pwc m&a 2012 review and 2013 outlook - january 2013

PwC M&A 2012 Review and 2013 Outlook

30 January 2013 PwC China and Hong Kong Transaction Services Leader: David Brown PwC China Tax and Business Advisory Services Partner : Jeremy Ngai

PwC

Foreword – explanation of data shown in this presentation (1 of 2)

• The data presented is based on information compiled by ThomsonReuters, ChinaVenture and PwC analysis unless stated otherwise

• Thomson Reuters and ChinaVenture record announced deals. Some announced deals will not go on to complete

• The deal volume figures presented in this report refer to the number of deals announced, whether or not a value is disclosed for the deal

• The deal value figures presented in this report refers only to those deals where a value has been disclosed (referred to in this presentation as “disclosed value”)

• “Domestic” means China including Hong Kong and Macau

• “Outbound” relates to mainland China company acquisitions abroad

• “Inbound” relates to overseas company acquisitions of Domestic companies，

• “Private Equity deals” or “PE deals” refer to financial buyer deals with deal value over US$10mn and/or with undisclosed deal value but invested by PEs

2

PwC

Foreword – explanation of data shown in this presentation (2 of 2)

• “VC deals” refer to financial buyer deals with deal value less than US$10mn and/or with undisclosed deal value but invested by VCs

• “Strategic buyer” refers to corporate buyers (as opposed to financial buyers) that acquire companies with the objective of integrating the acquisition in their existing business

• “Financial buyer” refers to investors that acquire companies with the objective of realizing a return on their investment by selling the business at a profit at a future date and mainly, but not entirely, comprise PE and VC funds

• In order to exclude foreign exchange impact, deal values from 2008 to 2011 were adjusted based on 2012 average Rmb/US$ exchange rate

3

PwC

Overview

PwC

Key messages (1 of 2)

Overall

• Overall 2012 China M&A decreased 26% by volume and 9% by value, with only Outbound deals showing growth (in value terms); we expect M&A activity to rebound in all sectors in 2013, with Outbound activity continuing to grow especially strongly

China Outbound

• Although China Outbound deal volumes surprisingly showed a small decline, deal values grew by 54% to reach a new record high of US$65.2 billion comprising more than a third of overall M&A activity measured by value, by far the highest proportion ever; we see many more deals in the pipeline and expect this growth trend to continue strongly with another record year in 2013

• We are seeing privately owned enterprises (POEs) taking on larger deal sizes; we think that private sector companies will be key drivers in the future growth of China Outbound M&A

• The growing activity of private sector buyers in acquiring industrial technologies and consumer-linked businesses overseas is an important trend; many of these deals are aimed at bringing advanced western technologies, know-how, IP and brands back for use in the Chinese domestic market; we are also seeing some POEs using overseas M&A to go global in addition to concentrating on the domestic market

5

PwC


Domestic and Foreign-Inbound Strategic

• Both Domestic and Foreign-Inbound Strategic buyer deal activity fell to their lowest levels in the last five years with declines greater than those seen after the global financial crisis

• We think activity will rebound in 2013 as the direction of the Chinese economy becomes clearer, industry consolidation accelerates, domestic leadership changes take effect, and foreign economies start to emerge from their stressed states allowing MNCs to deploy cash reserves with greater confidence implementing their China market entry or growth strategies

Private Equity

• In the PE sector there will be sharp consolidation across the industry, and the backlog of exits represents a real challenge for the sector

• PE has emerged as a key provider of capital to the liquidity starved private sector of the economy in China with real policy support - this demand for capital is driving strong market growth and activity; there are exceptionally strong tailwinds for the PE industry in China over the medium term

• We think new deal and exit activity will accelerate strongly from 2Q13 as pricing expectations adjust, 2012 results become available, IPO markets re-open, and China’s leadership transition takes effect; PE deal activity (new investments and exits by both IPO and M&A) will reach new record highs if not in 2013 then in 2014

6

PwC

Volume Value Volume Value Volume Value Volume Value Volume Value

Strategic buyers (US$bn ) (US$bn ) (US$bn ) (US$bn ) (US$bn )

Domestic 3,006 1 50.5 2 ,7 7 4 1 00.3 2 ,947 1 40.1 3 ,262 1 1 7 .6 2 ,667 88.0 -18% -25%

Foreign 61 4 1 9.3 409 1 1 .3 539 1 8.0 482 1 7 .3 286 9.1 -41% -47%

Total Strategic buyers 3,620 169.8 3,183 111.6 3,486 158.1 3,744 134.9 2,953 97.1 -21% -28%

Financial buyers

Priv ate Equity 365 22.0 254 22.3 425 24.9 502 32.0 332 23 .5 -34% -27%

VC 694 1 .7 7 1 2 1 .8 1 ,01 1 2 .5 903 1 .8 47 3 0.9 -48% -48%

Total Financial buyers 1,059 23.8 966 24.1 1,436 27.4 1,405 33.8 805 24.4 -43% -28%

China mainland Outbound

SOE 27 6.8 45 26.3 64 34.5 48 33 .0 48 39.7 0% 20%

POE 99 3 .6 99 6.5 1 24 6.4 1 58 9.4 1 43 25.5 -9% 171%

Total China mainland Outbound 126 10.3 144 32.8 188 41.0 206 42.4 191 65.2 -7% 54%

HK Outbound 156 6.6 152 6.2 171 18.8 183 8.2 166 12.8 -9% 55%

Total 4,961 210.6 4,445 174.7 5,281 245.3 5,538 219.3 4,115 199.5 -26% -9%

% Diff

volum

e 2012

vs.

2011

% Diff

value

2012

vs.

2011

2008 2009 2010 2011 2012

7

Source: ThomsonReuters, ChinaVenture and PwC analysis

Total deal volume and value, from 2008 to 2012

Overall 2012 China M&A decreased 26% by volume and 9% by value, with only Outbound deals showing growth (in value terms); we expect M&A activity to rebound in all sectors in 2013, with

Outbound activity continuing to grow especially strongly

PwC

3,006 2,774 2,947

3,262

2,667

614

409

539

482

286

365

254

425

502

332

126

144

188

206

191

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2008 2009 2010 2011 2012

Deal volume by main category

Domestic Strategic Buyers Foreign Strategic Buyers Private Equity Deals China Mainland Outbound

Deal volumes decreased across all major categories ...

8


No.

PwC

... But China Outbound deal values grew by 54% and now comprise more than a third of overall M&A activity measured by value, by far the highest proportion ever

150.5

100.3

140.1 117.6

88.0

19.3

11.3

18.0

17.3

9.1

22.0

22.3

24.9

32.0

23.5

10.3

32.8

41.0

42.4

65.2

0

50

100

150

200

250

2008 2009 2010 2011 2012

Deal value by main category

Domestic Strategic Buyers Foreign Strategic Buyers Private Equity Deals China Mainland Outbound

US$ billion

9


PwC

Strategic buyers

10

PwC

Both Domestic and Foreign-Inbound Strategic buyer deal activity fell to their lowest levels in the last five years with declines greater than those seen after the global financial crisis; we think activity will rebound in 2013 as the direction of the Chinese economy becomes clearer, industry consolidation accelerates, domestic leadership changes take effect, and foreign economies start to emerge from their stressed states

614 409 539 482

286

3,006

2,774

2,947 3,262

2,667

19.3

11.3 18.0 17.3

9.1

150.5

100.3

140.1

117.6

88.0

0

20

40

60

80

100

120

140

160

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2008 2009 2010 2011 2012

Strategic buyer deals, from 2008 to 2012

Announced Deal Volume Inbound Announced Deal Volume Domestic Announced Deal Value Inbound Announced Deal Value Domestic

No. US$ billion

11


PwC

Nearly all industry sectors posted declines, both in terms of volumes ...

12


664 539 614 668 570

529 428

475 575

439

522

381 446

500

402

372

310 320

395

352

432

404 369

384

273

358

106 137

252

264

241

253 248

272

203

502

762

877

698

450

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2008 2009 2010 2011 2012

Strategic buyer deal volume by industry sector

Raw Materials Industrials Consumer Related High Technology

Real Estate Financial Services Energy and Power Others

No.

PwC

... And values

33.1

12.7 30.3

22.0 16.6

9.0

11.9

5.2 12.2 16.1

23.2

10.4

22.3 16.1 13.7

21.3

20.3

22.0 22.2

12.5

15.2

14.0

19.4 18.1

10.5

9.9

8.7

11.3 11.0

8.6

9.2

10.5

11.3

9.5

6.3

48.9

23.0

36.2

23.8

12.6

0

20

40

60

80

100

120

140

160

180

2008 2009 2010 2011 2012

Strategic buyer deal value by industry sector

Raw Materials High Technology Financial Services Real Estate

Industrials Consumer Related Energy and Power Others

US$ billion

13


PwC

Japan remains the most active Foreign-Inbound M&A investor for the second year running, but we saw several deals put on hold in the second half year of the year in response to the Diaoyu Islands crisis; US and European deal numbers have steadily declined since their 2010 high ...

29 23 67

94 66

124 73

98 89

52

127

67

92 79

46

87

35

54 48

34

70

67

70 31

28

0

50

100

150

200

250

300

350

400

450

500

550

600

650

2008 2009 2010 2011 2012

Foreign strategic buyer deal volume by region of origin

Japan SE Asia US EU Other Asia

Oceania UK Canada Africa Other Europe

14


No.

PwC

... However, the biggest deals are still coming from US and European buyers; we expect Foreign-Inbound deal activity to rebound 2013 as European and US economies start to recover allowing MNCs to deploy cash reserves with greater confidence, implementing their China market entry or growth strategies

3.4 1.7 2.1 1.8

3.4

0.3

0.2 0.8

0.4

1.3

3.5

0.8

5.2 4.5

1.3

2.9

2.3

1.9

1.2 1.2

4.2

1.0

1.5

2.9

1.0

0.6

1.5

1.3 2.1

0.7

0

5

10

15

20

25

2008 2009 2010 2011 2012

Foreign strategic buyer deal value by region of origin

US UK EU Other Asia SE Asia

Japan Canada Oceania Africa Other Europe

15


US$ billion

PwC

PE/VC deals

16

PwC

PE and VC fundraising for China investment in 2012 trailed 2011’s record levels by less than we expected; however, if we look closer we see much fewer individual fund raisings but there were some large funds raised by many of the leading and established PEs including KKR ($6bn), PAG ($2.5bn), Hony ($2.4bn), Bain ($2.3bn) and Fountainvest ($1.4bn); there will be winners and losers in the sector - high quality, professional PEs will thrive, but the bubble is already bursting for many of the plethora of renminbi funds raised over the last few years

17

Source: AVCJ and PwC analysis

4.4 6.6

21.0

31.8

20.3

39.1

9.3

14.9

21.8

21.1

169

163

250

280

117

0

50

100

150

200

250

300

0

10

20

30

40

50

60

2008 2009 2010 2011 2012

PE/VC fund raising for China investment

Renminbi Fund Size Non-renminbi Fund Size Fund Volume

No. US$ billion

* Excludes global funds investing in China

PwC

2012 was a poor year for PE deal numbers, though deal sizes are trending upwards; we think that deal volumes will recover starting from 2Q of 2013 and average deal sizes will continue to trend upwards; however, within China, the days where PEs could throw money at deals and expect a “rising tide to float all boats” have gone; careful and professional diligence is vitally important; fraud risk is high; PEs should be prepared to walk away from opportunities if sellers will not accommodate diligence

365

254

425

502

332

22.0 22.3

24.9

32.0

23.5

0

5

10

15

20

25

30

35

0

50

100

150

200

250

300

350

400

450

500

550

2008 2009 2010 2011 2012

Private Equity deals, from 2008 to 2012

Announced Deal Volume Announced Deal Value

No. US$ billion

18


PwC

PEs tend to target industries that are “on strategy” for China, including consumer-linked, healthcare, media and entertainment, technology, and service industries

77 54 98

124 73

33

20

47 30

46

60

32

31

72

45

45

50

88

90

42

40

23

34

54

32

0

50

100

150

200

250

300

350

400

450

500

550

2008 2009 2010 2011 2012

PE deal volume by industry sector

Consumer related Healthcare Media and Entertainment

Industrials High Technology Real Estate

Financial Services Energy and Power Raw Materials

No.

19


PwC

Growth capital deals predominate, but PIPE (private investment in public equity) deals are important and we are seeing a buy-out market starting to emerge; we expect the nascent trend towards buy-outs to strengthen over the medium term

16.7

6.1

15.0 18.6

14.2

4.2

15.6

9.3

10.6

5.1

1.2 0.6

0.6

2.7

4.1

0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012

PE deal value by type

Growth PIPE Buyout

US$ billion

20


PwC

If we look at the same statistics in terms of deal volumes (rather than values) the dominance of growth capital is very evident; PE has emerged as a key provider of capital to the liquidity starved private sector of the economy in China with real policy support - this demand for capital is driving strong market growth and activity

329

199

327 368

246

21

51

85

118

68

15

4

13

16

18

0

50

100

150

200

250

300

350

400

450

500

550

2008 2009 2010 2011 2012

PE deal volume by type

Growth PIPE Buyout

21


No.

PwC

The PE industry in China is notable in that most exits have been by IPO; predictably, there has been a significant decline in 2012; there is a growing pipeline of future exits, perhaps more than the market can handle – this will be a challenge for the PE industry over the next few years

46

88

212

171

98

44

84

83

91

62

7

5

8

6

8

0

50

100

150

200

250

300

350

2008 2009 2010 2011 2012

PE/VC backed deal exit volume by type

IPO M&A - trade M&A - PE

22

No.


PwC

PE backed IPOs in offshore markets such as HK and New York in 2012 were the lowest in the last three years; we think that PE backed IPO activity must increase markedly in the short to medium term when capital markets return to normal functioning; the domestic A-share markets has been and will continue to be an important exit route for PE despite its many challenges

21

48

118 106

70 12

27

39

26

11

2

11

18

11

4

7

30

11

2

7

6

14

10

4

0

50

100

150

200

250

2008 2009 2010 2011 2012

PE/VC backed IPO exit volume by bourse

Shenzhen Hong Kong Shanghai A NYSE/ NASDAQ Others

23

No.


PwC

Overall, there is a huge overhang of Chinese PE and VC-backed enterprises waiting to come to market either by IPO or by M&A exit; the industry as a whole is moving into “exit phase” and the backlog of exits represents a real challenge; it is more than IPO markets can absorb, and trade and secondary sales by M&A will become more frequent; the quantum step-up in exit activity will be a key driver of future activity from this sector

24

365 254

425 502

332

694

712

1,011 903

473

46 88 212 171

98 51 89

91 97

70

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

2008 2009 2010 2011 2012

PE/VC deal volume vs. No. of exits

PE deals VC deals IPO exit M&A exit

Source: ThomsonReuters, ChinaVenture, AVCJ and PwC analysis

No.

PwC

China mainland outbound

25

PwC

Although deal volumes surprisingly showed a small decline, China Outbound deal values grew by 54% to reach a new record high of US$65.2 billion; we see many more deals in the pipeline and expect this growth trend to continue strongly with another record year in 2013

126 144

188 206

191

10.3

32.8

41.0

42.4

65.2

0

10

20

30

40

50

60

70

0

50

100

150

200

250

2008 2009 2010 2011 2012

China mainland outbound deals, from 2008 to 2012

Announced Deal Volume Announce Deal Value

No. US$ billion

26


PwC

We are seeing privately owned enterprises (POEs) taking on larger deal sizes; we think that private sector companies will be key drivers in the future growth of China Outbound M&A

27


99 99

124

158 143

27 45

64

48 48

3.6 6.5 6.4

9.4

25.5

6.8

26.3

34.5

33.0

39.7

0

5

10

15

20

25

30

35

40

45

0

50

100

150

200

250

2008 2009 2010 2011 2012

Strategic buyer deals, from 2008 to 2012

POE Announced Deal Volume SOE Announced Deal Volume

POE Announced Deal Value SOE Announced Deal Value

No. US$ billion

PwC

Although the state sponsored push to secure energy and resources is evident from deal value statistics ...

28

China mainland outbound deals by industry sector

– By value of deals (US$ billion), 2012 vs. 2011


36.2

1.1 1.6

0.7

10.7

4.6 5.4 1.2 2.6 0.2

23.1

1.1

8.5

1.9

1.3 4.1

1.4

0

5

10

15

20

25

30

35

40

Energy and Power Consumer related

Industrials Financial Services Raw materials Media and Entertainment

Others

2012 SOE 2012 POE 2011 SOE 2011 POE

US$ billion

PwC

... The growing activity of private sector buyers in acquiring industrial technologies and consumer-linked businesses overseas is an important trend; many of these deals are aimed at bringing advanced western technologies, know-how, IP and brands back for use in the Chinese domestic market; we are also seeing some POEs using overseas M&A to go global in addition to concentrating on the domestic market

29

13 6

22

2 2

33

33

10

28

17 10

5 3 4

19

5

16

7

37

34 13

19

32

4

3 2

14

0

10

20

30

40

50

60

2012 SOE 2012 POE 2011 SOE 2011 POE

China mainland outbound deals by industry sector

–By number of deals, 2012 vs. 2011


No.

PwC

Europe now challenges North America as the most important overseas destination for Chinese buyers; the importance of mature western markets reflects the search for advanced technologies and know-how ; Asian deals have declined sharply, primarily due to a fall in Japan transactions from 16 in 2011 to just 3 in 2012

Outbound M&A deal volume by region of destination 2012 vs. 2011

Source: ThomsonReuters and PwC analysis

56

North America

57 44

South America

Europe

Africa

Asia

Oceania

10 34

4

25

9

57 57

8 27

2012 2011

30

1 8

Russia

PwC

PE is emerging as a player in Outbound deal activity; the TPGs and Bain Capitals of China will emerge to compete with their global peers; we are already seeing a step-up in Outbound M&A involving some of the pre-eminent Chinese PEs and the Outbound trend is happening much faster than many people predicted or even realise

11

4

8 8

4

7

8

20 18

0

5

10

15

20

25

30

2008 2009 2010 2011 2012

China mainland PE backed outbound deal volume by PE category

SWFs Other PEs

31


No.

PwC

Key messages

32

PwC


Overall

• Overall 2012 China M&A decreased 26% by volume and 9% by value, with only Outbound deals showing growth (in value terms); we expect M&A activity to rebound in all sectors in 2013, with Outbound activity continuing to grow especially strongly

China Outbound

• Although China Outbound deal volumes surprisingly showed a small decline, deal values grew by 54% to reach a new record high of US$65.2 billion comprising more than a third of overall M&A activity measured by value, by far the highest proportion ever; we see many more deals in the pipeline and expect this growth trend to continue strongly with another record year in 2013

• We are seeing privately owned enterprises (POEs) taking on larger deal sizes; we think that private sector companies will be key drivers in the future growth of China Outbound M&A

• The growing activity of private sector buyers in acquiring industrial technologies and consumer-linked businesses overseas is an important trend; many of these deals are aimed at bringing advanced western technologies, know-how, IP and brands back for use in the Chinese domestic market; we are also seeing some POEs using overseas M&A to go global in addition to concentrating on the domestic market

33

PwC


Domestic and Foreign-Inbound Strategic

• Both Domestic and Foreign-Inbound Strategic buyer deal activity fell to their lowest levels in the last five years with declines greater than those seen after the global financial crisis

• We think activity will rebound in 2013 as the direction of the Chinese economy becomes clearer, industry consolidation accelerates, domestic leadership changes take effect, and foreign economies start to emerge from their stressed states allowing MNCs to deploy cash reserves with greater confidence implementing their China market entry or growth strategies

Private Equity

• In the PE sector there will be sharp consolidation across the industry, and the backlog of exits represents a real challenge for the sector

• PE has emerged as a key provider of capital to the liquidity starved private sector of the economy in China with real policy support - this demand for capital is driving strong market growth and activity; there are exceptionally strong tailwinds for the PE industry in China over the medium term

• We think new deal and exit activity will accelerate strongly from 2Q13 as pricing expectations adjust, 2012 results become available, IPO markets re-open, and China’s leadership transition takes effect; PE deal activity (new investments and exits by both IPO and M&A) will reach new record highs if not in 2013 then in 2014

34

PwC

Data compilation methodology: Key messages - disclaimer

Statistics contained in this presentation and the press release may vary from those contained in previous press releases. There are three reasons for this: ThomsonReuters and ChinaVenture historical data is constantly updated as deals are confirmed or disclosed; PricewaterhouseCoopers has excluded certain transactions which are more in the nature of internal reorganisations than transfers of control; and exchange rate data has been adjusted.

• Acquisitions of private/public companies resulting in change of control

• Investments in private/public companies (involving at least 5% ownership)

• Mergers

• Buyouts/buyins (LBOs, MBOs, MBIs)

• Privatisations

• Tender offers

• Spinoffs

• Splitoff of a wholly-owned subsidiary when 100% sold via IPO

• Divestment of company, division or trading assets resulting in change of control at parent level

• Reverse takeovers

• Re-capitalisation

• Joint Venture buyouts

• Joint Ventures

• Receivership or bankruptcy sales/auctions

• Tracking stock

• Property/real estate for individual properties

• Rumoured transactions

• Options granted to acquire an additional stake when not 100% of the shares has been acquired

• Any purchase of brand rights

• Land acquisitions

• Equity placements in funds

• Stake purchases by mutual funds

• Open market share buyback/retirement of stock unless part of a privatisation

• Balance sheet restructuring or internal restructuring

• Investments in greenfield operations

• Going private transactions

Included Deals Excluded Deals

35

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