SGCIB finds a niche in Asia's competitive LBO market

Societe Generale's leveraged and acquisition finance team says strong growth in LBOs creates the risk of a downturn.
Societe Generale Corporate & Investment Banking (SGCIB) recently enhanced its focus on the leveraged and acquisition finance business in Asia with Pierre-Louis Auzel moving from Paris to head the product for Asia-Pacific. FinanceAsia talks to Auzel and his colleague, Thierry Magnan, head of media and telecom finance Asia-Pacific, about how they see the business developing.

What is the motivation for you to enhance focus on leveraged finance in Asia?
Auzel : We have an established presence in Asia but setting up a 10-member strong leverage finance team is recent. This reflects our desire to expand our leveraged finance and corporate acquisition business beyond Europe. After we expanded to the US two years ago we came this year to Asia. I work closely with ThierryÆs four-year-old team.

What risks does your business face in Asia?
Auzel: Certain risks are specific to the region and certain to the product. Correctly assessing credit is a challenge across this business. In the region some companies may lack the transparency we are accustomed to. There may be legal uncertainties or issues related to enforcement of contracts.

Magnan: Also, the region is very fragmented which makes it difficult to form industry-wide scenarios from one country to another. Operating environments across countries are very distinct.

What is your assessment of China opportunities?
Auzel: In the long term we are bullish on China although currently it is not a large share of the LBO market. We expect to see more China deals. Enforcement of security can be an issue but we see the uncertainties of the legal and regulatory environment as a larger subject.

Many players feel it is more time consuming to close transactions in Asia. What is your experience?
Magnan: It can be time consuming on a country and deal specific basis. In Japan, Taiwan, Australia, Korea for example it is generally not the case. Where the buyers are international financial sponsors, they speak the same language as us and the time taken is shorter. With local deals it can be protracted and complex, and more time consuming. In some countries, the restriction on foreign currency lending and/or hedging may add to the complexity.

Which countries do you see most activity in?
Auzel: This is very dynamic market/environment. There has been a structural change in Australia and today it is an established market; this transformation has happened over the course of this year. In China the question is timing. When will the potential translate into reality. In Japan the market is already very well served and we are a late entrant. Taiwan and Korea are markets we are bullish on.

Magnan: For media and telecom transactions in Asia (ex-Japan) Korea and Taiwan are more mature markets so it's easier for investors to take advantage of opportunities. Southeast Asia is more on a case-by-case basis.

The arena is already quite crowded and you are a late entrant. What is your differentiating factor?
Auzel: Our significant European experience gives us a depth of expertise to structure transactions and assess risk which enables us to both effectively structure and syndicate deals. On the back of SGCIBÆs 30-years of experience in structured finance in the region we have significant sector specific strengths in for example oil and gas, mining, shipping, media and telecom. These three decades of presence as a bank have given us strong relationships with corporate clients which we can leverage. Due to all this we have already been able to close two deals over the summer.

Magnan: The new team is not starting from zero obviously. In media and telecoms we have been involved in many types of financing over the past four years, including LBOs and corporate acquisition finance. We have developed a good relationship with a number of key financial sponsors already. Furthermore, we have entrenched product experts and quite extensive local knowledge through our senior bankers across the region, which we bring into play on deals.

Do you attribute increased activity to a change in the risk perception of operating in Asia?
Auzel: There are two components of risk û absolute and relative. On a relative basis compared to other markets the risk premium in Asia may be smaller than it used to be, on average. In terms of the overall product risk of acquisition finance, we have seen LBOs grow by 100% during the first six months of 2006 in the US and 200% for the same period in Asia. This growth is on the back of an already very strong growth year in 2005. This kind of growth creates the risk of a downturn but we believe our global presence and portfolio management and sector understanding position us well to manage it.

We are bullish on the opportunity. Traditionally LBO volumes are measured relative to GDP. In Europe this reaches 1.5%. In Australia last year this was between 0.5-0.7%; this year this has probably reached 1.5%. In Japan the number is below 0.1% suggesting potential for growth, as is the case in various other Asian markets.

What is your assessment of the media/telecom opportunity looking ahead?
Magnan: In some countries low levels of penetration themselves provide a large opportunity. In others markets, penetration is high but we foresee digitisation of networks and provision of new services by operators increasing revenue per client thus driving overall growth. To illustrate, cable operators are moving, in mature markets, from providing only video to providing VOIP (voice over internet protocol), internet, home shopping. Ditto for mobile telephony û voice calls is only one of many applications.

Do you think Asian markets are ready to see more hostile transactions?
Auzel: While there have not been many successful hostile transactions to date, there have been attempts and even these are landmarks in terms of heralding a structural change. For example, in Australia, the tentative bid on Coles Myer has re-defined deal sizes and dynamics. Similarly, in Japan Oji PaperÆs decision to pursue Hokuetsu Paper. Over time this will develop. Also, transactions will start as hostile and during the course become friendly û we witnessed this while advising Mittal Steel during its bid for Arcelor.

Magnan: We believe the prevailing culture still encourages negotiated deals.
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