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Thailand’s political volatility has long cast a pall on the ambitions of dealmakers and this year is unlikely to be much different. Bankers, nonetheless, expect pockets of activity, including initial public offerings and offshore acquisitions as Thai companies battling flagging growth at home are forced to look overseas.
Business has been flagging since the junta seized power through a military coup, toppling the Yingluck Shinawatra-led government in May last year.
“The deal flow in the market has been suppressed because of the uncertainty over the new government and also because the economy hasn’t been strong and not many companies are expanding aggressively,” said a Bangkok-based banker at a foreign bank who declined to be named. “However, we do expect larger equity capital market deals in the second half.”
The Thai economy grew by just 0.7% in 2014, woefully underperforming the rest of the region as exports weakened and domestic spending remained subdued. And with fresh elections now not expected until the first few months of 2016, at the earliest, the country’s turbulent politics are likely to continue to weigh on its capital markets.
Thai companies have raised a total $2.2 billion so far this year by selling shares. But half of that is accounted for by just one deal – Jasmine Broadband Internet Infrastructure Fund’s $1.1 billion IPO, arranged by Bualuang Securities and Morgan Stanley.
Yield results
Domestic investors are key when it comes to Thailand’s stock market, particularly yield-hungry retail investors. So the jumbo Thai equity offerings of recent years, including this year’s Jasmine IPO and the True Telecommunications Growth Infrastructure Fund IPO that closed in late 2013, have been yield plays.
For example, Jasmine’s IPO offered investors a forward yield of 9% when it priced in February. This offered a pick-up of about 607bp over Thai government bonds at that time. Government bond yields have stayed low as the Bank of Thailand has kept the benchmark rate low at 2% to help stimulate the nation’s economy.
Bankers expect more of the same this year. “As domestic liquidity is strong, a lot of Thai IPOs are distributed domestically. We expect to see more infrastructure and property funds that appeal to depositors looking for yield,” Phumchai Kambhato, head of corporate banking and securities for Deutsche Bank in Thailand, told FinanceAsia in an interview.
To some extent, Thai IPO markets have been sheltered from the country’s political vicissitudes since they have continued to be well supported by domestic investors. As such, the market has pushed out a steady stream of medium-sized $200 million to $300 million deals.
Foreign banks, as a result, have often played only limited roles. The upcoming IPO for PTT’s electricity unit Global Power Synergy, for example, is mandated to domestic banks Finansa, Tisco and KT Zmico.
The exceptions are larger IPOs and block deals, where international investors have been helpful in providing some pricing tension. “At the end of the day, there are only about four large Thai funds and those funds can talk to each other so if you want a good size, you need access to other funds,” the Bangkok-based foreign banker said.
Outbound M&A
But any optimism on the part of dealmakers is a tempered one.“I have a cautiously optimistic outlook for the second half of the year,” Kambhato said. “Thai companies have been doing strategic planning in the past several months and we have been engaged in dialogues on whether they want to expand their businesses organically or inorganically or [to] tap the capital markets if they are leveraged.”
In terms of mergers and acquisitions, the unappetising combination of slow growth and political volatility has spurred Thai companies to look overseas, led by the likes of Dhanin Chearavanont’s CP Group and Charoen Sirivadhanabhakdi’s TCC Group.
Bankers now expect a wider group of companies, including smaller- and medium-sized companies to start venturing offshore. “The top 10 Thai corporates have already made outbound acquisitions and other leading companies have started announcing or making plans to expand and acquire assets overseas,” Kambhato said.
An example of a medium-sized company that has ambitions to grow overseas is hotel operator Minor International, which in January agreed to buy six hotel properties in Brazil and Portugal for €168 million ($182 million).
The relative strength of the baht currency and attractive valuations means some Thai companies have been looking at Europe for deals. “[The] valuation of certain assets has declined, while the baht has remained strong, especially relative to the euro and sterling. That combined with cheap onshore funding puts Thai companies in a strong position to pursue and raise funds for overseas acquisitions,” Kambhato said.
While Thai Inc face keen competition from international bidders in auctions, the fact that they are sitting on cash and have access to cheap funding from Thai lenders helps whet their appetite for dealmaking. Many are keen to spread their wings, as was the case with Thai Union Frozen Products which agreed to buy US canned tuna company Bumble Bee for $1.5 billion late last year.
“Companies in Thailand are still flushed with cash and looking for opportunities abroad,” said Weeratos Simapichaicheth, head of investment banking for UBS in Thailand, the adviser to Thai Union Frozen.
Soe Politics
Where the perennially shaky political backdrop is perhaps hurting the most is in the long overdue reform and reorganisation of Thailand’s state-owned enterprises.
State-owned oil giant PTT has a couple of deals in the wings, which could be affected. The company last year hired Bualuang Securities, Bangkok Bank and Morgan Stanley to study options that include spinning off its retail arm which operates petrol stations in Thailand through an IPO. Meanwhile, a long-delayed IPO for Star Petroleum Refining, which is jointly owned by PTT and US oil company Chevron, is expected to hit the market this year.
“The government is expected to call for elections [in] the first quarter of next year at the earliest and if those deals are not done by then, there could be a holdup as there is no clarity over the leadership,” said a second foreign banker in Bangkok.
The political volatility has already slowed down other SOE-related business. For example, PTT Exploration & Production bought US oil giant Hess’s assets in Thailand for $1 billion in April last year, shortly before the coup and has been quiet since then, said bankers.
Meanwhile, inbound M&A has largely been weak. “Inbound investors are not very active in Thailand at the moment, apart from scouting for greenfield projects,” said Harsha Basnayake, Asean Transaction Advisory Services Leader at EY. “Because of the political environment, people have been cautious."
It doesn’t help either that the Thai government has largely favoured domestic investors when it comes to SOE divestments, according to bankers. For example, PTT sold a 15% stake in Bangchak Petroleum to state-owned Vayupak Fund in February and another 12% stake to state-run Social Security Funds in April.
Bankers away from the Bangchak Petroleum stake sale told FinanceAsia that they went to domestic investors due to pressure from the government. Phatra and Goldman Sachs were arrangers.
Other Southeast Asian markets such as Singapore or Indonesia are seeing far more foreign buying interest, Basnayake added, and as such he thinks M&A activity in Thailand will continue to be driven by domestic consolidation or by Thai companies looking to expand overseas for diversification purposes.
