What's hot in the world of M&A?

ABN AMRO's top advisor for consumer sector deals forecasts trends in the region.
Kasper van Griensven who heads up consumer sector advisory for ABN AMRO knows his beers. He also knows a thing or two about food, tobacco, soy sauce and retail. This is because he focuses on mergers and acquisitions and equity offerings in the Asian consumer sector. He forecasts some regional trends.

To start with, tell us about some of the consumer sector deals ABN AMRO has advised on in recent months?

So far, weÆve done two major deals this year.

In February we advised on the sale of a minority stake of Gome Electrical Appliances to private equity investor Warburg Pincus. Warburg paid pay $128 million to purchase up to 9.7% of China's leading electrical goods supplier.

It was an interesting deal as it was WarburgÆs largest investment into a Chinese listed company to date. It was structured via a five-year convertible bond and warrants that Gome issued. So Warburg bought five-year convertible bonds with a face value of $125 million. They carry a 1.5% coupon and are convertible into new company shares at a price of HK$6.40, which equates to a 16.79% premium to the average closing price over the previous 30 trading day period to the deal.

Warburg also bought five-year warrants that can be exercised into $25 million worth of Gome shares at HK$7.70 per share. The subscription price for the warrants was $3 million.

The stock market reacted very positively to the deal and as a result now gives much more recognition to the quality and potential of Gome as a consolidator in the Chinese electrical retail sector.

And in January we closed the sale of DanoneÆs Asian food unit Amoy, which was sold to Japan's Ajinomoto Co. for HK$1,845 million ($238 million). Danone, which as you know sells water and yogurt and biscuits and the like around the world, had decided it wanted to focus on other businesses apart from Amoy, which makes soy sauces and very tasty dim sum.

But Amoy is a very profitable business with high market shares in Hong Kong and significant positions in China, the US and Europe and as you can imagine attracted quite some interest from the regional and global food companies. The ôethnic foodö category is the fastest growing segment of the food market in the Western world, and the Amoy brand has great potential in these markets.

What are you currently working on, that you can talk about?

WeÆve been on the road with Golden Eagle Retail, which is a department store chain in China that appeals to middle-class and more affluent shoppers û a fast growing segment of the Chinese population as a result of the continuous rise in disposable income of the average Chinese consumer. Golden Eagle offered 450 million shares at a price of HK$2.50 to HK$3.15 each, with a 15% greenshoe that could increase the total deal size to HK$1.63 billion ($208 million).

It priced a the tope end. We expected a strong response from both institutional as well as retail investors because the company operates in a one of the most attractive and fastest growing sectors in China.

Do you expect more big deals in the sector this year?

The consumer sector this year is looking amazing. The level of optimism is high and people are coming to the market because the stockmarket is booming and is giving them good valuations. So expect more IPOs this year. Plus corporates are taking a critical look at themselves and could be selling off parts of their business so as to balance out their portfolios, like Danone did with Amoy. So there should be a lot of activity this year.

Specifically, the beverage sector in China is still attracting interest. Most of the major deals in beer have been done, but we expect to see a lot more happening in non-alcoholic beverages such as juice, tea but also in dairy where consolidation still has to take place.

Expect more tobacco deals in the coming years following Sampoerna and PMI last year, and Carl Icahn making a move on KT&G more recently. The global majors such as Philip Morris, BAT and Japan Tobacco are definitely on the lookout for more expansion. For example, Philip Morris has just started producing Marlboros in China under a JV with the State Tobacco Monopoly Administration of China, better known as the Monopoly.. (Until now, Marlboros sold on the mainland have either been imported or illegal knock-offs.)

In Taiwan, TTLC is a big tobacco and beverages state-owned corporate that still needs to be privatized. And other interesting targets in countries such as Thailand, Indonesia and the Philippines remain on the radar screen of multinationals.

Why do you forecast an increase in activity?

Well for one, the private equity guys are all raising big funds and have a lot of money to invest. They like companies with predictable, growing cash flows, which they can gear up and for those reasons they love the consumer sector. Multinationals, for more long term strategic reasons, are going after the same companies. So if you ask our clients who they would like to buy, they all mention the same names.

Plus, the private equity firms like brand name recognition; it often means the exits are more clear because you know youÆre going to be able sell or IPO a name-brand company that youÆve improved. So the private equity funds are going to town in chasing them down. And of course they have the funds to help the younger companies grow. All in all, I believe these are all very positive developments for my sector clients in Asia.

As a result of all this activity and with equity markets really humming, valuations are going up. Look, for example, at the beer sector, where in 2002 we sold DanoneÆs Chinese breweries for almost $40 per litre, which at the time was a great valuation. In 2004 we acted for SABMiller in the famous hostile beer battle for Harbin, which eventually went to Anheuser Busch for $63 per litre. More recent deals such as InBevÆs acquisition of Fujian Sedrin and Heineken buying into Kingway were done at more than $100 per litre.

And although the stock markets have risen a lot over the last 12 months, I am still bullish. ThatÆs because many of the valuations were starting off from a low base, and thereÆs quality earnings and real growth, so companies see opportunities which translates into value. I donÆt believe it is a bubble this time, but of course volatility will remain a fact of life in emerging markets.

Regionally, where do you foresee more M&A activity?

Political stability, currency issues and growth potential are reasons why people are still focussed more on North Asia, in particular Korea, China and Taiwan.

That said, India is attracting a lot of interest. Most deals in the Indian consumer sector are still fairly small, but similar to what is currently happening in China I think going forward weÆll see more M&A activity in the country with multinationals and local champions snapping up targets, and over time also outbound û with Indian corporates investing abroad.

Similarly, Taiwanese companies have been very good at expanding. The best noodle and beverage companies on the mainland are invariably Taiwanese companies. And because some of them are reaching their legal limits of how much they can invest in China, I think you will see some interesting combinations of Taiwanese companies pairing up with other foreign companies or with private equity to fund their expansion.

In China, I expect to see further activity in packaged foods and also in dairy, where a rising number of high quality local players, who understand the Chinese consumer, are becoming quite successful while at the same time the multinationals and the private equity community are looking for deals. So watch this space.
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