Dealmaking slows amid travel curbs and valuation gaps

Singapore

WHILE merger and acquisition (M&A) activity in Singapore has slowed this year, industry watchers expect more special-situation transactions, promoter-led privatisations, private equity-led buyouts and restructurings of companies to unfold in the remaining months.

Mergermarket data shows that in the first five months of 2020, some 108 deals valued at US$26.3 billion were completed in Southeast Asia. This is about 20 per cent lower than the same period a year ago, when 161 deals worth US$32.4 billion were done. More than half of this year's deals were done in January and February.

Within the region, Thailand led in total deal value at US$11 billion, thanks to agribusiness conglomerate Charoen Pokphand Group's US$10.6 billion bid for a controlling stake in UK-based Tesco's Asia business in March.

Singapore was close behind with a total deal value of S$10.9 billion. The biggest deal closed this year here was the S$8.27 billion merger between CapitaLand Commercial Trust and CapitaLand Mall Trust.

Lawyers, bankers and financial advisers The Business Times spoke to said that they had started the year optimistic about dealmaking prospects, but that only the lucky ones that started on their deals early managed to see them through. The rest either saw parties pull out or had to temporarily shelve plans when the Covid-19 situation worsened.

Atin Kukreja, chief executive of financial advisory firm Rippledot Capital, found himself "in the midst of a perfect storm" in March when people started backing out of deals.

In crisis periods, Mr Kukreja said, the initial few months tend to be the most challenging because people cannot tell which direction the market is taking.

"Sellers don't want to adjust their price quotations downwards while buyers don't want to pay more, and the market goes a bit into the situation that we see now. But quite frankly, now, both sellers and buyers have adjusted to the new norm. And business as well as M&A and fundraising must go on."

In particular, Mr Kukreja said M&A with strategic and synergistic intents will still continue to happen. His firm has closed three deals in the last two months: US-listed Yum China Holdings's acquisition of a controlling stake in Chinese casual dining franchise business Huang Ji Huang, and US-listed human resource firm Ceridian's purchase of Singapore-based Excelity Global.

For the rest of the year, he is expecting more privatisations and special situation-type transactions as good-quality but capital-starved or overleveraged companies seek out equity and mezzanine financing.

Tougher market

But valuation multiples for deals may fall. "Vendors that are desperate to sell will have to adjust their pricing downwards, whereas those with more staying power will try to ride out the period," said Mr Kukreja.

TSMP Law joint managing partner Stefanie Yuen-Thio said that signs of corporate distress are in fact reinvigorating the M&A and dealmaking scene here.

"Corporate failures such as Hin Leong, and ailing companies now facing even more trouble, mean that there are good targets for takeover and acquisition. There are also recapitalisations and restructurings going on to strengthen shaky corporates.

"In addition, quite a lot of private equity funds are flush with cash, and acquisition targets are looking even cheaper with pandemic-related fallout."

But Evelyn Wee, deputy head of the corporate and transactional group at Rajah & Tann Singapore, cautioned that valuation gaps could delay deals due to the need for extended negotiations.

Buyers may push for purchase price adjustment mechanisms or for other mechanisms such as deferred consideration or earn-outs contingent on the target business' performance.

Sellers, in turn, may ask for post-closing information, audit rights and covenants from the buyer.

Obstacles to deal-making

Other obstacles to deal-making include travel bans and increased scrutiny, said Ms Wee. Travel bans have made it difficult for buyers to do their due diligence, she said, although this can be mitigated to some extent by the use of virtual data rooms and video conferencing technology.

Alternatively, the seller can facilitate on-site inspections, subject to movement control restrictions, as a condition precedent to closing a deal.

At the same time, she said, buyers are expanding the scope of their due diligence to better assess the exposure and impact of Covid-19 on targets. Assessments include a target's customer base, supply chains, and the availability of alternative sources in cases of supply chain disruptions.

Obtaining financing has also become more challenging and regulatory approvals may be delayed where offices are not open for business as usual, Ms Wee said.

More selective

In any case, the appetite for deals is lower in most quarters. Daniel Yong, partner and a private funds and cross-border investment specialist at Withers KhattarWong, said that corporate buyers have refocused on more immediate cashflow and business operating issues for now. Some private equity managers are also holding back from acquisitions because they are allocating more capital to keep their portfolio companies afloat.

Nevertheless, Mr Yong said "there is a huge reservoir of dry powder awaiting deployment at the right time and for the right price, particularly in industries which are proving resilient or innovative in managing the current crisis".

Choe Tse Wei, head of strategic advisory for institutional banking at DBS Bank, said the deals that remain viable will be those in which the buyer knows the target first-hand and has confidence identifying the worst-case scenario and putting a price on it.

These include promoter-led privatisations, because the founder and controlling shareholder leading the privatisation would know the business well and would not need to undertake further due diligence; private equity-led buyouts in which the existing management is committed to staying on to drive the businesses when Covid-19 ends; and restructuring of companies as they earnestly prepare for the post-Covid new normal.

One lawyer who declined to be named suggested that more privatisations could happen towards the end of the year, when government reliefs run out and the true distressed state of companies becomes clear. Even if the companies are not distressed, they may be more open to investors coming in to ensure their own operational viability going forward, he said.