil

17

9,705

11

Germany

14

6,158

11

France

16

9,931

12

Australia

13

3,718

12

Italy

15

10,308

13

Netherlands

11

15,440

13

Norway

12

6,294

14

Luxembourg

10

5,206

14

Hong Kong

10

5,430

15

South Korea

10

3,638

15

Ireland (Republic)

9

23,746

16

Denmark

9

3,677

16

Switzerland

9

5,031

17

Colombia

7

4,883

17

Finland

8

9,015

18

Ireland (Republic)

7

1,939

18

Sweden

8

2,257

19

Brazil

7

1,143

19

Mexico

7

5,740

20

Mexico

5

26,309

20

Singapore

7

5,056

Germany

10

South Korea

Luxembourg

36

38 33

Italy

India

Singapore

China

37

20 17

Japan

10

Hong Kong

7

13

35

Australia


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ASEAN Diverse markets edge towards cohesion

At a glance...

While investors are increasingly seeing the fast growing, ten-nation ASEAN group of economies as a distinct regional entity, the reality is that integration has a long way to go and growth opportunities remain mainly national.

– Progress towards integration remains relatively slow – Investors continue to target individual markets – Japan leads the way on deals; Western investors struggle – Hurdles to investment in key sectors, like banking It is 46 years since five countries – Singapore, Malaysia, Thailand, Indonesia and the Philippines – came together to sign the Bangkok declaration to form the Association of South East Asian Nations (ASEAN).

ASEAN remains essentially a two-tier organisation, divided between its more advanced partners and those that are still in the relatively early stages of development, despite their recent fast economic growth.

The aim was to promote greater political, economic and social cohesion between the signatory nations to promote growth, cultural development and regional security. ASEAN grew progressively, with Brunei, Vietnam, Laos, Myanmar and Cambodia joining this grouping of extraordinary and diverse economies between 1984 and 1999.

And progress towards economic integration remains slow, with even “senior” ASEAN members, such as Thailand, taking longer than expected to sign up to or implement key agreements. Some now think it is likely that the 2015 deadline will slip and that any new trade treaties in the next few years will be bi-lateral rather than region-wide.

Bit by bit, ASEAN’s own ambition to establish and be recognised as a single cohesive market has grown, culminating in 2007 with an agreement to establish an ASEAN Economic Community by 2015.

Investors may sometimes identify the ASEAN countries as a regional entity, distinct from China, North Asia and India, because of their geographical proximity. International companies operating in the region are also organising themselves along ASEAN lines, with an ASEAN office often established in Singapore. And some have realised commercial advantages – it is nearly ten years since a Thai distributor of a certain Scotch whisky began blending it in the Philippines to qualify for import duties of 5% rather than 61%, for example.

But while this has all the hallmarks of an economic union – and will be underpinned by agreements on such things as tariffs and free movement of workers – it is important to recognise that ASEAN remains, and will remain for some time, essentially a customs union. This is not another European single market in the making – yet, at least.


But from an investment perspective, people still look at this market as a group of very different countries at different stages of development. That said, this remains a key target market for investors from within the ASEAN grouping, elsewhere in Asia and beyond. With average GDP growth projected at between 3% and 5% in most of the countries, an under-developed market of some 600 million consumers, some areas extremely rich in energy and natural resources (Indonesia is the world’s biggest exporter of thermal coal, for instance), and a recent record of relative political calm, that is not surprising.

Asian investors in the lead But the track record of inward investment has been mixed in recent years with ASEAN and other Asian investors, particularly Japan, faring better than Western investors. Japan has played a leading role in opening up many of these markets, as part of a general trend for Japanese companies to look to overseas markets for the sort of growth opportunities not readily on offer in a stagnant home market. The main focus has been on energy and financial services. Culturally comfortable to invest within Asia, Japanese investors have taken a different tack, prepared, for instance, to invest for the long term, taking minority positions where necessary and willing to execute deals quickly – approaches that play well in the region. They have also been prepared to

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“Bit by bit, ASEAN’s own ambition to establish and be recognised as a single cohesive market has grown.”

invest early in key developing markets like Vietnam and Myanmar, gaining a first mover advantage. Capital flows within the ASEAN region have also been gathering momentum, with Singapore, Malaysia and Thailand coming to the fore. Again, the tendency has been for more advanced economies to target growth in their fast-developing neighbours, benefiting, once again, from that sense of shared culture. The focus in Indonesia, however, has predominantly been on domestic transactions in the last two years with relatively little outbound M&A. Western companies and PE funds undoubtedly see these markets as prime targets, but, with the exception of some big consumer multinationals, they have struggled to do deals, not least because in the last few years there has been a dearth of outright sellers. Those willing to consider partnerships and joint ventures are far more likely to succeed in securing an ASEAN foothold.

Hurdles in key sectors Financial services remains a huge and growing opportunity in the region, as demand for banking and other services, such as insurance, rises among an expanding middle class. There has been a tendency for some of the global banking groups to exit the region since the financial crisis, which has forced many to refocus their efforts closer to home. The last year, for instance, has seen ING make several big exits from key ASEAN markets. This has left a gap that is being filled by leading ASEAN banks such as CIMB of Malaysia (which uses the tag line: “Feel at home anywhere in ASEAN”) and Singapore’s

DBS Bank. Big Japanese banks have also made their presence felt, as we have seen with Bank of Tokyo-Mitsubishi UFJ’s (BTMU) offer for up to 75% of Thailand’s Bank of Ayudhya, which involves taking a 25% stake from GE. But banking investments are far from straightforward and we have seen some ASEAN countries taking an increasingly protectionist line on direct foreign investment. Indonesia’s decision to place a 40% cap on single shareholdings in its banks, for instance, has frustrated attempts by DBS Bank to buy a controlling stake from Singapore’s Temasek Holdings in Indonesia’s Bank Danamon. Some observers believe the real issue at stake here is Indonesia’s desire to get reciprocal access to Singapore and Malaysia’s banking sector – the issue runs both ways. While slower growth in key developing countries, notably China and India, have taken the heat out of the energy market, it remains a main focus for investors. Again, this is not an easy market for Western investors, as the recent power struggle between Nat Rothschild and the Bakrie dynasty over the Indonesia coalmining group, BUMI Resources, shows. The power sector is also increasingly busy, although most of the activity is through project finance initiatives rather than M&A transactions. Lack of a regional approach to telecoms regulation has thwarted efforts by providers to build trans-ASEAN operations, though some have tried. But this sector could see increased M&A activity, particularly if telcos follow a growing trend in other markets of hiving off their infrastructure access to focus on service provision.

Stock markets in the region by contrast are showing an increasing willingness to work together. Singapore, Malaysia and Thailand have already established joint trading arrangements and calls for a pan-ASEAN exchange are growing, despite conflicting regulatory systems.

Connectivity is key Recent investor nerves sparked by uncertainty over the future direction of U.S. monetary policy seemed to have calmed, if only temporarily, since the Federal Reserve’s decision in September of this year to continue its quantitative easing (QE) programme. There had been widespread fears that the huge amount of capital that has flowed into Asian markets in recent years would go into sharp reverse should the Federal Reserve unwind the programme. We believe ASEAN markets will continue to see growth and increasing levels of investment, which will be good for transactions. However, political progress towards greater ASEAN integration is likely to remain slow, not least given the fact that several countries have either just gone through elections or, like Indonesia, are about to do so. Inertia often precedes a poll. A bigger driver of activity and of convergence is likely to be the rapid build-out of important infrastructure projects across the ASEAN region – notably roads, railways and power stations. ASEAN governments continue to prioritise this kind of vital development, and that, in the end, may make the case more powerfully for greater economic integration than pure politics.


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Tax and M&A M&A tax strategies face tougher scrutiny

At a glance...

Aggressive tax management by multinationals, however legal, is in the public and political spotlight like never before, presenting clear reputational risks for M&A dealmakers. But how far will promised reforms go?

– Tax avoidance in political and public glare – Scrutiny by authorities likely to increase sharply – Tax benefits during and post-deal in the spotlight – Reforms unlikely to have adverse effect on M&A activity Politicians like to link themselves to issues that demonstrate they have their fingers on the pulse of public opinion. But it remains relatively rare to see an issue rise up the public and the political agenda at the same rapid pace. So when it does – as it has, in recent months, with the thorny issue of aggressive cross-border tax management by some of the world’s biggest corporations – it is fair enough to expect action. Public boycotts of the sort experienced by Starbucks, for example, present businesses with a whole new set of reputational risks that were largely unheard of a year or two ago. Amazon, Apple, Vodafone, Google, to name but a few more, can attest to the uncomfortable spotlight their cross-border strategies, however legal they may be, have put them in. And then when a growing international political consensus thrusts the same issue onto the agenda of the G20, the kitchen becomes an even hotter place to be.


What’s more, the growing political clamour about the erosion of corporate tax revenues – from political leaders in the UK, the U.S., France, Germany and Italy – does appear to be translating into action. Under instruction from the G20, the OECD is now conducting an 18-month review of international corporate tax strategies. Called the Base Erosion and Profit Shifting (BEPS) review, it has set out an agenda of action, with deadlines. It is looking to see where tax policies can be harmonised to prevent corporations shifting their profits to low-tax jurisdictions, how governments can share information more effectively and how they can tighten their own anti-abuse and anti-avoidance rules. For multinationals, there is one clear conclusion to be drawn. Not only do they now face much more vocal (and in some cases, direct) objections from the public on this issue, they must also accept that scrutiny by tax authorities will get considerably more stringent, as they have to be seen to respond to public and political concerns.

The tax debate has, without a doubt, been intensified by the politics of austerity. But while the heat may go out of the political debate once economic recovery in key jurisdictions gathers momentum, public opinion looks set to remain hostile for some time to come. Tax as an issue is here to stay. Either way, multinationals face a new set of risks that will need to be managed with great care.

The M&A dimension This debate has a direct bearing on corporate M&A. Companies may achieve tax benefits in the course of doing a deal – for example, selling a business without realising a taxable gain, or introducing tax-deductible acquisition financing. Alternatively, M&A transactions such as company and business sales within a group may be involved in implementing tax-efficient corporate structures. Vodafone’s recent sale of its 45% stake in Verizon Wireless is an example of the former. It attracted criticism for using a Netherlands-based vehicle to conduct the transaction. The implication was that it did so deliberately to avoid UK tax, which ignores the fact that the UK would not impose tax on this sort of sale by a UK company. Regardless of the technical merits, it seems that Vodafone will pay no tax on what is one of the biggest deals in corporate history, which has given the press and politicians plenty to consider.

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“The tax debate has, without a doubt, been intensified by the politics of austerity.”

IP-rich companies are also increasingly in the spotlight, thanks to the difficult tax treatment of intangibles, such as trademarks and royalty payments. We have seen this in the ongoing Dolce & Gabbana case, which centres on the transfer of brand and trademarks from Italy to a Luxembourg entity and on last year’s challenge to the Valentino Fashion Group disposal by the Marzotto Group to Permira, where it was alleged that the capital gain realised in Luxembourg by Marzotto Group should be taxed in Italy. Internet-based businesses are also in focus for locating their profit centres in low-tax jurisdictions, rather than paying tax in economies where they make huge sales. (Of course, the distinction between sales and profits usually gets lost in this debate.) But the complexity of, often contradictory, tax regimes and rules is unlikely ever to be

completely ironed out, despite the best efforts of individual governments, the G20 and the OECD. Changes will undoubtedly be made that may affect some of the ways in which deals are currently structured, but they are unlikely to involve wholesale reform of the global tax system. And, since most countries put great store by maintaining sovereignty over their tax regimes, there may be limits to how far the move to greater harmonisation will go. We doubt that these changes will have a negative impact on M&A activity. Indeed, in a complex, global economy, some contradictions between competing tax regimes are likely to continue and may even act as a continuing spur to transactions. But should the current reputational risks affect how dealmakers approach M&A transactions?

It is obvious that using tax avoidance transactions as a key driver of post-tax profits is becoming hard to defend. It is equally obvious that tax will be a relevant factor in commercial decision-making, and where the tax and commercial substance are aligned, there is no reason to avoid seeking tax efficiencies. The key is to be able to explain the commercial justification for any tax benefit if the transaction is scrutinised. M&A transactions are highly commercial, and in general, there will be a good case to make for any resulting tax benefits. Precisely how M&A transactions are structured may have to change in response to the changing tax landscape, but tax will continue to influence whether and how deals are done.


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Regional analysis: U.S. CEOs’ faith in recovery grows

At a glance...

A number of blockbuster strategic deals suggest that faith in the economic recovery, and not just in the Federal Reserve’s policies, is growing in the boardrooms of some of the biggest corporations in the U.S. – CEOs growing more confident in economic fundamentals – Verizon and Microsoft deals point to new sense of ambition – Earnings-boosting M&A transactions back on the agenda – Federal Reserve continues bond buying to support programme recovery In recent editions we have spoken often about macro-economic conditions being almost perfect for dealmaking – with near-zero interest rates, a supportive equities market, cash-rich companies and PE funds, improving access to finance and plenty of attractive targets at affordable prices. Yet, with a few exceptions, transactions have failed to ignite even when, in recent months, the market was free of the sort of shocks caused by the eurozone crisis and the fiscal cliff debate. The best explanation for the mismatch is that CEOs have been sceptical about the recovery, questioning whether the recent gains were real or just an artefact of the Federal Reserve’s efforts to keep recovery rolling. In Q3 2013, sentiments changed, as evidenced by two very important strategic deals – Verizon Communications’ decision to buy out Vodafone’s 45% stake in Verizon Wireless for USD130bn and Microsoft’s acquisition of Nokia’s devices and services unit for USD7.2bn.


For Microsoft, the acquisition means access to the technology, patents and mapping services that will allow it to take on Apple and Samsung in the smartphone market, where it has fallen far behind. Verizon Communications gains full control of the leading wireless carrier in the U.S. and the deal is also a big vote of confidence in the debt markets, including USD60bn worth of bonds and debt in financing. While there had been speculation that Verizon Communications would make this move at some point, the fact it chose to do it now suggests it felt current market conditions were optimal. Boards know they need to secure growth in earnings, and M&A deals done at the right time and at the right price may once again be back on the agenda as a prime route to achieving that growth. There were other significant strategic deals elsewhere in the telecoms sector, including the proposed USD4.7bn buyout of troubled BlackBerry by Fairfax Financial and American Tower’s USD3.3bn acquisition

of Global Tower. AT&T’s USD1.2bn cash purchase of Leap Wireless not only represented an 88% premium, but was also notable for a number of sophisticated defence mechanisms to keep competitors at bay. In healthcare, Amgen’s USD10.4bn acquisition of cancer drug-maker Onyx Pharmaceuticals is being 80% financed with bank loans, while Stryker Corporation’s USD1.65bn purchase of medical device company, MAKO, was also completed at a huge premium. The willingness to take on big acquisitions also spread to the retail sector, with the USD2.4bn acquisition of Saks by Canada’s oldest company, Hudson’s Bay Company, and the decision by the PE owners of luxury retailer Neiman Marcus to sell the chain to a consortium led by Ares Management and a Canadian pension fund for approximately USD6bn. The Federal Reserve’s decision to continue its massive bond-buying programme rather than taper it off was a very significant event in Q3 and surprised many. The move was intended to support economic growth and did, in fact, result in a short-term bump in the markets. It may be too early to say a recovery in transactions is finally in full swing, but Q3 definitely looks like the quarter where boardrooms finally went back on the acquisitions trail with a sense of real confidence.

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U.S. DEAL TYPES: q1-Q3 2007-2013 Take private Public recommended acquisition Public hostile acquisition Other private M&A Merger Joint venture Divestment Demerger


100

Deal totals

1.89%

3.09%

3.08%

4.63%

2.85%

3.39%

1,000

5.76%

850 14.74%

80

20.93%

16.13%

0.51%

0.32% 25.77%

23.88%

0.69%

0.24%

800

0.67% 20.55%

21.92% 0.18%

626 583

597

60

600

552

27.49%

472

1.03% 0.34%

40

39.19% 46.17%

44.08% 41.53%

45.47%

0.34%

0.71% 0.12%

1.60%

49.25% 0.67%

400

0.85% 0.21%

1.09%

291

0.36%

20

200

29.67% 26.82%

0

40.55%

29.71% 27.17%

31.16%

34.96%

0.94%

2.57%

1.03%

0.72%

1.44%

0.67%

0.85%

2007

2008

2009

2010

2011

2012

2013

0

The diagram above represents the breakdown of the total number of deals in Q1-Q3 from 2007 to 2013.


16


Regional analysis: Latin America Currency and prices spark inbound interest

At a glance...

After a bumpy 12 months, the pace of transactions is beginning to pick up again, putting the region back on an upwards trajectory. In key markets, like Brazil, devaluation and more realistic asset prices are helping that growth.

– Deal activity returns to the growth path after a lull – Devaluation and lower multiples mean better asset prices – Biggest domestic companies search for new markets overseas – Mexico, Peru and Colombia attracting new inbound interest M&A activity in Brazil took a big step backwards in the second half of 2012 and there was only a modest rebound in the first half of this year. That appears to be changing now, and, where domestic and intra-regional deals have dominated the market in the recent times, we are seeing a resurgence of interest from foreign investors looking to establish themselves in key economies, most notably Brazil, Colombia, Peru and Mexico. In Brazil’s case, that has got a lot to do with the recent sharp devaluation of the Brazilian real, which has made asset prices much more attractive for inbound investors. In addition, there has been a noticeable reduction in the multiples that domestic companies are trading at, helping to bring buyer and seller price expectations much closer into line. We expect to see a raft of deals completed in the coming months, with natural resources, infrastructure, energy, financial services, food and healthcare all among the sectors where investors are currently negotiating deals.


Brazil is heading for important national elections in the second half of 2014. We expect investors to try to complete deals between now and then, especially now that the popular protests seen earlier in the year, which gave some cause for concern to foreign investors, have subsided. The energy and power sectors saw some activity in Q3, including China’s Sinochem investing USD1.5bn to buy a stake in the BC-10 deepwater oil project from Petrobras. There was also a significant domestic merger in electricity as Energisa bought its rival, Rede Energy, to bring it out of bankruptcy protection, in a USD862m deal backed by a pledge to invest a further BRL1.1bn, which falls within Petrobras’ broader plan to dispose of certain of its non-core assets with the intention to raise USD9.9bn in 2013. For many of Brazil’s largest companies, further domestic growth is not widely an option, either for antitrust or market saturation reasons. They are increasingly looking to make long-term investments overseas – in Latin America, Europe, Asia, Africa and the Middle East.

Mexico remains a vibrant market for both inbound and outbound investment. A standout inbound investment was Eutelsat’s USD1.1bn acquisition of Satmex, the cable, broadband and data resources business, which makes the French satellite provider a major player in the region. The Mexican tycoon, Carlos Slim, continues to pursue his ambitious plans to expand his América Móvil mobile phone business in Europe. But his move to buy the remaining near-70% of shares in the Dutch telecom group KPN for around EUR7.2bn hit some early turbulence as KPN mounted a “poison pill” defence. Negotiations between the two sides are now underway, however. Peru and Colombia, having been a focus mostly for intra-regional investment in recent times, have also continued to attract strong interest from international inbound investors – in particular, from Europe, China and Japan. As part of a more buoyant M&A scene across the region, we expect to see some of these investments come to fruition in the months ahead.

17

Latin AmERICA DEAL TYPES: q1-Q3 2007-2013 Take private Public recommended acquisition Public hostile acquisition Other private M&A Merger Joint venture Divestment Demerger


Deal totals

100

150

1%

9.73%

10.19%

15% 1%

17.24%

80

7.79% 1.30%

14.88%

121

120

21.88%

113 108 100

60

90

87 38.96% 1.30%

77

31.25%

40

49.07%

41.38% 1.15%

64

45% 1%

42.15% 0.83% 1.65%

47.79%

60

20

30

40.71%

0

40.74%

40.23%

46.88%

37%

40.50%

1.77%

50.65%

2007

2008

2009

2010

2011

2012

2013



0

18


Regional analysis: Western Europe Nascent economic recovery boosts deals

At a glance...

Economic recovery in Germany and the UK may still be relatively tenuous, but it is already translating into increased deal activity in those markets. Other economies are lagging behind and the market remains quieter.

– Activity picks up as recession recedes – Vodafone/Verizon Wireless deal eclipses other transactions – KPN in the spotlight as Carlos Slim makes a move – Mixed reception for Publicis/Omnicom merger Economic recovery remains patchy across the region, but where “green shoots” are showing through it is having an immediate impact on M&A activity, as investors move to deploy cash and take advantage of greater access to financing.

Carlos Slim has since launched an offer for the near-70% of KPN he does not already own at a transaction price likely to reach EUR7.2bn. The deal hangs in the balance since KPN Foundation launched a “poison pill” defence, but the two sides are talking again.

Not surprisingly, Germany and the UK are experiencing a quicker recovery in deals – German investors even skipped the traditional “summer break” in transactions. Growth was not spectacular, but it was definitely stronger than in preceding quarters and a more active pipeline is building up.

Amsterdam is also playing a role in the proposed EUR26.5bn mega-merger between advertising giants, Omnicom of the U.S., and Publicis of France. The all-stock deal will see the two groups overtake the current market leader, WPP. It also sparked Vivendi into announcing that it was considering demerging into two separate groups, a deal which, based on the current market, would be worth around EUR23bn.

The standout deal of the quarter was undoubtedly Vodafone’s disposal, through its Dutch holding company, of its 45% stake in Verizon Wireless, raising USD130bn. But there were some important major deals elsewhere. Dutch telecom giant, KPN, was centre stage thanks to two transactions. The sale of its German mobile subsidiary E-Plus to Telefónica was eventually completed for approximately EUR8.5bn, after KPN shareholder, América Móvil – owned by the Mexican tycoon, Carlos Slim – rejected a lower offer.


Germany’s real estate sector was lively. Deutsche Wohnen’s near-EUR8.5bn public takeover of GSW Immobilien, creating a company with 150,000 units, was the most significant deal. A hospitals deal, previously abandoned after objections from two major shareholders, was revived. But Fresenius Helios’ EUR3bn takeover of 43 hospitals from Rhön-Klinikum underlines the growing impact of shareholder activism in Germany.

PE funds in Germany and the UK were active as Q3 closed. Although 3i’s attempt to buy the remaining 50% of Scandlines ultimately failed, Cinven and Hannover Rück successfully acquired life insurer Heidelberger Leben from Lloyds Banking Group for some EUR300m and Triton bought Rexroth Pneumatics from Bosch. In the UK, the IPO market is again proving a popular exit route for funds, as we saw with the float of estate agent Foxtons by BC Partners, with high demand for its shares reflecting a rapidly heating real estate market, notably in London. Privatisation is also back on the UK agenda, with the government beginning to reduce its Lloyds holding and discussing a GBP3bn Royal Mail sell-off. There was a strong accent on international deals in the Dutch domestic market, including ING’s continuing divestment of Asian interests – most recently the EUR1.24bn sale of ING Life Korea to MBK Partners. Italy is still attracting some big inbound acquisitions – as we saw with LVMH’s EUR2bn acquisition of an 80% stake in Loro Piana, the fashion house – but mid- and small-market companies are still the preferred target. Telecom Italia and Alitalia may soon be sold or reshaped by foreign investors taking significant stakes, but political instability is back on the agenda.

19

Western Europe DEAL TYPES: q1-Q3 2007-2013 Take private Public recommended acquisition Public hostile acquisition Other private M&A Merger Joint venture Divestment Demerger


Deal totals

100 1.74% 2.89%

2.09%

0.87%

0.87%

14.86%

14.35%

0.26%

1,000

1.90%

13.78%

831

80

18.65%

13.74% 17.88%

19.51%

0.45%

1.05%

0.35%

0.47%

0.86%

1.28%

800

0.24%

671

60

600

572

39.10% 29.62% 0.70% 0.35%

40

39.83% 0.72%

467 43.71% 1.18%

41.43%

0.47%

0.60%

422

0.70% 0.35%

0.48%

45.18%

44.13%

0.21% 0.21%

0.26% 0.26%

400

392

287

20

200

41.71% 36.81%

46.34%

0.60%

0.75%

0.70%

1.42%

2007

2008

2009

2010

36.58%

0

37.76% 37.69%

39.29%

1.40%

0.86%

0.77%

2011

2012

2013

0



20


Regional analysis: CEE and CIS Momentum builds in key markets

At a glance...

After an expected summer lull in activity, a decent pipeline of transactions is now building in key markets, promising a busier end to 2013 across the region and in a wide number of sectors.

– Activity and confidence building after summer lull – Telecoms and media take centre stage – Opportunities remain in Hungary, despite interventionism – Energy and infrastructure still drive CIS market Summer is traditionally a quiet time for transactions in the region, and this year was no exception. The data shows the overall number of deals slipping backwards, but values more than doubled, thanks mostly to a number of significant deals in the still-buoyant CIS energy market. Last year we faced a similar picture, but the promise of a busier second half of the year was soon disrupted by the bubbling Cyprus crisis. This year the mood is cautiously optimistic, with enquiries rising and a decent pipeline of deals. That is certainly the case in Poland. Despite continuing market volatility, we expect to see important deals emerging in Q4 in the financial services, telecoms, healthcare, and industrial sectors. One of the transactions to come to the market in Q4 is the USD1bn sale by Montagu funds of Emitel, the TV broadcast network owner. Further south, telecoms are increasingly in the spotlight. The privatisation of Telekom Slovenije is heading a queue of some 15 potential state asset sales by the Slovenian government, and will act as an important test


case. Investment banks have been invited to submit bids. A similar, much talked-of sell-off of Telekom Srbija in Serbia is supposed to be underway before the end of 2013. Elsewhere, PE fund Mid Europa Partners continued the reorganisation of its interests with the sale of SBB Telemach; in Bulgaria the sale of cable operator, Blizoo, has been mooted; and there has been press speculation that Deutsche Telekom may offload its 61% stake in T-Mobile CZ. In an otherwise quiet Czech market – becalmed ahead of important elections in October – newspapers have been making headlines. The AGROFERT conglomerate, headed by Andrej Babiš – an entrepreneur with political ambitions – has acquired MAFRA, publisher of two national newspapers, from German publisher Rheinisch-Bergische Verlagsgesellschaft. Another national newspaper, Hospodářské Noviny, is already owned by Czech businessman, Zdeněk Bakala, and there are rumours that Ringier Axel Springer, the German publisher of the largest Czech tabloid, may also exit the Czech market.

The infrastructure sector also saw some activity, including the acquisition of the Chvaletice power plant by coal mining company Litvínovská uhelná, the acquisition of Otrokovice heating and power plant by LAMA Energy, and with Spain’s Aqualia selling its 49% shareholding in the SmVaK water utility to Mitsui. The Hungarian government’s recently restated ambition to renationalise utility companies – following on from MVM’s purchase of E.ON’s gas business in March – has caused significant concern about interventionism. Political interference has become an issue, particularly in regulated sectors, including banking and the media, and there is a concern that significant investment opportunities are being contaminated. But local advisers and bankers are urging investors to keep an open mind. The CIS energy and power markets remain the main driving force behind deal activity, featuring both sizeable domestic deals – Rosneft was particularly active in Q3 – and big inward investments, not least the China National Petroleum Corporation’s USD5bn investment in an 8.3% stake in the Kashagan oil project in Kazakhstan. Infrastructure is a growing focus following the Russian Direct Investment Fund’s creation of a USD2bn fund with Mubadala and another USD5bn fund with direct backing from the Abu Dhabi government.

21

CEE AND CIS DEAL TYPES: q1-Q3 2007-2013 Take private Public recommended acquisition Public hostile acquisition Other private M&A Joint venture Divestment


100

Deal totals

150

1.35%

147 4.76%

5.88%

133 11.28% 0.75%

13.83% 18.75%

14.86%

17.28%

1.35%

120

80

94 33.82%

60

90

29.63% 44.90%

32.43%

81

2.04% 44.36%

40.43%

37.50%

74

0.75%

40

68

60

64

20

0

30

48.30%

42.86%

43.75%

53.09%

45.74%

50%

60.29%

2007

2008

2009

2010

2011

2012

2013



0

22


Regional analysis: Middle East and North Africa Clear signs that a better Q4 is in store

At a glance...

The conditions which fuelled increased activity in 2012 have largely disappeared as steady declines in activity and values endure, with one notable exception. There are clear signs that a better Q4 is in store. – Deal volumes decline each of the last four quarters, with Q3 down one third year-on-year – Value of M&A activity lowest recorded in last eight quarters – Lack of completed high-value deals, with one notable exception – An encouraging pipeline signals a strong Q4 Current indicators paint a bleak picture of the environment for dealmaking throughout the MENA region. But spirits have been buoyed by several announced deals which provide hope that capital reserves and strategic opportunities will meet to fuel increased activity before year end, largely driven by large potential transactions. Regional deal volume continued its precipitous decline during 2013 to complete the fourth consecutive quarter of waning activity, down more than one-third from Q2 2013. Apart from one exception, deal values also remained generally low. The merger creating the USD15bn Emirates Global Aluminium is a significant exception, however. Mubadala Development Company of Abu Dhabi and the Investment Corporation of Dubai (ICD) created Emirates Global Aluminum as a jointly-held, equal-ownership company bring together Dubai Aluminum (DUBAL) and Emirates Aluminum (EMAL). Other deal value was driven by the usual suspects, with inbound acquisition of targets in Saudi Arabia and Kuwait leading the way.


Ironically, the sale of a minority stake was one of the largest completed transaction whose value was made public – the sale of 38% of Saudi’s Alessa Industries to Aseer Trading, Tourism & Manufacturing Company for USD151m. The continued strength of the region’s industrial sector was underlined by Investcorp’s acquisition of a stake in Al Yusr Industrial Contracting Company, a leading provider of technical industrial support services to the regional stalwart sectors including petrochemicals, oil and gas and key industrial companies. By contrast, there was a relative decline in bank deals, which have driven much of the region’s activity recently (including USD2.9bn in Q2 2013 alone). Good news is on the horizon. With its rapidly growing population attracting continued strong interest amongst trade buyers and financial investors, the region could see a flurry of activity in Q4 – not unusual as businesses seek to beat the year end with value accretive acquisitions. In particular, strong trends in the region’s familiar sectors (oil and gas, telecoms

and banking) and robust fundamentals in developed businesses continue to attract strategic buyers with cash reserves. Amongst the deals expected to be completed during Q4 is the UAE telecom giant Etisalat’s binding offer to buy Vivendi’s 53% stake in Morocco’s Maroc Telecom. Etisalat’s offer values Vivendi’s stake at USD5.27bn and continues a trend of significant activity in the region’s consolidating telecoms sector. Two other trends were apparent in Apache Corporation’s announcement of a global strategic upstream oil and gas partnership with China’s Sinopec – that oil and gas remain the backbone of the region’s economy and that growing strategic links between China and the region are continuing to drive transactions. As a first step, Apache Corporation will receive USD3.1bn in cash in exchange for Sinopec gaining a 33% minority stake in Apache Corporation’s Egypt oil and gas business. Significant activity in the banking sector is also expected to resume, typified by the expected completion of Al Salam Bank-Bahrain’s acquisition of BMI Bank from BankMuscat SAOG. To balance the optimism, continued regional tensions and an expected decline in oil prices may result in regional businesses becoming more cautious. However, while these uncertainties may deter some, they may also create opportunities for trade and PE investors willing to embrace risk in their search for attractive values.

23

MENA DEAL TYPES: q1-Q3 2007-2013 Take private Public recommended acquisition Public hostile acquisition Other private M&A Merger Joint venture Divestment Demerger


100

Deal totals

1.96%

60

3.57%

10%

51

80

2.50%

13.89%

50

17.65%

20.83%

21.74% 26.92% 28.57%

40

40 36

60 26.09% 17.86% 33.33% 3.92%

40

30

3.57%

28

24 50%

44.44%

26

41.67%

5.56%

23

20 46.15% 3.85%

20 10

42.86%

0

43.14%

37.50%

37.50%

52.17%

3.57%

36.11%

23.08%

2007

2008

2009

2010

2011

2012

2013



0

24


Regional analysis: India Political and economic woes predominate

At a glance...

Significant economic reforms continue in India, including initiatives on food poverty and company law. But amid continuing economic and political uncertainty, investors’ faith in the system and liberalisation has been shaken.

– Pre-election nerves and economic woes hit deals – Currency depreciation sharper than in other BRIC economies – Investors lose faith, despite some ambitious reforms – New bank governor surprises with interest rate hike With India in the nervous last months before important national elections and continuing to wrestle with an uncomfortable collision of difficult economic problems, it is not surprising that the deal market has continued on a very quiet note. Overall, transaction volumes and values were down again in the third quarter, and few people expect the pace to pick up any time soon. India’s historic problems of high inflation and a widening balance of payments deficit persist. But with growth slowing, a new problem has emerged in the shape of a rapid decline in the value of the rupee against the U.S. dollar. Depreciation of the currency here has been sharper than in any of the other so-called BRIC economies and, despite a slight rebound towards the end of the quarter, it is having a big impact on investor confidence. As in other Asian economies, the Federal Reserve’s decision to delay the much-anticipated wind-down of its quantitative easing programme has settled investors’ nerves a little and taken some of


the pressure off the currency. But we expect transactions to remain becalmed for a while to come. Commentators have regularly spoken about the policy paralysis that has gripped India in recent years. That is a little ironic – some significant changes are underway. The quarter saw two significant milestones crossed. A new Companies Act was finally cleared by legislators, which will reform a creaking corporate governance system in place since the mid-1950s. It promises greater transparency for companies, less bureaucracy, plus a novel provision that businesses of a certain size should invest a set proportion of their profits in social responsibility initiatives. More radically, a Food Security Bill has also been cleared, which will subsidise the cost of staple foods for two-thirds of the population at huge cost. It is a bold manoeuvre by a government and done with half an eye on next spring’s elections, where it faces a strong challenge from the BJP’s business-friendly, but socially divisive, candidate, Narendra Modi.

Aviation is the one sector where liberalisation has had an immediate impact. The quarter saw the industrial giant, Tata, make its second strategic move into aviation this year. It is joining forces with Singapore Airlines to form a new full-service carrier, having already linked up with Malaysia’s AirAsia to create a low-cost airline. Elsewhere – notably in retail – reforms have had a less enthusiastic welcome from investors, who appear to have lost faith in the political system as it edges towards next year’s polls. The new governor of the Reserve Bank of India, Raghuram Rajan, has, by contrast, made his presence felt immediately and shows every sign of being prepared to act (as well as talk) tough. Along with signalling moves to free up the banking sector to invest in key sectors of the economy, he took the unpopular, but probably necessary, decision to raise interest rates by a quarter of a point to curb inflation, which hit a six-month high of 6.1% in September. Other standout deals in the quarter included the formation of Claris-Otsuka, an emerging markets injectables joint venture between Claris Lifesciences, Otsuka Pharmaceutical Factory and Mitsui, underlining growing Japanese interest in the Indian market. We also saw Baring Private Equity Asia invest nearly USD260m for a 41.8% stake in Hexaware, the IT services group.

25

india DEAL TYPES: q1-Q3 2007-2013 Public recommended acquisition Public hostile acquisition Other private M&A Joint venture Divestment Demerger


Deal totals

50

100 46

41

80

40 21.43%

26.83%

19.57%

21.05%

3.57%

40 25.93%

27.50%

38

30.30%

33

60

30 28

27

30%

40

37.04% 41.46%

47.83%

42.86%

20

47.37%

2.44%

48.48%

20

10

3.03%

12.12%

0

37.50%

6.06%

29.27%

32.14%

5%

32.61%

31.58%

37.04%

2007

2008

2009

2010

2011

2012

2013



0

26


Regional analysis: Asia Pacific: Greater China Governance climbs the agenda

At a glance...

With the deal market relatively quiet, attention has instead been focused on China’s new leaders and how they are deploying Chinese law to clean up sectors and achieve broader objectives.

– Domestic, particularly public, deals a bright spot in a quiet market – Energy remains a strong spur to outbound deals – PE struggling to compete with cash-rich buyers – Crackdown on corruption intensifies If Q3 was a disappointing quarter for transactions in and out of China, it certainly was not a quiet one for the still relatively new administration led by Xi Jinping. After a noticeable pick-up in deals in Q2, the overall market slipped back again in the last three months, with a noticeable dearth of cross-border activity. We did, however, see a fairly significant spike in public recommended deals within China itself, and a total of 23 public deals – the highest quarterly number since 2007. After a spate of IPOs a few years back, there are now many more listed companies in China. It is also a mark of continuing domestic consolidation across a range of sectors, as China continues its transition to a full-blown consumer economy. The search for energy supplies and essential commodities continues apace, however, and that is likely to remain the case for some time, particularly in shale gas-related investments, where China needs Western technology to tap its huge but geologically difficult reserves. China National Petroleum Corporation was active in Q3, joining a consortium of Chinese


banks to help fund Novatek’s Yamal LNG project in Russia and spending USD5bn buying an 8.4% stake in the Kashagan oil project from KazMunaiGaz, the Kazakhstan state-owned company. Sinochem is trying to acquire a stake in the Brazilian deepwater oil field BC-10 from Petrobras for USD1.5bn, although ONGC of India and Shell were reported to be planning to pre-empt the move. Foreign funds are, with a few exceptions, finding it hard to compete in China with cash-rich domestic buyers. Temasek of Singapore – who this quarter joined forces with Goldman Sachs to buy around 18% of the Shanda-owned e-book provider, Cloudary, for USD110m – is one of those exceptions. An early investor in China benefiting from deep market knowledge and strong contacts, Temasek has been shifting its focus from financial services to other sectors. These are still relatively early days for the administration, but it is clearly not afraid to use the law to shape behaviour and reshape industries. Perhaps this is reflective of

Premier Li Keqiang’s legal background. The GlaxoSmithKline (GSK) bribery investigation looks set to have a huge impact on the health industry. But charges made against GSK’s Chinese operations have sent significant shock waves through food producers, carmakers and financial services firms, too. The use of antitrust arguments, specifically resale price maintenance violations, to penalise global dairy companies has been an innovative way to attack the high-margin imported infant formula market. It will be interesting to see if the global giants decide to move dairy operations onshore and improve China’s domestic industry, as a result. Such probes are often designed to tackle a number of problems at once – in GSK’s case, not only using the law to improve governance standards, but also to send a strong signal to the wider pharma market, where the government wants to reduce the cost of drugs – a major concern, given China’s rapidly ageing population. If the administration is as serious as it seems to be in improving governance, inbound multinationals will need to be sure their compliance systems are effective throughout their supply and distribution chains. The long reach of the U.S. Foreign Corrupt Practices Act and the UK Bribery Act provides another strong impetus to get this right. In short, China will continue to be a compliance challenge for multinationals seeking success there.

27

greater china DEAL TYPES: q1-Q3 2007-2013 Take private Public recommended acquisition Public hostile acquisition Other private M&A Merger Joint venture Divestment Demerger


Deal totals

100

200

2.31%

3.31%

3.76%

186

173

80

151

22.79%

155

24.50%

160

21.29%

29.58%

24.28%

25.63%

150

0.58% 28.49%

0.70%

142

136

60 23.53%

23.23%

2.21% 22.58%

40

31.13%

28.87%

1.32%

0.70%

32.37% 1.16% 0.58%

32.50%

100

0.54%

1.88%

50 20

54.19%

0

39.74%

51.47%

1.29%

40.14%

2007

2008

2009

2010

38.15%

39.38%

44.09%

0.58%

0.63%

0.54%

2011

2012

2013



0

28


Regional analysis: Asia Pacific excluding Greater China Caution is the new watchword

At a glance...

A period of stock market and currency volatility, as investors try to weigh up the impact of U.S. monetary policy, has inevitably hit deals. While cautiousness is the prevailing sentiment, there are signs that U.S. confidence may spread more widely. – Transactions go into reverse after a brighter Q2 – Federal Reserve’s quantitative easing (QE) policy the prevailing worry – Companies and shareholders content to play it safe – Japan continues to be a slight exception – Hopes increased at the very end of Q3 that confidence may be returning After a relatively buoyant second quarter, deal activity across the region went backwards in Q3, with both deal volumes and values in retreat. That is, perhaps, not surprising, given the volatility that has gripped the currency and equity markets in recent months as nervous Asian investors try to figure out the impact of the Federal Reserve’s stance on QE. The pessimists fear that any sharp reduction in bond buying by the Federal Reserve will send international capital flooding out of the region, rather than in – as it has done since the financial crisis. Those fears were, perhaps, always overblown. And, indeed, the Federal Reserve’s pronouncement in September that it would maintain its QE programme a while longer did immediately calm nerves a little. But dealmakers in the region think long term and they are clearly happier at the moment to play safe, even at a time of relative political stability across Asia. Similarly, shareholders are not putting pressure on companies to use their cash on risky ventures.


As caution prevails, deals that do go ahead usually take much longer to complete. But many investors are more content to bide their time and several large companies have told us that they expect the outlook for deals to remain negative for some time. Thailand’s biggest outbound investor, PTT, has even cut its investment budget by half. Japan remains something of an exception. Many companies continue to recognise the need to globalise to free themselves from dependence on a home market which has long been stagnant. The search for attractive international assets giving them access to new markets remains active, even if the effects of the new government’s economic stimulus measures (“Abenomics”) and depreciation of the yen have slowed momentum in recent months, throwing the focus back on consolidation deals. These are mostly domestic but can sometimes be international, as with the USD10.2bn semiconductor merger between Tokyo Electron and Applied Materials of the U.S.

Attractive deals will get done – and pretty swiftly, when opportunity knocks. Suntory’s audacious move to deploy some of the capital it raised from an IPO to buy the Ribena and Lucozade brands from GSK for GBP1.3bn is a case in point. In doing so, it pre-empted an auction process that had attracted interest from big PE funds and other drinks industry players, not least IRN-BRU maker A.G. Barr. Bank of Tokyo-Mitsubishi UFJ’s (BTMU) tender offer for up to 75% of Thailand’s Bank of Ayudhya – which, if completed as planned, will be worth some USD6bn – is a prime example of another important trend: the effort by Japanese banks to diversify within the region. BTMU sees this as an opportunity to build a retail business in Thailand and establish a hub to serve emerging ASEAN markets, notably Laos, Cambodia and Myanmar. Australia had another quiet quarter but there are signs of an improvement in sentiment and activity following the election of a new government. In a number of recently announced public M&A deals, there have been multiple bidders, thus creating a real auction and some fierce bid battles, as we are seeing in ongoing tussles for control of the loss-making surfwear group, Billabong, and the wealth management group, Trust Co.

29

asia pacific excluding greater china DEAL TYPES: q1-Q3 2007-2013 Take private Public recommended acquisition Public hostile acquisition Other private M&A Merger Joint venture Divestment Demerger


100

Deal totals

1.33%

0.96%

1.14%

2.24%

0.40% 1.67%

350

2.03%

313 301

299

296

80

300 23.89%

263 27.36%

28.57% 1%

31.10% 0.96%

34.82%

30.43% 33.08%

1.62%

250

1.35%

1.67%

247

1.52%

1.28%

60 200

209

40 28.12% 1.28% 0.96%

34.88%

27.27%

24.33%

0.96% 0.48%

0.38%

30.41% 31.77%

0.34%

34.41%

150

0.40% 0.81%

1% 0.33%

1.66% 0.66%

100

20 50 36.88% 31.77%

30.35%

0

0.96%

31.89%

2007

2008

37.80% 0.48%

2009

2.66%

1.34%

2010

2011

37.84% 0.68%

38.46%

2012

2013



0

30


A global snapshot Top target markets for the world’s largest acquiring countries Rank

Country

Volume of deals

Value of deals USDm

Rank

Country

Volume of deals

Value of deals USDm

1

U.S.

99

76,271

6

Canada

32

36,262

2

UK

41

45,896

7

France

23

37,459

3

China

29

34,239

8

Singapore

16

6,017

4

Hong Kong

29

13,791

9

Switzerland

16

8,525

5

Japan

28

21,997

10

Sweden

15

8,371

U.S.

UK Volume of deals

Volume of deals

9

20

4

7

8

4

7

3

6 29

5

Value of deals (USDm) 30,800 7,636 6,298 7,414 2,681

UK Canada Netherlands Australia Germany

India France Mexico Israel Finland

5

2,381 2,634 4,498 3,796 8,133

3

13 U.S. Germany France Canada Italy

5 5

china

Value of deals (USDm) 6,619 Norway 25,393 Spain 3,055 Switzerland 1,516 Australia 5,375 Austria

2 2 2 1

624 1,912 427 204 771

Hong Kong Volume of deals

Volume of deals

4

4

7

2 2

8

Germany 4,813 10,970 Kazakhstan 1,608 Mozambique Egypt 1,792 Angola 677


549 5,000 4,210 3,100 1,520

1 1 1 1

2

2 2

11

2

Value of deals (USDm) Australia U.S. Hong Kong Brazil Singapore

3

Value of deals (USDm) China Australia UK Macau India

4,245 Singapore 889 South Korea 518 Kazakhstan 1,580 Netherlands 645 Ireland (Rep)

2 639 345 2,559 1,258 1,113

1

1

1

31

Japan

Canada Volume of deals

3

4

Volume of deals

3

20

2

3 2

2

9

Value of deals (USDm) U.S. UK Thailand Germany Netherlands

2

Brazil Indonesia Australia France Canada

2,993 3,206 6,592 1,208 3,778

Value of deals (USDm)

1,060 1,000 1,500 465 255

U.S. UK Australia Czech Republic Ireland (Rep)

1 1 1

France

Germany Malaysia Peru Brazil Bermuda

1,441 599 516 481 281

Singapore Volume of deals

3

Volume of deals

3

5

1

1

1

2 Value of deals (USDm)

U.S. UK Italy Belgium Spain

2

2 1

5

25,899 2,437 818 2,051 1,739

1 1 1 1 1 1 1

22,629 Mexico 6,502 Hong Kong 3,363 China 831 Canada 844 Russia

1,129 696 631 505 329

1 5

1 1 1 1

Switzerland

1

Value of deals (USDm) China Australia India Hong Kong South Korea

1,443 358 540 505 103

Morocco UK Spain Germany Mauritius

279 500 1,356 782 151

1 1

Sweden Volume of deals

2

2

Volume of deals

1

2

2 1

3

1

1

1

6

1

Value of deals (USDm) U.S. UK Australia Belgium Germany

2,405 Netherlands 943 Chad 914 Austria 2,998 Spain 374

348 300 135 108

1

Value of deals (USDm)

1 1

3

U.S. Germany Denmark Finland UK

1,824 488 867 306 1,430

Hong Kong Norway China Estonia

1,369 1,076 901 110

1 1


32


Sector analysis: Energy Deals slump to four-year low Investor caution and shareholder pressure to consolidate conspired to push transactions to their lowest Q3 level since 2009. Despite some bright spots, it may be some time before the mood changes.

–– With energy deals declining 18% by value and 30% by volume, this was the worst Q3 for energy transactions since 2009. Tracking activity across the year so far, it is clear that deals have gradually tailed off and the market is now demonstrably quieter. Energy traditionally accounts for around a quarter of all global M&A transactions and has held up well during the downturn. That has changed and the energy share of M&A currently comprises around 12% of global deal volumes. –– A number of factors are at play. It is clear that some investors remain cautious about the economic outlook, despite the upturn in the U.S. economy and the nascent recovery in the UK (neither helped in recent weeks by the U.S. budget impasse and the re-emergence of eurozone jitters). –– Some shareholders are taking a notably more conservative approach, urging companies to concentrate on their current asset base rather than embark on M&A transactions, which is having an impact on even the boldest boards. –– The U.S. shale gas boom is experiencing something of a lull, with concern amongst companies and investors that many shale transactions have taken place at too-high premiums. More widely, though,


North American shale is having a disruptive influence on global gas markets. Centrica’s decision to abandon several UK gas storage developments is a sign that the effects are also being felt in other markets and evidence that arbitrage opportunities are likely to diminish if exports of cheap American shale gas occur. –– Despite a depressed market, some sizeable deals have been completed. China National Petroleum Corporation is investing USD5bn in the Kashagan project in Kazakhstan, while Sinopec is acquiring Egyptian assets from Apache Corporation for USD3.1bn and Sinochem is seeking to buy a stake in Brazil’s BC-10 deepwater project from Petrobras. India’s ONGC is bidding to take a USD2.6bn stake in the Rovuma offshore project in Mozambique, underlining the continuing vibrancy of the East African market. –– Russian giant Rosneft was also active in the quarter with two gas deals, gaining complete control of Itera Oil and Gas Company in July in a USD2.9bn deal and signing an agreement to buy a 40% stake in Arctic Russia from Enel for around USD1.8bn, a deal that is yet to complete.

–– Assets are also entering the market. Total has announced a USD20bn global programme of disposals and GDF Suez has initiated a divestment programme of between EUR11bn-EUR13bn for 2013 and 2014 in its mature markets. –– Longer term, Kurdistan is, we believe, another potential bright spot if it begins to export by independent pipeline to Turkey overcoming an ongoing stand off with the Iraqi government on the export of hydrocarbons. –– More broadly, the global energy market may be at an inflexion point. American shale gas is changing the dynamics of the market, as we have noted. How political uncertainty in the Middle East, particularly in Syria, Egypt and Libya, plays out will have an inevitable impact on oil prices and sentiment. One way or another that could have a big influence on future M&A transactions. But in the short term, the market may well remain quiet.

33

Total

18%

69

decrease in value of deals compared to Q3 2012

30%

deals in Q3 2013

decrease in volume of deals compared to Q3 2012

ENERGY DEAL TYPES: q1-Q3 2007-2013 Demerger

0.36% 0.33% 0.51% 0.67%

80

0.63%

50 Deal type (proportion of 100%)

300

13.65%

60

0.90%

15.77%

315

8.11%

0.45% 14.72% 17.95%

200 Deal number

14.29%

0.34% 1.54%

20%

0.51% 0.51%

25

298

Take private

18.31%

25.76%

0.32% 0.32%

40

295

32.06%

0

100

0.71%

29.10%

1.36% 0.34%

20

0

299

33.56%

52.70%

0.32%

0

29.28%

0.90%

0.36%

32.14%

2.01%

0.33% 1.68%

0.67%

2007

Public recommended acquisition

280

195

47.32%

0.51%

2008

58.46%

0.68%

2009

Public hostile acquisition

222

53.56%

1.34%

2010

Other private M&A

52.17%

0.71%

2011

Merger

51.43%

0.45%

2012

Joint venture

59.91%

2013

Divestment

100 400

75

100

400

350

300

250

200

150

100

50

0


34


Sector analysis: Financial services Expected tapering subdues activity but a reprieve sparks optimism Five years after the events of 15 September 2008, deal activity remains about 50% off pre-crisis levels and deal values less than a third of pre-crisis levels, but continued quantitative easing points to the only direction possible: up. ––Five years after the collapse of Lehman Brothers, the M&A market in the financial services sector is still struggling to recover and remains a considerable way off the vibrant pre-crisis market. Looking back to 2007, that year certainly was the heyday in terms of financial services M&A: the acquisition of ABN AMRO by the RBS-led consortium; UniCredit’s acquisition of Capitalia; Bank of America’s acquisition of LaSalle; Morgan Stanley’s acquisition of Discover Financial Services; and BBVA’s acquisition of Compass Bancshares, to list just a few of the megadeals that were all the rage at that time. Indicating the extent of the inflated pricing in the pre-crisis bubble, the average deal size has fallen 48% from USD1.15bn in 2007 to USD603m in 2013. The nature of the transactions has also changed: in 2007 public recommended deals made up 55% of the total value of financial services M&A transactions, which has fallen to 25% year-to-date in 2013, while asset/subsidiary disposals have increased from 24% in 2007 to 46% of the total value of transactions so far in 2013. This is a reflection of the continued effort of financial institutions to offload non-core assets and subsidiaries as they refine and adjust their businesses to respond to the new capital and regulatory requirements and focus on seeking out profitable business lines.


––While deals involving European targets accounted for 55% of total transaction values in 2007, this has dropped to 36% year-to-date in 2013, with the third quarter being a particularly slow period for European financial services M&A. The value of transactions in each of the first three quarters of 2013 has been the lowest over the past five years, along with the second quarter of 2010. The U.S. and Asia account for the vast majority of the financial services M&A activity in the third quarter, with 44% and 36% of the total transaction value, respectively. ––The insurance sector remains active, accounting for over 40% of the transaction value in the quarter. Continuing with their disposal programmes, ING sold a 90% stake in its life insurance company in South Korea to MBK Partners, and Lloyds Banking Group sold Heidelberger Leben to Hannover Rück and Cinven. Both of these deals involved private equity acquirers, illustrating a wider trend of private equity interest in the insurance sector, with just under 50% of the deals in the quarter involving a private equity firm, including Hellman & Friedman’s acquisition of Hub International. ––Two large deals in Thailand elevate it to second place after the U.S. – Bank of Tokyo-Mitsubishi UFJ’s tender offer for a 75% stake in Bank of Ayudhya (the largest

deal worth up to USD6bn in the quarter) and Meiji Yasuda Life Insurance Company’s acquisition of Thai Life Insurance. ––DBS Bank’s year long pursuit of Bank Danamon of Indonesia finally ended when DBS Bank failed to secure regulatory approval for its offer for majority control, in a bid worth some USD7bn, throwing back into doubt the question of what level of control foreign banks desperate to invest in Indonesia’s burgeoning financial sector will be allowed to have. ––Continuing the theme we raised in the previous quarter, the U.S. continued to see the consolidation of smaller banks, as U.S. lenders join efforts to comply with stricter regulation and capital requirements. ––The Federal Reserve’s decision to postpone the widely expected tapering of bond purchases, together with the Bank of England’s Mark Carney’s forward guidance indicating that rates will be held until mid-2016, illustrates both the view that global economic recovery is still somewhat vulnerable and that the central banks remain committed to doing all they can to continue to encourage investment and economic activity. This prolonged easing should help push M&A activity, particularly as levels of cash on balance sheets continue to rise, with cheap financing available – and with M&A activity still so far off pre-crisis levels, the only way is up.

35

Total

43%

46


19%

deals in Q3 2013


financial services DEAL TYPES: q1-Q3 2007-2013 Demerger

0.51%

0.51%

19.39% 1.73%

0.51% 0.61%

23.78%

0.33%

0.33%

370

300

80

2.70%

0.27%


306

28.65%

60

28.10%

31.37%

200 Deal number

0.59%

23.67%

0.51% 1.22%

1.22%

35.14%

25

24.75%

198

31.10%

0.65%

40

Take private

25.97%

31.31%

1.52%

1.01%

0

100

0.81%

20

0

196

32.47%

0.87%

0.43%

0.54%

30.81%

1.08%

0


231

164

38.56%

0.65%

40.85%

1.22%

2007

39.90%

0.51%

2008


0.59%

41.84%

169

38.53%

2009

Other private M&A

36.73%

44.97%

0.51%

2011

2010

Merger

29.59%

0.59%

2012

Joint venture

0.51%

2013

Divestment

100 400

75

100

400

350

300

250

200

150

100

50

0


36


Sector analysis: Infrastructure & utilities Dry powder gathering dust after a muted quarter Whilst deal volume was up from 10 to 13, deal value dropped by over 50%. The real shortage of assets coming to market means that the increased availability of debt and equity financing is yet to be put to work. ––The real story of Q3 is the People’s Republic of China (PRC). 30% of global deal activity in the sector involved Chinese targets and Chinese acquirers. The China-related infrastructure market is showing signs of life, however understanding and distinguishing transactional activity and opportunities is particularly important in the PRC. Onshore, central government has been far more selective in using infrastructure investment as a way to stimulate the economy. On the outbound side, Chinese companies continue to look further afield for infrastructure investment opportunities. ––M&A involving airports remains steady, with Abertis selling London Luton Airport and Stockholm Skavsta Airport in Q3. Looking ahead, Abertis has put Grupo Aeroportuario del Pacífico (GAP) in Mexico and the concession for Sangster International Airport (MBJ) in Jamaica on the market, whilst Heathrow Airport Holdings is expected to dispose of Glasgow, Aberdeen and Southampton airports in the UK over the coming 18 months. ––In the U.S., the second attempt at privatising Chicago’s Midway International Airport under the Federal Aviation Administration (FAA) pilot programme collapsed after one of the two consortium bidders dropped out amid heightened


bidder concerns about political risk in Chicago. The City’s high-asset valuation expectation, paired with uncertainty over Chicago’s commitment to public private partnerships (P3), created a particularly tough environment for the deal. ––Other cities in the U.S. present distressed asset opportunities. The City of Detroit filed for Chapter 9 bankruptcy in July and made headlines after having its public art collection appraised. More realistically, Detroit’s non-core infrastructure assets may be privatised to free up funds to restore public services and settle claims by creditors. More generally, we are of the view that U.S. opportunities for investments in the secondary market for infrastructure, including distressed assets, are set to increase in the near future. ––The fact that only one significant infrastructure asset acquisition was announced in Australia during Q3 2013 belies the current appetite for deal activity in the Antipodes. However, local and international pension and sovereign funds have demonstrated a strong desire to invest in Australian port, energy pipeline and road infrastructure, so we are likely to see an uptick in deal volume in late 2013 and beyond. The recent Australian federal election result has removed some of the uncertainty that had put a dampener on deal making in the year to date.

––There are tangible signs of tension in the European infrastructure M&A market at the lack of deals being done. Fortum’s Scandinavian electricity transmission businesses are expected to be sold and these will be of interest to a number of bidders. Rumours abound of EQT Partners’ proposed disposal of Swedegas, so Nordic activity in the sector is healthy. However, there is little evidence of an abundance of deals in the pipeline over the short term. ––Globally, if transactions involving Chinese targets are stripped out from Q3, deal levels are at their lowest since 2008. Viewing the market from this perspective gives good cause for pessimism, yet we prefer to accentuate the positive fundamentals that indicate that a resurgence in deal activity may just be round the corner. Our rationale? More and more institutional investors are increasing their allocations to infrastructure, whilst some of these are making the transition to direct investing. Infrastructure is increasingly seen as a cornerstone of a diverse alternatives portfolio and this means more bidders in the market, but the lack of supply is frustrating market participants and holding back deal activity. We hope, as the market does, that this will change.

37

Total

21%

13


7%

deals in Q3 2013


infrastructure & utilities DEAL TYPES: q1-Q3 2007-2013 Divestment

2.33% 2.94%


49 6.67%

25

60

80

30

Deal number

2.44%

2.04%

0

20

12.24%

34 18.37%

40

10

11.63%

30

20

4.88%

12.12%

43

26.67%

0

26.83%

51.02%

0

41

33

35.29%

61.76%

2007

2.44%

66.67%

2008

Take private

30.61%

51.02%

2009

30.30%

46.51%

2010


30.61%

57.58%

2011


4.08%

63.41%

2012

Other private M&A

39.53%

2013

Merger

40

75

49

100 50

100

50

40

30

20

10

0


38


Sector analysis: Life sciences Major deals dominate as volumes remain constant Public M&A activity increased significantly in Q3 2013. Amgen’s acquisition of Oynx Pharmaceuticals is the fifth-largest biotechnology transaction in history, while Community Health Systems’ acquisition of Health Management Associates is the biggest hospital deal since 2006. –– After a slow start to the year, the number of deals in the sector increased significantly from Q1 to Q2, and this increased activity level was sustained during Q3, with 34 reported transactions. However, M&A activity remains slightly lower than in equivalent periods in 2011 and 2012. The overall deal value for Q3 2013 was USD41.6bn, which is approximately 40% higher than during the same period last year. This is attributable mainly to three very large public M&A transactions – one particularly noticeable trend in Q3 2013 has been the continued increase in public M&A, with 16 announced transactions. –– Amgen’s acquisition of Onyx Pharmaceuticals for USD10.4bn is the fifth-largest biotechnology deal in history and reflects pharmaceutical companies’ continued appetite for cancer treatments – the Onyx Pharmaceuticals transaction follows Johnson & Johnson’s agreement to acquire cancer drug developer Aragon Pharmaceuticals in June 2013. The Onyx Pharmaceuticals transaction is also another example of a pharmaceutical company acquiring pipeline products as it seeks to mitigate the effect of the patent cliff. –– U.S. generic drug maker Perrigo agreed to acquire Elan Corporation for USD8.6bn. This is another example of an acquisition being driven to a significant extent by Ireland’s favourable tax regime


(Perrigo expects to halve its corporation tax bill as a result of the transaction). –– Consolidation in the U.S. hospital sector continues, with Community Health Systems, the second-largest U.S. hospital chain, agreeing to acquire Health Management Associates for USD7.1bn, in the biggest acquisition of a hospital company since 2006. It is hoped that U.S. health reforms, due in 2014, will increase demand from newly insured patients. The European hospital sector is also seeing consolidation, as is evidenced by Fresenius’ agreement to acquire 43 hospitals from RHÖN-KLINIKUM for USD4.1bn to create Europe’s biggest chain of private hospitals. –– GSK has agreed to sell its nutritional drinks brands Lucozade and Ribena to Suntory, the Japanese consumer goods company, for GBP1.3bn. This disposal reflects GSK’s decision to focus on core healthcare (and OTC consumer healthcare) products. Disposals of non-core products form part of the announced strategies of other major pharmaceutical companies, including Novartis and Pfizer. –– Listed French diagnostics company bioMérieux agreed to acquire BioFire, a U.S. competitor, for USD450m. Also in the diagnostics arena, Roche agreed to acquire the U.S. company Constitution Medical Investors for USD220m. The potential

for diagnostics to enable companies to better identify the causes of diseases, and design more targeted treatments, is causing a number of pharmaceutical companies to move into or consolidate their existing positions in the sector, either through acquisitions (eg bioMérieux and Roche) or by expansion of internal diagnostic capacity (eg, Abbott). –– The biggest news in the digital health space has been Google’s launch of a health and well-being focused company, Calico. Details of Calico’s proposed business have not been released, but commentators expect it to use Google’s huge databases to help search for solutions to ageing and age-related diseases. Elsewhere in the digital health arena, M&A activity has continued with Medtronic’s acquisition of Cardiocom and Teladoc’s acquisition of Consult A Doctor. –– There was no inbound M&A into China in Q3 2013, which must be, at least to some extent, a result of the Chinese authorities’ highly publicised anti-corruption probe in the sector. We expect M&A in China to be muted for the foreseeable future as a result of the ongoing investigations and, in any event, any company considering investment in China is now certain to carry out exhaustive due diligence in relation to corruption issues.

39

Total

46%

44


6%

deals in Q3 2013


LIFE SCIENCES DEAL TYPES: q1-Q3 2007-2013 Demerger

2.19% 3.05%

0.61%

21.95%

4.10% 5.48%

2.74%

23.29%

3.31%

150

100 200

100

200

50

75

150

0


80

5.26%

0.58%

28.07%

60

0.90%

0.73%

1.64%

1.65%

33.88%

100 Deal number

171

100

25

40

164

26.23%

32.88%

0

23.36%

48.17%

50

Take private

25.23%

0.90% 0.61%

0.58%

20

121

45.03%

20.47%

0

122

41.32%

3.31%

0

137

73

16.53%

35.62%

2007


111

47.54%

19.67%

0.82%

2008


45.05%

1.46%

25.61%

2009

Other private M&A

49.64%

0.73%

2011

2010

21.90%

0.90%

2012

Merger

27.03%

2013

Divestment


40


Sector analysis: Private equity Competitive landscape changes The balance of power has shifted in the PE industry with U.S. funds leading the pack. Now that strategic trade buyers are back in the game, competition in auctions is growing fiercer and funds must fight harder for deals.

–– Q3 was relatively quiet for PE funds across the world, with most activity focused on recapitalising existing deals and some leveraged buyouts. That reflects the fact that the bond market is operating well again and that debt markets are relatively deep and liquid. M&A activity in Europe has tended to centre on secondary or even tertiary deals, and we expect that to remain the case for a while longer. But funds have plenty of cash and finance is very available for the right assets. With more sellers on the market it can only be a matter of time before more M&A activity materialises. –– The balance of power in the industry has shifted since the credit crunch, and U.S. funds have been increasingly successful in terms of raising new funds and doing deals. –– Another significant shift has taken place in recent months with strategic trade buyers coming back into the market in a way that has not been the case for several years. Auctions have, for a while, been almost the exclusive preserve of PE funds. Increasingly, trade buyers are prepared to pre-empt the auction process and pay a big premium to get their hands on a chosen asset, as we saw with Suntory’s GBP1.3bn purchase of the Ribena and Lucozade brands from GSK, where several PE funds were lined up for an auction.


–– Asia remains a tough nut for most PE funds to crack, although some are proving successful. One problem is the relative scarcity of sellers, certainly those prepared to relinquish control of the business. In key markets, notably China, funds also face growing competition from cash-rich domestic trade buyers who know the system well and valuations continue to be high, as do seller expectations, regarding asset values. Some funds, notably Temasek Holdings of Singapore, benefit from long exposure to China as well as deep market knowledge. Temasek Holdings continues to diversify, this quarter joining Goldman Sachs to buy 18% of the Shanda-owned e-book provider, Cloudary, for USD110m. –– Europe is seeing an increase in corporate carve-outs as companies either try to dispose of distressed assets or change strategic course. This is opening up some interesting opportunities for funds. –– In a relatively quiet quarter for PE in Germany, there were a number of successful deals including Cinven and Hannover Rück’s joint acquisition of life insurer Heidelberger Leben from Lloyds Banking Group for around EUR300m and Triton’s purchase of Rexroth Pneumatics from Bosch for just under EUR200m.

–– Australia also had a relatively quiet quarter for PE deals, with the majority of new deals taking place in the Australian mid-market. PE secondaries remain a prominent feature, although there are also positive signs that the IPO market is finally opening up again (with Quadrant Private Equity’s AUD485m float of Virtus Health). At the larger end of the PE market, funds have tended to focus on refinancing existing portfolio companies (taking advantage of relative liquidity in both the U.S. and domestic debt markets) and a number of AUD1bn+ exits and IPOs are rumoured to be tabled for Q4 2013 and H1 2014. –– Some IPO markets in Europe are motoring again, providing PE-owned companies with a good alternative exit to a trade sale (a feature we are also starting to see again in the Australian market, after a long hiatus). One notable UK IPO in the quarter was the successful float of Foxtons estate agency (which was owned by BC Partners) and Merlin Entertainments, (which is backed by Blackstone and CVC Capital Partners) has been reported to be considering a GBP3bn IPO before the year-end.

41

Total

27% 136 19% decrease in value of deals compared to Q3 2012

deals in Q3 2013


private equity DEAL TYPES: q1-Q3 2007-2013 Total buyouts

39.70% 35.01%

207

0

40

250

25

32.42%

20

32.04%

593

32.85%

8.21%

0

42.66%

48%

0

457

14.84%

53.12%

2007

46.35%

58.94%

2008

15.54%

49.45%

2009

592

19.59%

44.93%

2010

511

15.37%

41.10%

2011

425

16.24%

36.94%

2012

Trade exits

16.71%

2013

Secondary buyouts

500 Deal number

60


873

750

80

75

100 1,000

100

1000

800

600

400

200

0

44.79%

13.54%

41.67%

42.86%

11.04%

46.10%

www.allenovery.com/maindex 37.9

10.

51.

42


Sector analysis: Telecoms, media and technology Transformational deals in the telecoms space Q3 2013 saw the biggest value of deals since 2007, with a spate of high-profile telecoms transactions in the quarter, notably Vodafone’s sale of Verizon Wireless, its U.S. mobile phone business, to Verizon Communications (its JV partner) and Microsoft’s acquisition of Nokia’s devices and services unit. ––TMT deal value in Q3 2013 was USD251.745bn – the biggest quarter by value since 2007 and a 200% increase over Q3 2012. 2013 is also on track to be the biggest year by deal value since 2007. But volume for Q1 to Q3 2013 is 10% down on the same period in 2012. ––The largest transaction (and the third-largest deal in corporate history) was Vodafone’s sale of its 45% interest in Verizon Wireless to Verizon Communications for USD130bn. A significant portion of Vodafone’s proceeds will be returned to shareholders; in addition to USD60.15bn of stock provided to Vodafone shareholders under the deal, USD23.9bn of cash will be returned. Although it represents a portfolio shuffle for Vodafone, it is a big and transformational one. Vodafone has exited one of the few growing markets for telcos in the developed world – one with high margins, and for which data applications (generally acknowledged as the future of the business) are designed. It is what Vodafone does with the unreturned cash that is interesting – does it build the best 4G networks in Europe and out-invest competitors? Or buy more European cable assets (like its ongoing EUR7.7bn purchase of Kabel Deutschland), for a fully integrated offering? Or look for consolidation


opportunities in India or another emerging market? M&A is trending away from emerging markets, but they still present growth opportunities for telcos that are scarce in the developed world. Vodafone has an opportunity that is harder for other global telcos to play, and its next moves may well set the pace for its competitors. ––The headline technology deal of Q3 was Microsoft’s acquisition of Nokia’s consumer business – a footnote in the rubber boot company’s history, or Microsoft finding a real strategy to take back the future of personal computing? Microsoft has everything to play for. With the Android ecosystem coming of age, can Apple repeat its magic in emerging markets, where the greatest number of first-smartphone-buyers live? It certainly seems to have started well in China. And what of BlackBerry? Perhaps it will be taken private and given time to strategise, but without a compelling App World, its attractive proprietary technologies may mean it is destined for Motorola’s fate. The medium-term future for M&A in the tech industry may continue to be competition for compelling applications and partnerships for the best content driving consumer choice. Meanwhile, in the back end of the glamorous personal electronics industry,

the manufacturers of semiconductors, display screens and batteries are attractive targets, like shovel manufacturers in a gold rush. ––The Publicis/Omnicom merger reflects the challenges of digital media to advertisers and agencies. Over the medium term (possibly not the next quarter), standalone providers of online content (Netflix, Spotify and their as-yet-lesser-known challengers) may be acquired by old-media companies for whom the writing is clearly on the wall for linear TV and its companions. Paid-subscription content providers may be proving that if it is easy enough to pay an acceptable price for quality content, not everyone is a pirate file-sharer. So they will attract more content deals to their “platforms”, and who will be able to afford not to buy into them? Small mobile and data analytics specialists are also attracting buyers (Accenture bought Fjordnet) in this new world of media, where spend and effect are better measured. We continue to expect more M&A activity in this area, with consultancies and digital media companies looking to add this key skill set to their capabilities to translate existing product offerings into the world of new media and digital.

43

Total

84

199% increase in value of deals compared to Q3 2012

6%

deals in Q3 2013


TELECOMS, MEDIA AND TECHNOLOGY DEAL TYPES: q1-Q3 2007-2013 Demerger

1.67%

0.42%

2.25%

20.60%

1.50%

4.87%

20.22%

2.15%

0.43%

2%

27.33%

30.67%

0.67%

0.72%

23.10%

0.36%

277

40

25

200 Deal number

60


390

300

80

3.85%

0.77%

36.92%

27.44%

42.60%

0.36% 0.36%

0

100

24.89%

41.63%

20

0

0.75%

51.31%

2007

Take private

18.75%

0.42%

47.50%

240

49.06%

1.50% 0.75% 0.37%

29.61%

2008

30.51%

20.97%

150

0


233

31.05%

24.72%

1.29%

2009


267

38%

30.83%

0.75%

2010

Other private M&A

267

0.51%

0.37%

2011

Merger

1.44%

0.42%

2012

Joint venture

1.33%

2013

Divestment

100 400

75

100

400

350

300

250

200

150

100

50

0


44


Top ten global outbound acquirers Q1-Q3 2013 140

U.S. USD107,327m

52

UK USD48,483m

38

China USD38,658m

37

Hong Kong USD17,262m

36

Japan USD23,511m

33

Canada USD36,407m

27

France USD38,278m

15

Sweden USD8,371m

17

Singapore USD7,408m

16

Switzerland USD8,525m

The U.S. is the world’s largest outbound acquirer and has the largest “net score” of 53 deals in Q1-Q3 2013: countries can be assigned a “net score” based on the volume of outbound (+) versus inbound (-) M&A.


45

Definitions Divestment

Insolvency-related

A disposal where the seller is a corporate selling a controlling interest (>30%) in one or more of its businesses. This excludes private equity exits and disposals made by high net worth private individuals and families. Includes government-related sales and disposals made by non-private equity financial investors, such as investment holding companies.

A transaction where a company has filed for bankruptcy or is subject to another insolvency process or procedure, and sells off part or all of its assets to generate the cash necessary to pay creditors.

Joint venture

A transaction that is conducted across national boundaries. The deal involves parties from at least two different countries.

A transaction that involves the pooling of assets between different companies, whereby the ownership of the new joint venture is shared between the parent companies involved. Does not include so-called joint ventures where a company’s sole contribution is cash rather than assets.

Demerger

Merger

Cross-border

A transaction where a company spins off one of its subsidiaries, resulting in the creation of a separate listed business independent from the activities or influence of the former parent. The shareholders ultimately hold shares in each company and neither the former parent company nor shareholders receive any cash as a result of the deal (as opposed to a flotation/IPO).

Domestic A transaction conducted within a national boundary. The deal involves parties that are incumbent nationals of that country.

A transaction that involves the combination of two or more separate businesses into one, with broadly equal holding and governance rights assigned to the respective shareholders of each company.

Other private M&A Acquisitions or disposals not covered by the other classifications. Includes PE exits and disposals made by high net worth individuals and families.

Public recommended acquisition (excl PE-related take privates) A friendly acquisition where the parties involved reach agreement over the terms of the deal, normally prior to the acquisition being formally announced. The transaction requires approval from either the bidder, target or vendor shareholders in a public forum.

Public hostile acquisition (excl PE-related take privates) An acquisition of a publicly-quoted target where the target management does not recommend the offer within two weeks.

Take privates (hostile and recommended) An acquisition of a publicly-quoted company by financial investors such as private equity houses or venture capital firms (as opposed to a trade buyer). The target company is subsequently delisted.


46


About the research The underlying data to this research comes from Remark’s sister product, Mergermarket. Both products are part of the Pearson-owned Mergermarket Group. Remark, the publishing, market research and events division of The Mergermarket Group, offers a range of services that give clients the opportunity to enhance their brand profile, and to develop new business opportunities. Remark publishes over 50 thought leadership reports and holds over 70 events across the globe each year which enable its clients to demonstrate their expertise and underline their credentials in a given market, sector or product.


Remark is part of The Mergermarket Group, a division of the Financial Times Group. To find out more please visit www.mergermarket.com/remark/ or www.mergermarket.com/events/ ––This report only includes deals worth USD100m and over. ––The data contained in the 2013 results spans 1 January 2013 to 16 September 2013 inclusive.

47

5th globally by volume of deals Thomson Reuters, Q3 2013

1st in Latin America by value of deals Thomson Reuters, Q3 2013

1st in Asia by value of deals

2nd in Europe by volume of deals

Thomson Reuters, Q3 2013


1st in Middle East and North Africa by both value and volume of deals

2nd in Eastern Europe by volume of deals Thomson Reuters, Q3 2013


1st in Emerging Markets by both value and volume of deals Thomson Reuters, Q3 2013


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