China SOE reforms could be M&A El Dorado

China's SOE reorganisation promises multi-billion-dollar deal opportunities amid a global resurgence in jumbo M&A deals, says Bank of America Merrill Lynch's Asia Pacific M&A head

Big opportunities beckon for M&A bankers as China restructures and streamlines its sprawling state-owned enterprises.

In an interview with FinanceAsia, Stephen Gore, head of Asia-Pacific mergers & acquisitions at Bank of America Merrill Lynch, explained why he lays great store by China's reform programme and how it dovetails neatly with a global pickup in business.

“The broad reorganization of ownership structures in China is a major source of potential deal activity," Stephen Gore, head of Asia-Pacific mergers & acquisitions at Bank of America Merrill Lynch, told FinanceAsia.

"We are expecting to see a number of multi-billion dollar deals emerging from this,” he said.

The State-owned Assets Supervision and Administration Commission of the State Council (Sasac) is currently reviewing ways to restructure China's SOEs, which could take various forms.

"The restructuring may include injecting state-owned assets into [listed companies], introducing private capital for minority stakes or consolidating assets that should be held together," Gore said.

To some extent this process is already underway.

Sinopec, China's second-largest oil company, is in the midst of selling off a 30% stake in Sinopec Sales, its retail unit. According to two sources familiar with the matter, the company wants to list Sinopec Sales. A third source familiar with the company said Sinopec's chairman Fu Chengyu had been looking to clarify Sinopec's corporate structure even before the government's push for SOE reform last year, by spinning of assets in similar fashion to Cnooc, a company he led previously.

In addition, Citic group injected $36 billion worth of assets into Hong Kong-listed Citic Pacific in April while in July Chinese officials named healthcare giant Sinopharm and China National Building Materials among the next wave of SOEs seeking private investment. Conglomerate Xinxing Cathay was also earmarked for a management overhaul, while investment holding company SDIC and China's largest grain producer Cofco were tasked with finding ways of making more efficient use of state money.

Jumbo M&A deals

China's reform programme comes at a time when M&A markets globally are seeing a resurgence of jumbo transactions thanks to low interest rates and cheap funding and to easing economic worries. This has put companies into deal-making mode.

"M&A activity in the first half [of the year] was exceptionally strong," Gore said. "It feels like we might be heading towards record levels this year but the notable difference may not be in absolute volumes but in the very large deals. We are seeing $5 billion-plus deals in much greater number than we have seen in the past, both globally and in Asia Pacific," he said.

According to data provider Dealogic, the total value of Asia ex-Japan-targeted M&A transactions so far this year is $317 billion compared with $235 billion a year earlier. Over the same period, the number of Asia ex-Japan-targeted deals worth between $1 billion to $10 billion is 40 compared with 29, while the number of outbound deals of that size is 23 compared to 16. 

Private equity players have plenty of funds on hand and can tap additional funding cheaply, enabling sizeable deals to take place. A recent example is Singapore packaging company Goodpack, which closed a leveraged buyout financing earlier this month, with a debt-to-Ebitda of about 6.5 times. Another one is Treasury Wine Estates, which is the target of a bidding war between KKR and TPG.

"We have got a pick-up in private equity activity, driven by a return of leverage multiples," Gore said. "A lot of these deals would not have been able to get done two years ago because the leverage multiples would not have supported it," he said.

Deal diversification

There has also been a broader diversification in the type of M&A deals this year, with greater activity across different sectors. "In previous years many deals have followed the same theme -- natural resources consolidation. This year it has been more varied, focusing on telecom, property, FIG and other sectors," said Gore.

Chinese internet giants Alibaba and Tencent been driving deal activity in the technology sector, which has been the second-busiest this year after real estate, accounting for $39.2 billion of Asia ex-Japan-targeted M&A. Alibaba, which is set to raise billions of dollars through a much-anticipated US stock listing, extended its spree in June by buying out mobile internet browser UCWeb.

"The Chinese internet sector has been active and part of the reason for this is [high] valuations. The single strongest indicator for deal activity is valuation levels as companies have a highly valued acquisition currency through [their] stock," Gore said. 

The financial institutions sector has also been active, driven by Japanese banks looking for growth overseas. This week Sumitomo Mitsui Banking Corp. acquired a stake in Cambodia’s largest bank by assets, Acleda and Japan's Bank of Tokyo-Mitsubishi UFJ last year struck a deal to buy Thailand's fifth-largest bank, Bank of Ayudhya.

Within Southeast Asia, banks that have traditionally had a domestic focus are looking to expand regionally, including OCBC which struck a deal to acquire Wing Hang Bank.

"A number of previously domestically-focused banks are now considering who will be the key players in pan Asia and jockeying for that position," Gore said.

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