M&A bankers hopeful despite China's market woe

China's wild stock market ride and shredded investor confidence will not necessarily kill off deal-making but the road ahead could be tougher for new mergers and acquisitions.

The Shanghai Composite Index plunged by 8.5% on Monday and continued to fall further on Tuesday and Wednesday, rocking financial markets around the world, before rising 5.3% on Thursday. The benchmark is some 40% below its June 12 peak but still 40% higher than it's 52-week low.

Corporate chieftains need confidence in markets to forge ahead with major acquisition plans. While deal-makers contacted by FinanceAsia said they haven't seen any deals pulled, the market volatility appeared to dampen demand for Bank of China (Hong Kong)'s sale of Nanyang Commercial Bank, which attracted only one bidder in the final round of bidding.

According to a Hong Kong exchange filing on Wednesday night, China Cinda Asset Management was the only bidder for Nanyang Commercial Bank, which is expected to be sold for about $8.8 billion.

One source familiar with the matter said it had been a competitive process with bids placed by other parties, albeit in previous rounds. Among those that had looked at Nanyang Commercial Bank was Chinese investment firm Yue Xiu, which did not place a bid in the final round.

The deal has not yet crossed the line as an agreement has still to be reached. China Cinda Asset Management will need to be "qualified" by the Beijing Financial Assets Exchange -- a process which is expected to conclude within the next couple of weeks, one banker said.

Thereafter, both Cinda and Bank of China (Hong Kong) will negotiate the final terms of the agreement and will also be waiting for Hong Kong and Chinese regulatory approval, which could take several months to come through.

The other jumbo deal in the market -- Tesco's sale of Homeplus, which is expected to fetch about $6 billion -- is still ongoing and in full swing, according to one banker backing a bidder. Three consortiums and private equity bidders including Affinity Equity Partners and KKR, Carlyle, and MBK are in the fray.

Valuations

Some consultants and bankers argue that the slump in market prices could make valuations more attractive to bidders, particularly private equity groups that have already raised funds and need to deploy them. That's assuming sellers are willing to let go of assets at cheaper levels.

"If you are a private equity investor and you see decreased valuations, it's actually a good time to be more aggressive in the market. The pricing is now more attractive for them than it has been in the past," Charlie Alexander, managing partner for Asia-Pacific financial services transactions at EY, said.

China's weakening renminbi could crimp the offshore ambitions of China Inc, which has dominated Asia's M&A market. "If you're buying, then you might wait for the foreign exchange rate to stabilise...so there might be a lull. But a lot of Chinese companies have got very active outbound agendas and they don't lack the ambition to continue doing M&A," EY's Alexander said.

In spite of the shaky stock market backdrop, Chinese private conglomerate Dalian Wanda pressed ahead on Thursday by announcing an agreement to buy World Triathlon Corporation for $650 million.

Privatisations of US-listed Chinese companies could be scuppered though, given that valuations of some of the companies have fallen. "We could see some revisiting the valuations for take-private transactions," said the banker backing the Tesco bid.

Asia ex-Japan targeted M&A totals $584 billion so far this year, a rise of 56% from the same period last year, according to data provider Dealogic. However, fees stood at about $682 million, down nearly 10% from the same period last year, Dealogic data also shows.

Increasingly, banks are finding it harder to make money out of M&A as companies look to do more work in-house.

"I think the pure traditional M&A business model is being squeezed pretty hard and maybe more so in Asia. The fee rates are getting increasingly competitive and a number of the big institutions are doing more in-house and growing their own corporate development strategy teams," EY’s Alexander said.