Chinese companies indicated declining appetite for mergers and acquisitions in the first half of 2014, however the outlook remains positive, due to state reforms and changes in the macroeconomic environment, according to latest KPMG analysis.
The appetite for M&A among Chinese companies - as measured by predicted forward price-to-earnings ratios - dropped 6 percent between January and June 2014, equating to an increase of only 8 percent over 12 months. Meanwhile, global appetite for M&A grew 16 percent from a year ago, according to KPMG’s latest M&A Predictor.
Rupert Chamberlain, Head of Transaction Services, KPMG China, says: “Sentiment in China has been hit by a combination of factors recently, impacting both local investor appetite and the market’s relative attractiveness for global fund allocators. A well documented anti-graft drive, measures to maintain property prices at affordable levels and export competitiveness have dampened broad demand and impacted profitability of enterprises evidenced by declining forward multiples. On the other hand part of the state sector reform agenda aimed at improving the competitiveness of domestic institutions and the longer term trend driven by macro issues, such as demographics, urbanization and new technology will continue to attract significant investment in specific sectors such that we still maintain a positive near term outlook for the China M&A market.”
Anticipated capacity for M&A, as measured by the net debt to EBITDA (earnings before interest, tax, depreciation and amortization) ratios rose 17 percent in China year-on-year. This was higher than the global average of 13 percent for the same period. However, this is yet to translate into deal completions, which continued a downward trend.
According to KPMG analysis, deal values for Chinese outbound M&A edged down 4 percent year-on-year to USD35.6 billion in the first half of 2014, while deal volumes dropped nearly a quarter to 167. Highlights of outbound M&A include several deals completed in the natural resource sector in Australia, Canada and Peru.
In terms of inbound investment, a sharp drop in both values and volumes was noticed. A total of 204 deals were recorded through the first half of 2014, a 27 percent drop from 280 deals in the same time last year; deal value was down 24 percent to USD10.8 billion.
Consumer goods and services led all other inbound M&A sectors through the first half of 2014. Despite a slight decline in deal value versus 2013, transactions of a significant size continue to be prevalent in the diverse consumer goods and services sub-sectors. Meanwhile, the materials sector also bucked the downward trend seen in 2014.
Jeremy Fearnley, Head of M&A for Hong Kong at KPMG, adds: "China is continuing to support the outbound ambitions of its companies, having announced a relaxation in deals requiring NDRC approval from USD300 million to USD1 billion, effective from 8 May. This will allow Chinese companies to be more active in competitive bid situations. Difficulties still exist in terms of funding, however, due to the capital requirements for onshore borrowing in China and therefore we expect outbound deals to rely increasingly on debt and equity funding offshore, where lenders are generally more aggressive and the cost of finance is cheaper. In terms of sectors, we expect that the consumer space will continue to be a bright spot in the M&A arena for both inbound and outbound deals as multinationals, domestic companies and private equity firms invest to compete for a share of the growing Chinese middle classes' wallet."
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