Changing patterns of acquisition finance in Asia

Global macroeconomic developments and geopolitics undoubtedly impact the acquisition finance sector by altering a company's source of funds and target destination country

The acquisition finance market in Asia still offers a rich seam of opportunity despite the economic uncertainties in the near term. One noteworthy trend of late is the move away from its reliance on bank finance as companies increasingly tap into the capital markets.

Tapan Vaishnav, head of advisory and financing group for Asia-Pacific at Societe Generale, cites the Sino-US trade war, the volatility in equity markets and the perceived pressure to raise interest rates and its consequential impact on borrowing costs, as some of the challenges facing the acquisition market in Asia this year.

Brexit is also creating much uncertainty, although this historic UK departure from the European Union (EU) may offer selective opportunities for deal-making as valuations could be impacted. In other countries such as China, the ongoing deleveraging is putting more pressure on smaller Chinese credit and privately-owned enterprises.

But having said that, for the well-run corporates, for the right kind of credit and, more importantly, for the right kind of transaction, Vaishnav says funding will not be a problem.

Asia saw a its fair share of large transactions in 2018, many of which underpinned the acquisition financing market in the region.

While Chinese outbound transactions into the US have virtually come to a halt due to geopolitical tensions, Chinese buyers have set their sights on Europe. Their strategy revolves around bringing in technology and high standards of production into China to meet the needs of the growing Chinese middle class.

Zhejiang Geely Holdings Group, for instance, completed in June 2018 its 8.2% acquisition of shares in Swedish truck maker AB Volvo for an estimated US$3.3 billion. The Chinese company already owns Volvo Cars, which it bought in 2010. In another European acquisition, Fosun and Beijing Sanyuan Foods Company acquired French margarine company, St Hubert, for 625 million euros (US$710.22 million).

At the same time, new buyers have emerged from Japan, India and even Southeast Asia to fill the gap vacated by China and seize sizeable acquisitions in the US. Many Asian acquisitions into the US are being led by companies from Japan and India.

For instance, Takeda Pharmaceutical of Japan acquired in June 2018 its larger rival Shire in one of the biggest pharmaceutical transactions ever and the largest international takeover so far by a Japanese company at a value of US$62 billion. The deal gives Takeda, a gastroenterology and cancer specialist, greater access into the US market.

One of the significant Indian acquisition in the US was undertaken by Hindalco Industries, through its wholly-owned subsidiary Novelis, buying Aleris Corporation, a global aluminium rolled products company for US$2.58 billion.

Aleris, which operates 13 production facilities in North America, Europe and Asia, was the same company that Zhongwang of China tried to buy, but was thwarted by the US regulators.

In another deal, UPL Corporation, one of the leading global crop protection products companies headquartered in India, announced in July 2018 the signing of a definitive agreement with Platform Specialty Production Corporation to acquire Arysta LifeScience and its subsidiaries for US$4.2 billion in cash consideration.

Arysta is a global provider of innovative crop protection solutions, and following the acquisition, it will make UPL one of the world's largest global crop protection companies with an innovative and differentiated product portfolio.

India's renewed appetite for overseas assets marks a return to the acquisitive mode adopted by a number of large Indian companies around the time of the global financial crisis in 2007 and 2008, highlighted by deals such as Tata Motors' acquisition of Britain's iconic Jaguar Land Rover, a takeover of the jewel in the crown of the British automotive sector. The Indian thirst for acquisitions subsequently slowed down for all sorts of reasons, including in some instances what Vaishnav referred to as the Chinese premium, resulting in inflated prices being paid for a number of transactions.

"Many of these companies – from India, Japan and in some cases from Southeast Asia – are well-capitalized with stronger balance sheets and are backed by stock market liquidity," says Vaishnav, as he explains their ability to launch overseas acquisitions.

"Quite often, they are rated, have access to the bond markets to raise capital and also look at non-recourse solutions when making acquisitions. They are also supported by their relationship banks, which provide them with a valuable pool of liquidity. In the current landscape, listing could also help them in foreign jurisdictions, since with more disclosure they are subject to less scrutiny from a political perspective," he adds.

To fund these acquisitions, companies are increasingly looking at the capital markets for financing, Vaishnav notes. "Companies from China, India and Japan have solid investment grade ratings. They are aware that the bond market appetite is there when they look for funding."

Meanwhile, there were also some large inbound transactions into Asia during the past 12 months and one that stood out was Walmart's acquisition of Flipkart for US$16 billion. "It was a well-calculated transaction, as India is witnessing a growing consumer market and it is an IT hub for new tech revolution," says Vaishnav

He adds: "This inbound trend into Asia may continue because where else do you see growth. It's basically from countries like China, India and from Southeast Asia. The disposable incomes in the region have been increasing, and as more of the younger generation enters the middle class over the next five to 10 years, there are a lot of reasons for the US and European companies to keep investing in Asia."

For Vaishnav, what also makes Asia an interesting proposition as an investment destination is the fact that it is a heterogeneous region with lots of diversity. "These diverse types of economies attract companies to Asia," he explains. "If China's economy is slowing down, it does not mean that a company cannot invest in Indonesia or India or elsewhere in the region for that matter. This coupled with continuing growth prospects, would translate into more opportunities for overseas companies to invest in this region."


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