Geopolitical tensions, sustainability goals to continue to drive Asia-Pac M&A in 2023

THE pursuit of sustainability and diversification is driving corporate merger and acquisitions (M&A) in the Asia-Pacific region, said investment bankers. They expect this trend to continue in 2023, although the tough economic environment may hamper dealmaking.

Regional M&A activity is already on the downtrend, after a record-breaking 2021. In the first nine months of 2022, Refinitiv data showed, the value of deals involving companies in Asia-Pacific excluding Japan declined 34 per cent to US$748.5 billion.

The fall was at least partly due to differences in the expectations of buyers and sellers.

OCBC head of corporate finance and global investment banking David Cheng said that over the past year, the bank has seen a valuation expectations gap between what sellers are asking for and what buyers are willing to pay.

“This gap has arisen largely due to volatility in equity valuations in the public markets, as well as in rising interest rates. Buyers are pricing in the risks,” he said.

Need for diversification

Against that backdrop of risk aversion, South-east Asia appears to have developed a reputation for resilience.

Raghu Narain, Asia-Pacific head of investment banking at Natixis Corporate and Investment Banking, said the South-east Asia region attracted the second-largest deal volume of 15 deals in the first half of this year. He attributed this to venture capital and buyout funds chasing bigger returns outside China in South-east Asian startups.

Tensions between the United States and China are also pushing companies to do more intra-regional M&A in Asia, Narain added.

Rather than pick a winner in a cold war, companies are seeking instead to diversify their geographical bases of operations.

“If you look at the investments that are going into India, for instance, there’s a lot of South-east Asian investment going in,” he said.

Among the big regional deals were the acquisitions by Singapore banks DBS and UOB of Citigroup’s consumer banking assets in Asian markets such as Taiwan, Indonesia and Malaysia.

Bank of America South-east Asia head of global corporate and investment banking Martin Siah said South-east Asia has also benefited from reshoring and friendshoring activity away from China, Hong Kong and Taiwan, due to geopolitical uncertainty around these markets.

“I think for businesses…they will have experienced, from the two years or so of Covid, that to rely on a single business, single country, single product could be extremely risky, and hence (there is) the need to diversify,” he said.

Sustainability goals

On the environmental sustainability front, deals are being driven by companies looking to green their balance sheets.

Keppel Corporation and Keppel Infrastructure Trust jointly invested 305 million euros (S$445.3 million) in August for a stake in an offshore wind farm in Germany.

Renewable energy producer EDP Renewables purchased a 91 per cent stake in solar panel provider Sunseap for S$1.1 billion in February as it looks to establish a clean energy hub based in Singapore for the Asia-Pacific region.

But a new class of M&A is also emerging that involves contraction instead of expansion.

For instance, DBS is advising the Indonesia Investment Authority as it works with the Asian Development Bank and a power plant company to shut a coal power plant 10 to 15 years before the end of its useful life.

“If (this pilot programme) is successful, we will do more, buy more of these plants across Indonesia,” said Choe Tse Wei, who heads M&A strategic advisory at DBS.

Opportunities in 2023

In their M&A and equity offerings market report for Q3 2022, S&P Global Market Intelligence analysts called the near-term outlook for M&A and equity dealmaking “challenged”. Valuations remain depressed, and equity markets are hampered by rising interest rates.

Yet, such conditions could also push companies to sell assets.

“Higher interest rates can increase the expenses for debt-laden companies and force them to consider selling. A difficult operating environment can also push operators to divest non-core businesses to shore up their balance sheets,” they said.

Standard Chartered global head of M&A Tom Willett expects the rising cost of debt to have a smaller impact on Asian markets than European and US markets.

“The sheer amount of dry powder, undeployed capital that (private equity) funds have raised either globally or with regionally dedicated Asia funds is very, very significant,” he said. All that money will be in need of a home, Willett added, and will “continue to drive deal activity in a very meaningful way”.

By sector, digital infrastructure is one to watch.

UBS global banking head of South-east Asia M&A Axel Granger said infrastructure funds and private equity funds have emerged as strong buyers. The bank was part of negotiations for six different telecom tower sales and leaseback transactions that were announced in the Philippines in 2022.

Meanwhile, some selling activity is expected among Chinese companies.

StanChart’s Willett noted that five to 10 years ago, a lot of the activity connected with China was outbound as companies acquired businesses globally. Now, that trend is being reversed as companies divest certain businesses that they have bought.

“We are seeing, statistically, China-China activity being more pronounced than it has been in the past,” he said, adding that it will be easier for deals to be made as Covid-19 restrictions are loosened.