SocGen bullish on China M&A

Richard Lewis and Fabien Simon from Societe Generale discuss M&A, acquisition finance and why China outbound M&A is poised to continue.

We talk to Richard Lewis, head of M&A for Societe Generale for Asia-Pacific, and Fabien Simon, co-head of acquisition and leveraged finance for Asia-Pacific, about their M&A practice.

What is Societe Generale’s focus in M&A advisory?
Lewis: We focus on European sell-side mandates and Asian buy-side mandates riding on our strong execution capabilities globally and on sectors in which we have particular strengths. In terms of sectors, we have expertise in natural resources (across oil and gas, metals and mining); consumer and retail; industrial and chemicals. Our key target markets are the major outbound investors from China and Japan.

We see Asia and CEEMEA (Central and Eastern Europe, the Middle East and Africa) as the biggest growth areas especially in terms of M&A. There are strong fundamentals supporting this view. There are $50 billion of oil and gas assets up for sale globally, mostly concentrated in the US and Europe from investors looking to cash in while Asia has resources available for investment.

China took up about 30% of Asia M&A volume last year mainly driven by energy and natural resources. We expect demand to continue with more diversity in M&A targets plus possibly increased outbound M&A in consumer-related and soft commodities. This was reinforced by the 12th five-year plan where the key message to Chinese corporates was to internationalise.

How does your ability to provide financing tie in with your M&A capabilities?
Lewis: The ability to provide an integral approach on both M&A and financing is fundamental to us. The M&A teams work closely with the acquisition finance and hedging teams to ensure the client receives a full service.

Chinese state-owned-enterprises (SOEs) are being encouraged to arrange financing from the market for their M&A deals. Have you participated in any of those deals? What kind of terms do they feature?
Simon: Indeed, we see an emerging trend that Chinese SOEs are increasingly looking to work with international banks when seeking financing support for their overseas M&A activities, driven by stronger liquidity and more attractive pricing offshore.

SG is one of the most active players in supporting Chinese SOEs in such overseas acquisition financing and played a lead role in a number of deals last year, including a bridge facility to support CNOOC’s acquisition of a 60% stake in the Argentina-based Pan American Energy from BP for $7.06bn. We also provided a significant commitment to Sinopec that helped finance one of their most important overseas acquisitions to date. We’re currently looking at a number of active offshore acquisition opportunities with SOEs, mainly in the natural resources sector.

The strategic nature of these companies forms an important element of our credit assessment and one key aspect is to be able to rely on the top entity’s credit strength, for example benefiting from a legally enforceable guarantee where in some cases would entail registration of the offshore debt guarantee with the State Administration of Foreign Exchange. Typically, the transactions are structured as a short term bridge to facilitate the client’s settlement of the consideration amount with the vendor whilst giving them time to plan out a longer term financing strategy.

How active will financial sponsors be during the coming months?
Lewis: Activity is picking up across the board on the buyout side with Australia and Japan particularly active. However, the recent events in Japan will impact deal activity this year.

What kind of leverage levels do you expect?
Leverage levels will continue to be determined by sector, deal and location — particularly in areas where there are strong pockets of domestic liquidity.

What were your landmark M&A deals in the past year?
Lewis: On March 31 last year Veolia Transport [a French company that is a leader in international transportation] completed the acquisition of a 50% interest in Hong Kong Tramways. We acted as financial adviser to Veolia Transport. And in April Sumitomo Chemical Corporation, the listed Japanese chemical manufacturer, agreed to acquire 20% of the Australian listed chemical company, Nufarm. SG acted as financial adviser to Sumitomo Chemical.

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