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IMAP Story at Sunday Business Post


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IMAP Story at Sunday Business Post

  1. 1. TheSunday BusinessPost March8,2015 26 M&ABriefing Activitysetto remainrobust ascompanies putcashtowork IMAP’sJurgisOniunas giveshisassessmentofthe currenttrendsdrivingthe globalM&Amarket,writes PhilipConnolly The Global o Mergers and Acquis Jurgis Oniunas, chairman of IMAP Progressexpectedfor2015 butcountryoutlooksdiffer Growthmaybenearingpeak ineconomyand markets Favourableconditionsboost economictransformationLatinAmericanbriefing USbriefing Africanbriefing By Yassine Mekki Berrada A fricahasbecomean obvious choice for investors,asabroad rangeoffactorshave createdfavourableconditions for economic transformation in this continent. Although someSub-Saharancountries stillsufferfromalackofsecu- rity and political stability, the InternationalMonetaryFund expects Africa to become the secondfastest-growingregion in2015,behindEmergingAsia. The fast improvement of Africa’s macroeconomic performance is supported by investor-friendly regula- tory measures and startling economic, social, legal and businessenvironmenttrans- formations. Boosted by these strong fundamentals,Africaisenjoy- ingitsbestspellofinvestment banking activity. According to Capital IQ, investment bankingtransactionsinAfrica amountedto$118billionover the 2013-2014 period, main- ly driven by M&A deals and publicofferings(respectively 44percentand49percentof total value). Over the same period, South Africa drew the lion’s share (47 per cent), followed by Nigeria (13 per cent), Morocco (9 per cent), Ivory Coast (6 per cent) and Egypt(5percent),intermsof transaction value. Main sec- torstargetedwereenergyand mining, telecommunication and financial services. Today, the African market isbullishwithheterogeneous evolutionsacrosstheregions. Hence,theAfricantransaction landscape is concentrated, with regional players driving the whole market. The South African market is the most mature in Africa intermsofinvestmentbank- ing,with2013-2014totaldeal valueamountingto$55billion - 47 per cent of Africa’s total transactions volume. Thesecondlargestcontrib- utor in terms of transaction value is Sub-Saharan Africa (AfricaexcludingSouthAfrica andNorthAfrica),with34per cent of Africa’s transactions during 2013 and 2014. This area is all the more impres- sive as investment banking transactionsareboomingwith a 2009-2014 compound an- nualgrowthrateof39percent. Theincreaseismainlydriv- enbyNigeria–acountrywith strong fundamentals and a widerangeofnaturalresourc- es (eg, disposal of Shell’s oil wellsat$5billion)–andoth- er emerging countries which issued sovereign bonds (eg, Ivory Coast). North Africa (Morocco, Algeria, Tunisia, Libya and Egypt) only accounts for 18 per cent of the transactions in the continent over 2013- 2014, as it remains affected by the political turmoil after the Arab Spring. However, over the same period, some major deals were completed: theacquisitionofMarocTele- combyEtisalatinMoroccofor $7.2 billion; the acquisition of Optimum Telecom Alge- ria by the FNI in Algeria for $3.1billion;theacquisitionof Egypt Oil And Gas Business by Sinopec International Pe- troleuminEgyptfor$2.6bil- lion.Thelargestcontributorin termsoftransactionvaluewas Morocco,while79percentof the strategic sponsors for this region came from the Middle East and North Africa. TransactionsinAfricawere boostedtheselasttwoyearsby largedealsandsovereignfund raising.Nevertheless,sectors’ contribution is evolving: op- erationsinthefieldofnatural resources sharply decreased in 2014 as regards to previous years, whereas for the tele- communication sector, 2013 and2014wererecord-break- ing years. 2015 is expected to remain strong, as some very large transactions were already announced,suchastheacqui- sition of Pepkor by Steinhoff international at $5.7 billion. Thus, in line with the latest trends,2015willprobablysee theemergenceofnewsectors to boost transactions on the continent. YassineMekkiBerradaisapartner with Ascent Capital Partners T he current high level of activity in the mergers and acquisitions market is set to continue for a couple of years, ac- cording to one of the world’s leading advisory networks. Jurgis Oniunas, chairman of global advisory network IMAP, believes cash- rich companies looking for deals will continue to drive the market. “Merger and acquisition strategies are coming back into vogue as methods to drive growth,” said Oniunas. “We are seeing high profit levels with low levels of in- vestment, so there is a lot of cash built up. At the same time at the mid cap level, we have seen that private owners have low interest rates, so they don’t have many places to invest the money they might get from a po- tential sale. It is ironic that the best investment they can see is the company they are already in. That is creating a lack of good opportunities at the mid cap level.” Low interest rates have also contributed to the growth in buyer activity as acquisition finance remains cheap, so companies are increasingly casting their net into a global market for opportunities. “There is more focus on cross-border deals,” said Oniunas. “There are opportu- nities in emerging markets, in the US and in Europe at a certain level, while we have also seen a lot of deals happening in Asia.” Oniunas has also seen the overhang in pri- vate-equity firms as a driver in the market. “There is a lot of money [in private equity] that is not being put to use,” said Oniunas. “At the same time private equity groups are using the robustness of capital markets to exit through initial public of- ferings.” According to Oniunas, the level of activity in the market is set to continue for a number of years yet. “There is enough fuel there for this to be a multi-year thing,” said Oniunas. “There are dangers in the market of course. The slowdown in China is a major issue – this country has been a major driver of growth and has shown a big drop in industrial profit- ability, while there is also over-capacity. There is also the effect of rising oil prices in the Russian market and in Latin America.” For Oniunas, Ireland has been one of the major bright spots in Europe over the past 12 months and the trend of Irish firms – such as CRH and Smurfit Kappa – looking for international deals is set to continue. “We have seen a number of large Irish companies starting out locally and going overseas simply because the market opportunities locally are too small,” said Oniunas. “Now some of these companies are huge mul- tinationals which have expanded by mergers and acqui- sitions. That market depends on the local opportunities to raise finance and things like tax structures.” Internationally Oniunas has also seen a rise in val- uations across a number of sectors, something which could become an issue for private equity firms. “The rise in valuations has been very noticeable, which is based on stock markets,” said Oniunas. “It is more or less across the board – valuations are rising in terms of stra- tegic deals but private equity firms are also being forced into higher valuations. They don’t like to do that as their whole reason for being in business is to buy cheaply and sell more expensively, which is one of the reasons that they are not fully invested. The smaller the deal, the smaller the valuation, not just in absolute terms but also in terms of multiples, as there are more risks and less synergies. Also it depends on the growth of the market – I recently spoke to someone in India who laughed when they heard that we were happy to get nine times EBIT- DA on a media deal.” By Gilberto Escobedo T hegrowthrateofLat- inAmerica’seconomy plungedin2014.How- ever, it’s expected to experience moderategrowth in2015.Theregion’sconsum- er expenditure is expected to increase in 2015. Caribbean economies will lag behind other countries due to their excessiverelianceontourism and remittances. Economic growth in Lat- in America will range from 3 per cent to 4 per cent over the next year, which would support an increase in M&A activity. The respondents are notablymoreoptimisticthan other commentators: the In- ternational Monetary Fund’s (IMF) projection in October isfortheeconomiesofthere- gion(includingtheCaribbean) to grow by an average of 1.3 per cent in 2015. The country-by-country breakdownismixed,however. Brazil,thedominantecon- omyinLatinAmericaandthe previousgo-todestinationfor M&A and other investments, continues to battle slower economic growth, with the IMF forecasting 0.3 per cent for 2013 compared to 2.5 per cent last year. Mexico is benefiting from greater investor confidence after implementing sweep- ing structural reforms in its labour market, financial sys- tem,telecommunicationsand energysector,allofwhichare aimed at enticing foreign in- vestment. The country’s en- ergyandtelecommunications sectorsaresettobeparticular beneficiaries. TheeconomiesofPeru,Co- lombia and Bolivia are also enjoyinghighergrowthrates. TheIMFexpectsPeruandCo- lombiatogrowby3.6percent and 4.8 per cent, respective- ly, during 2015, well ahead of major international markets such as the US and Europe. WhileBrazilstillhashalfofthe totalregionalM&Amarket,its overall share of M&A activity has been declining in favour of countries such as Mexico and Chile. It is projected that transac- tionsinLatinAmericaoverthe next year will be dominated by acquisitions. Specifical- ly, acquisitions by strategic investors are likely to be the most common type of trans- action in 2015. Mexico’s energy reforms, which will allow private in- vestmentintothesector,have takencentrestageasoneofthe most significant opportuni- ties, not only in Latin Amer- ica,butalsoamongtheglobal energy markets. Mexico had proven oil re- servesamountingto10.9bil- lion barrels in 2013. Oil pro- duction was 141 million tons ofoilequivalentin2013.There havebeencomplaintsthatPe- mex does not have sufficient funds available for explora- tion and investment, owing to the high financial burden placed upon the company by the government. Natural gas reserves to- talled 0.3 trillion cubic me- ters in 2014 and production amountedto51.0milliontons of oil equivalent in that year. Both production and con- sumption of natural gas are steadily rising. Together,oilandnaturalgas will likely remain the dom- inant energy sources until 2020, accounting for well over 80 per cent of total en- ergy consumed. GilbertoEscobedoiswithSerficor Partners in Mexico By Scott Eisenberg T he US economy wit- nessedconsistentbut moderategrowthover the past two years. Real GDP grew approxi- mately 2.3 per cent per year for 2013-14 (nominal GDP grew approximately 3.8 per cent per year for the past two years). While that is not very strong growth, it has been enoughtosubstantiallyreduce unemployment. As recently as January 2012, the unem- ployment rate was over 8 per cent. At December 2014, the unemploymentrateintheUS was 5.6 per cent. Mostindustriesareenjoying greatstability.Inflationisvery low,capitalisreadilyavailable andinexpensive.Theindustry with the biggest challenge is energy, due to the drop in oil prices. The manufacturing sector is very strong. The two largestindustriesintheUSare automotiveandhousing.Both of these industries are enjoy- ingverystrongresults.Annual auto sales finished 2014 at a 16.9 million run rate, which is near full capacity. Real es- tatepriceshaveincreasedap- proximately25percentsince January 2012. Inthefinancialmarkets,the US markets have performed very well and the Dow Jones Industrials Average and S&P 500 are at record highs. For the three-year period ended December 31, 2014, the S&P 500 generated an annual re- turn of 17.5 per cent, which is substantially higher than the returns generated by the non-USequitiesonanaggre- gated basis. Deemed a safe haven, the dollar is rallying. Since the last half of 2014, the dollar has increased significantly against most currencies and approximately 20 per cent againsttheeuro.Interestrates aremodestlyhigherintheUS as the rate on the US 10 year Treasury is 2 per cent, which is above the rate in most Eu- ropean countries and Japan. In terms of the M&A mar- kets, activity in the US has been steadily increasing over thepastcoupleofyears.There wasaspikeofsalesattheend of2012duetotaxlawchanges. After that, there was a slight reduction in M&A activity in the lower and middle mar- kets as many of the sellers contemplating a sale did so in 2012. But as the economy was gaining steam, the larger segment of the market wit- nessed strong growth. From 2013 to 2014, the number of transactionsinexcessof$100 milliongrewbyapproximate- ly 37 per cent. Fortransactionsunder$100 million, the growth rate in the number of transactions in 2014 vs 2013 was a much more modest 11 per cent. In addition to the strong M&A market, there has also been an increase in IPOs. The in- dustries with the most M&A activity in terms of the num- ber of transactions are busi- nessservices,technologyand finance. Overall, there is a very sta- bleandsteadyeconomyinthe US and the financial markets havegeneratedverygoodre- turns. The concern is that we may be nearing a peak and that the growth in both the economyandthemarketswill be very tepid. Scott Eisenberg is the managing partner and co-founder of Am- herst Partners Thereismore focuson cross-border deals Thisweek,morethan150leading internationaldealmakerswill arriveinDublinforamajorM&A conference.AllaremembersofIMAP, aninternationalaffiliateofcorporate advisorsspecialisinginmid-market transactions.Theconference,hosted byIrishfinancehouseKeyCapital, bringstogetherseniorM&Atransaction advisors,corporatedevelopment officersandglobalinvestors.Here,some leadingmembersofIMAPprovidea briefingonglobalM&Aactivity
  2. 2. TheSunday BusinessPost March8,2015 M&ABriefing 27 utlook sitions By Michael Reeves B ritain represents the largest market for mergers and acqui- sitions (M&A) in Eu- rope. Supported by substan- tial private equity activity in London, 2014 was the best year for the market since the economic downturn. In re- ality this upturn in M&A was driven by an increase in deal values,asoveralldealvolume remained largely flat. A number of factors con- tinue to play to the strengths oftheM&AmarketinBritain, namelylowinterestrates,ever increasingdemandinnumer- ous end-markets and greater banksupportforlargertrans- actions. Last year saw numerous high-profile transactions, with a particular focus on US buyers acquiring a num- ber of high-profile British assets. These included Wal- green Co’s $24bn acquisition of AllianceBoots Ltd from US private equity firm Kohlberg KravisRobertsandAlcoaInc’s $2.9bn acquisition of Firth Rixson Ltd from US private equityfirmOakHillPartners. The key driver for trans- actions such as these was US corporates utilising their strongbalancesheetstodeliv- er top-line revenues growth. Inaddition,theyareseekingto expandtheirglobaloperations at a time when British-based players in a number of sec- tors are experiencing strong growth. An additional driver for acquisitive groups is the po- tential for them to undertake a tax inversion, whereby they relocate their corporate headquarters to countries such as Britain where a more attractive and benign tax en- vironment exists. Whilst this factor clearly increases the appetite of buyers for British assets, the failure of Pfizer’s proposed $110bn acquisition ofAstraZenecaplcandAbbVie Inc’sproposed$54bnacquisi- tion of Shire plc showed that a combination of investor, public and regulatory senti- ment can still foil tax-driven M&A deals. A further important factor for British M&A has been the growing appetite from banks and other lenders to provide increasingly attractive debt packages. Combined with the low interest rate envi- ronment, this trend is seeing both trade buyers and pri- vate equity investors bene- fiting from increasing bank support for strategic deals. Noticeably Britain is becom- ing an important destination for new alternative US debt funderswhohaverecognised thatthereisanopportunityto replicate their recent experi- ence in the US and follow the pathofUSprivateequityfirms who invest in Britain. With Britain forecasting GDPgrowthofaround2.5per cent in 2015, the potential for furtherM&AactivityinBritain this year is clear. Mega deals such as BT Group plc’s $19bn acquisitionofEEfromOrange SAandDeutscheTelecomAG will continue to be the big talkingpoints.Othertransac- tionsofnoteinearly2015have included Ball Corp’s $6.9bn acquisition of Rexam plc and Fairfax Financial Holdings Ltd’s $1.9bn acquisition of Britplc,whilstStryker’sInc’s proposed$20bnacquisitionof Smith&Nephewplcremains in the pipeline. The strength of the US dol- lar is likely to see US buyers remain the primary drivers of inbound M&A activity in Britain. At the same time, US multinationals tend to hold largeforeignreservesanditis expected that they will con- tinue to deploy this cash on acquisitions. Michael Reeves is chief executive ofClearwaterInternationalBritain Britain’supturndrivenbyincreaseindealvalues BY TERO TIILIKAINEN I reland’s emergence from recession is as well de- served as it was hard fought.Sevenyearsofaus- terity has made us – and our companies – better, stronger and faster. Corporate balance sheets are leaner. Operations are more efficient. Margins have expanded. Indeed, the fat has been cut. Irish companies are now poised to capitalise on these developments. No longer are they pining for the past, but rather they are planning for a very bright future. This new- found optimism is manifest- ingitselfindifferentways.For buyers,ithasfosteredadesire to grow and expand into new markets. For sellers, it means they are now operating from a position of strength and entertaining real, rather than distressed,offers.Bothareno- tions many would not have even dreamt of a few short years ago. And while this recovery is nascent, it is broad. Compa- nies in sectors as varied as dairy, technology and en- gineering services, to name but a few, are all beginning to explore strategic alternatives for the first time in years. This activity is being fu- elled not only by better bal- ance sheets and a recovering economy,butalsobyaninflux of foreign capital and non- bank financing. Indeed, Irish companies may yet still face many obstacles as they enter thisneweconomiccycle,but itisclearthatliquiditywillnot be one of them. Key Capital, as the exclu- siveIrishpartnerofIMAP,has had a unique vantage point throughout this recovery. Our network connects us to buyers and sellers around the world. We speak to Irish companies every day about their desires to expand into new markets, and to foreign buyerseagertoinvestingrow- ing Irish companies. The interest is mutual. It is pronounced. And it is real. Thisweek,weintendtotell this story to the world. Key Capitalhasinvitedmorethan 180 of our IMAP colleagues from30countriestocomeand hear the story of the Irish re- covery for themselves at the IMAP Spring 2015 Confer- ence. And if we leave them with one message, we hope it’s this: Ireland is back, and it’s better than ever. Tero Tiilikainen is a director in corporate finance at Key Capital, the Irish affiliate for IMAP RecoverynascentbutbroadinIrishbusiness GreatprospectsforChina despiteeconomicslowdown OutboundM&Aincrease highlightsstrategicshift By Francisco Gómez G DP growth in the EU remains slug- gish. Sputtering investment has so far prevented a broader and more robust acceleration of domesticdemand.Amidchal- lengingglobalconditions,the fall in crude oil prices should provide a welcome boost to growth. The European economy is entering its third year of re- covery,buteconomicgrowth remains stuck in low gear and output has yet to reach pre-crisis levels. Slowly ex- pandingprivateconsumption has been the only reliable source of growth since the start of the recovery almost two years ago. Investment faltered in 2014 and remains weak. Longer-term trends such as ageing and declining productivitygrowthmayalso have affected short-term in- vestmentdecisionsbyreduc- ing expected rates of return. Against this backdrop, monetary accommodation and the shift of the fiscal stance to neutral have so far not been enough to spur growth. Headline inflation has dropped, largely on the back of lower energy prices, which should benefit growth by boosting real incomes. In the short run, downside risks have intensified, but new upside risks have also emerged. In a more long-run view, are we facing an era of low growth, low investment, low inflation and the occa- sional storm in global finan- cial markets? Not if the right policiesareimplementednow with determination. New developments have occurred that are expected to brighten the EU’s econom- ic outlook in the near term. Whileallofthemhavepoten- tialtostimulateeconomicac- tivity,theirimpactoninflation differs.Thethreemostprom- isingnewfactorsarethesharp fall in oil prices, the newly announced monetary policy measuresintheeuroareaand the EU Investment Plan (the ‘Juncker Plan’). These three factors have the potential to stimulate economic activity. Overall, real GDP is pro- jected to grow by 1.7 per cent in the EU and by 1.3 per cent in the euro area in 2015 and to accelerate to 2.1 per cent and 1.9 per cent respectively in 2016. There is apparently a lot of confidence and the recovery in key markets has improved the prospects for M&A. Although return expecta- tions and multiples for the whole of Europe fell in 2014, valuations in Northern and Western Europe had experi- enced a climb in the previ- ous two years. Deal values dropped, but the volume of transactionsincreased.Survey respondentsbelievemomen- tum is building, which will push up valuations to a five- year high run. Experts agree that a complete turnaround is not to be expected, but do anticipateabetterM&Amar- ketinWesternEuropein2015. However, the diversity in economic performance is likely to persist. Following a riseinM&Avaluationsin2014, amoreoptimisticoutlookfor NorthernandWesternEurope means that valuation multi- ples are expected to continue increasingtoreachamultiple of 10.7 in 2015. The outlook for Southern Europe remains subdued. Multiples in Cen- tral and Eastern Europe slid in 2014, but respondents an- ticipate a big pickup. FranciscoGómezworksforClear- water International Iberia Valuationoutlookhingeson outcomeofpolicyaction Irishbriefing Chinabriefing Japanesebriefing Europeanbriefing Britishbriefing BY Eduardo Morcillo F romamacroeconomic perspective, the Chi- neseeconomyishead- ingforasustainedpe- riod, say of up to five years, of around 6-7 per cent GDP growth. This slowdown from previousdouble-digitgrowth isconnectedtoagovernment economicrestructuringplan, aimedattacklingcorruption, excesscapacity,questionable bank loans, and other indus- trialbubbles,allconsequences ofthetraditionalstate-backed splurge in spending. In our view,suchshort-termmoves aretobewelcomed,andthey shouldn’t detract from the excellent mid- to long-term prospects.Themiddleclassis still growing by 30 to 40 mil- lion every 18 months, driven bythespreadofurbanisation, especially into tier two, three and four cities. The service industry has been completely rebooted in recent years too, with untold improvementstolivingstan- dards and significant invest- mentinhealthcare,education and environmental sectors. Thesemarketsareperforming very strongly right now. For example, healthcare is grow- ing at more than 20 per cent. From a business perspec- tive,whileinternationalfirms continue to explore new sourcesofgrowth,theimper- ative has become profitable growth. After many years of piecemealexpansion,wehave been working with clients to rethink their structures and portfolios,placingtheempha- sisonwhatmakesmostsense forChina.Profitdriverswithin the business are being better understood,resourcesreallo- catedaccordingly,andareasof under-performancenolonger tolerated. Whereas the incli- nation of the past might have beentogoitalone,weexpect our work on strategic part- nerships and the realisation of operational synergies to continue through 2015. Inthiscontext,international firms continue to pursue ac- quisitionsoflocalcompanies. Interestsinmarketaccess,rel- evant products and building scaleremain.However,where sectors are maturing, IMAP China is increasingly work- ing on transformative deals intended to reshape industry structuresandbusinessmod- els. An increasing number of international firms will be trying models in China that aren’tdeployedanywhereelse in the world. Meanwhile, we have seen an increase in disposals in China. This is not just Chi- nese business owners with- outsuccessionplans,butalso private equity firms seeking exits to trade buyers as they moveintonewroundsoffund raising,andbothChineseand international firms spinning off non-core businesses. We expecttoworkonmanymore disposals through 2015, con- tributing to the gradual con- solidation trend. Eduardo Morcillo works for In- terchina By Jeff Smith I n Japan, prime minister Abe’s monetary and fis- cal policies have led to a doubling of the Nikkei stock index since he took office. He is gradually acting on structural reforms (the third of his three econom- ic policy ‘arrows’) and his party won another election last December, but the grace period for showing results in the real economy is winding downandbusinessownersare anxious to see if the recovery can be maintained. In March we are entering the spring wage bargaining season,whichwillbeatestof whether prime minister Abe is able to generate the wage inflation which is key to his policies. Meanwhile,thereareobvi- ousconcernsaboutlongterm domesticgrowthinacountry whereby2060thepopulation is expected to shrink by one third and the portion of pop- ulation over 65 will rise to 40 per cent. Withthisbackground,Jap- anesecompaniesaremaking useoftheirlargecashbalances andtheeconomicrecoveryto act on bold outbound M&A strategiesandpositionforthe long term. Based on deal tracking by Recof Data, total M&A vol- umeinJapanagainincreased in 2014 by 10.3 per cent and outboundcross-borderM&A increased by 11.6 per cent, forming 23.4 per cent of total M&A volume. Perhaps the best illustra- tion of this strategic shift was spirits and beverage maker SuntoryHoldingsannouncing 2014’s largest outbound deal, with its $16 billion acquisi- tionofUScompanyBeamInc. Theactivenatureofconsumer products companies in out- bound M&A was also illus- trated when leading vinegar maker Mizkan surprised the marketlastyearwithits$2.15 billion acquisition of Unile- ver’s Ragu and Bertolli pasta sauce businesses. Other noteworthy activi- ty has been tie-ups between leadingJapaneseandnon-Ja- pan Asian players. Trading houseItochuenteredintotwo suchmajortransactionswith a cross shareholding invest- ment in Thailand’s Charoen Pokphand Group (CP), and thenjointinvestmentwithCP GroupinChina’sCITICGroup. For Japanese companies with business-to-business models,theywilloftenmake cross-borderacquisitionsthat allow them to support their Japanese clients that are ex- panding outside Japan, as well as allow them to build channels to serve foreign businesses. Twotransactionsillustrative of this theme are the acqui- sitions this year by transpor- tation/delivery companies Kintetsu World Express and Japan Post announcing deals worthover$1billionforcom- paniesbasedinSingaporeand Australia respectively. There is talk of overly high pricesbeingpaidbyJapanese companies in cross-border deals, sometimes 20-30 per centmorethanthenexthigh- est private equity or strategic bids. However in the recent wave of activity, Japanese companies tend to be avoid- ing the non-core and trophy assetsthatweresoughtinthe 1980-90s which later caused problems. For business owners glob- ally, the strategic pressures of Japanese companies create an opportunity. If a business owner is willing to actively engage Japanese buyers and work out the benefits to both parties, then the owner may beabletooptimisetheirbusi- ness’s value in a transaction. Jeff Smith is with Japan, Pinnacle Inc continued on page 28
  3. 3. TheSunday BusinessPost March8,2015 28 M&ABriefing BoomingTMTM&Aactivityseesrecordyearin2014 Druginnovationkeydriverofgrowingpharmaactivity FurtherM&Aactivityinchemicalsindustryin2015 Cross-borderautomotivedealvolumesettoaccelerate Infrastructureinvestmentoffersopportunitytodiversify Investingintelecoms Investinginpharma Investinginchemicals Investinginautomotive Investingininfrastructure By Dr Heiko Frank M any companies in different indus- triesarelookingto make their mark in the telecommunications, mediaandtechnology(TMT) sector.Mostofthemarepart- neringwithcompaniesinthis fieldtoadvancethenextgen- eration of consumer service and professional models – especially for the new me- ga-trend, Industry 4.0. TMT is a rapidly changing market,evenasonesegment’s growth slows down or loses market share, other key seg- ments attract attention with newly developed modes of social networking, digital in- teraction, connectivity and new devices. The continuously expand- ing media and IT landscape has become more and more essential. Current key trends exist in cloud computing, digital media, IT infrastruc- ture, 3D printing, wearables and ‘The Internet of Things’. Thesub-segmentsITsecurity, cloudandmobilecomputing, big data and IT outsourcing were the main drivers in the IT segment in 2014. Inthefirstthreequartersof 2014, the TMT industry had a total transaction volume of nearly $500 billion – this is the highest value of trans- actions since 2001. TMT is the leading sector with 19.8 per cent of the total value of globalM&Atransactions.The aggregatevaluefortechnolo- gy M&A deals worldwide in the third quarter of 2014 set a new post-dotcom bubble era record of $73.7 billion, which is up 41 per cent from Q2. Among the three sub-sec- tors,telecommunicationswas stilltheleadingsectorwith89 dealsvaluedat$236.3billion, the highest value on record, contributing 61.6 per cent of thetotalofTMTinthefirstsix months of 2014. Important drivers for the ongoing deal activity are the continuously consolidating TMT segment, followed by thehighinterestfromforeign potential investors, divesting fromnon-corebusinessesand raisingcapitaltoexpandbusi- nessactivities.Recentimport- ant deals include Comcast’s acquisition of Time Warner Cable, AT&T’s acquisition of DirecTV, SAP’s acquisition of Concur, Vodafone’s acqui- sition of Kabel Deutschland and Facebook’s acquisition of WhatsApp for $19 billion. North America had the highestcontributionat62per centtoglobalTMTM&Aactiv- ity.Lastyearwasarecordone for TMT M&A activities with deals worth more than $500 billion. Strategic and institu- tional investors feel that 2015 could be an even bigger year with growing M&A volume andanincreaseindealvalue. We have ongoing robust (mid-market) M&A activity, with continued interest in European technology com- panies; especially as those in Asia recognise the value of European tech assets. The fastpaceoftechnologychange andthehighnumberofSMEs within the sector is likely to lead to further consolidation opportunities. IMAP is a leading global M&A adviser with focus on M&Atransactionsinthemid- dle market. Due to a long track record, IMAP closed globally 120 transactionsintheTMTindus- try within the past five years. Supportedbyseveralindustry experts, IMAP gained global experience and recognised several industry trends over previous years. This success factor helps IMAPtobealeadingM&Aad- visorwithinthisfastgrowing market. DrHeikoFrank–IMAPinGer- many,IMAPM&AConsultantsAG By Christoph Bieri T hepharmaceuticalin- dustry,valuedaround $700 billion, is in a prolonged period of reorganisation. Deal activ- ity is high, with more than 600 transactions with a total transaction volume of $240 billion in 2014, according to IMAP’sstatistics.Dealactivity increased from 2013 to 2014, partlydrivenbycheapfinanc- ing,butalsobyhighvaluations ofpubliclytradedcompanies and an accelerating pace of strategic realignment. Three long-term mac- ro-drivers for transactions can be distinguished. First, the growing middle class- es in emerging economies have created substantial new markets:China,India,Russia, Latin America and, more re- cently, Africa drive the phar- maceuticalindustry’sgrowth by volume. Being present in thesemarketshasbecomean imperative for pharmaceu- tical companies with global aspirations.Particularlyman- ufacturers of generic drugs, suchasSandoz(partofNovar- tis), Teva, Mylan and Abbot, which have had to perform substantial acquisitions in theseregionstoestablishtheir presence. Second, the cost of health- careexpenditurehasreached the sustainable maximum in mature economies. Pharma- ceuticals generate around 10 per cent of total healthcare costs,andcontainmentofex- penses for drugs has become a major topic in Europe, Ja- pan and, more recently, the US. For one, various mecha- nisms have been established to ensure that generic drugs compete on price only (and not with their brands). This has led to a substantial de- crease of “branded generics’ which were common with medium-sized pharmaceu- tical companies (in our defi- nition, below US$ 5 billion sales). On the other hand, reim- bursement prices for newly developed,proprietarydrugs aresetrelativetotheirmedical value-added versus existing treatments. This demand, to- getherwithincreasingregula- tory scrutiny, have increased the average amount of R&D spendforeachsuccessfuldrug launch to €3.5 billion. This prohibits the ability that me- dium-sizedcompanieshaveto establishandmaintainmean- ingful R&D programmes. Third, medical advances have been unlocking new treatment opportunities, particularly in oncology and previously untreatable, rare diseases. The pace of inno- vation has been so fast that the large, complex organisa- tion of ‘big pharma’ typically cannot keep up. The last de- cade saw the establishment of an ‘ecosystem’ comprising small companies driving in- novation,and‘bigpharma’as acquirersorlicenseesoftheir products. Much of the current deal-making in the phar- maceutical industry involves large pharmaceutical com- panies willing to shell out substantial amounts, some- times hundreds of millions or even billions, to acquire small, loss-making firms with a potentially lucrative drug in development. The most extreme example for such a transaction was Gile- ad’sacquisitionofPharmasset in 2011 for $11.2 billion, for a programmewhichresultedin Sovaldi,theleadingtreatment againsthepatitistypeC,acon- dition which was previously almost incurable. Ireland, with its low cor- porate tax rate, has become a major hub for acquisitive pharmaceutical companies. Taxinversions,themovement ofthetaxdomicileawayfrom the US in the context of an acquisition, have been a key elementofmanytransactions inthelasttwoyears.IfIreland managestoattractmorethan just letter boxes, the country may profit from the vast re- shuffling which takes place in one of the industries with the highest value generation. Christoph Bieri works with KurmannPartnersinSwitzerland By Constantine Biller T he global chemicals industryischaracter- ised by ongoing cor- poratereorganisation, active private equity invest- mentandmergersandacqui- sitions (M&A) right across all of the key geographies. The Asianmarketcontinuestoof- fer growth opportunities to global players as demand in China and other Asian coun- tries remains robust. Europe remains a key location for innovation, driven in large partbyeverstricterregulation and end-market sophistica- tion. Meanwhile, the US has returned as a crucial location inglobalproductionvolumes as domestic players benefit from the attractive energy pricing offered by shale gas. M&A activity in chemicals maintained its upward tra- jectory throughout 2014. The competition from corporate andprivateequitybiddersfor the most prized assets also drove up transaction multi- ples.Manyglobalplayersused their strong balance sheets and profitability to make transformational deals and deliver top-line growth. For example, Platform Speciality ProductsCorpacquiredArysta LifeScience Ltd from British private equity firm Permira for $3.5 billion. This followed itsearlier$400millionacqui- sition of Agriphar SA. Other significant transac- tions during the year were Albemarle Corp’s $6.2 bil- lionacquisitionofRockwood Holdings Inc, Archer Daniels Midlands Co’s $3.1 billion acquisition of Wild Flavours GmbH and INEOS AG’s $1.5 billion acquisition of the re- maining 50 per cent stake in Styrolution Group GmbH from its joint-venture part- nerBASFSE.Elsewhere,FMC Corp completed the $1.5 bil- lionacquisitionofCheminova AS and subsequently sold its alkali/soda ash business to Tronox Ltd for $1.6 billion. There was also significant mid-market activity with corporate buyers and private equity sharing the spoils. Fresh from its sale of Arysta LifeScience,Permiraacquired CABB GmbH for $1.1 billion from Bridgepoint Capital. Japanese group Kurita Water Industries Inc acquired the APWwatertreatmentchem- icalsbusinessofIsraelChem- icals Ltd for $316 million and Lubrizol Corp, a subsidiary of Berkshire Hathaway Inc, acquiredWarwickChemicals LtdfromBritishprivateequity firm CBPE. US investor Strategic Value Partners sold Vestolit GmbH to Mexichem for $293 mil- lionandBritishprivateequity firmCVCCapitalPartnerssold FlintGroupLtdtoKochEquity Development and Goldman Sachs for $3 billion. Theappetitefornewprivate equity investment is also ev- ident. The ongoing corporate disposalprogrammespresent private equity firms with the opportunity to make signifi- cant investments and create platforms for further buy- and-build activity. Exam- ples of recent private equity investment into the chemi- cals industry include Rhone Capital’s$355millionacquisi- tionofASKChemicalsGmbH fromAshlandIncandClariant AG,AresManagement’s$431 million acquisition of Farrow & Ball Ltd and LBO France’s $359 million acquisition of Chryso SA from Materis SA. Through 2015 there will be more M&As in the chemicals industry as the large groups look to realign their product portfoliosandgeographiccov- eragetowardsmoreprofitable segments.Thiscanbeseenin theactive$2.8billionpursuit ofSikaAGbyCompagniedeSt Gobain SA. At the same time, the likes of Bayer AG, Dow Chemical Co and DSM NV willlookatnon-coredispos- als, while mid-sized players such as Arkema SA, Clariant AG, Croda International plc, Givaudan SA, Innospec Inc, TessenderloNV,ValsparCorp and WR Grace & Co remain the subject of potential bid activity. ConstantineBiller,IMAPinUK, Clearwater International UK By Katja Diepelt I n the first half of 2014 the global automotive deal value was $27.5 billion, the highest level since 2008. The global automotive deal volume increased 13 per cent in the first half of 2014 compared to 2013, while the globalcross-sectorM&Avol- ume increased by only 6 per cent in same time. The in- crease was mainly driven by five mega-deals with a total aggregated disclosed value of $20.9 billion. Automotive experts maintain a positive outlook for automotive M&A activities in the future. In spite of political uncer- tainties, economic volatility and an increased number of product recalls, the vehicle assembly sector will con- tinue to grow. In the period from 2014 to 2020 the global automotive assembly sector is expected to grow by 4 per cent.Thegrowthwillbemain- lydrivenbytheinternational expansion in developing the key markets – Asia, Europe and North America. In the first half of 2014 the components suppliers’ total deal value climbed to $10.1 billion.Componentssuppliers sawdealvolumerisefrom100 to 117 deals in the first half of 2014,representinganincrease of17percentcomparedtothe first half of 2013. The reason for the smaller deal value is caused by the fact that the supplier industry is domi- natedbysmallandmid-sized transactions. The automotive industry willseeanincreasingnumber of cross-border transactions – inbound as well as out- bound. Europe will continue to be an attractive region for M&Atransactions,influenced by the current exchange rate and technology know-how, as well as the access to pre- mium automobile manufac- turers headquartered in Eu- rope. The increasing number of cross-border transactions will be also driven by ‘fol- low-the-customersstrategies’ whichforcesupplierstomove abroad. Theautomotivesupplierin- dustry will see both financial and trade buyers. The num- ber of financial buyers’ M&A activities increased by 39 per centin2014comparedto2013. Financialbuyersarefocusing on components suppliers in Asia and they further expect consolidation on the tier 3 to tier 4 level. The automotive industry has overcome challeng- ing times in the past and it seems that the market has recovered from the econom- ic downturn. The automotive market expects to stay strong and continue M&A activities. M&A activities will be used to improve technology, grow thecustomerbaseandexpand geographic presence. M&Awillplayanincreasing role in the development and realisation of new technol- ogies. IMAP as a world leading M&A adviser is mainly fo- cusing on M&A activities in the small and mid cap sector. Supported by senior advisers from the automotive indus- try, IMAP is watching several trends in the supplier indus- try. During the last five years IMAPsuccessfullyclosedover 35transactionsinthecompo- nents supplier industry. KatjaDiepeltworkswithIMAP M&A Consultants AG By Pelino Colaiacovo B ridges, power plants, pipelines and sea- ports: these are just a few of the structures that fall into the ‘infrastruc- ture’ asset class. Typically, ‘infrastructure’ is defined as the basic or fundamental framework of an organisa- tion, system, city, region or country. From an investment perspective, both econom- ic infrastructure (highways, sewer systems, electricity networks, airports, etc) and social infrastructure (such as hospitals,universities,public buildings,courthouses)canbe attractive. Infrastructure investments share some characteristics with both real estate and long-term bonds. Like real estate, infrastructure invest- mentsaretypicallylong-lived (with lifetimes measured in decadesorlonger),andbring withthemhighdevelopment costs and construction risk; major facilities often require years of planning, design and permitting, while con- struction failures can lead to enormouscostoverruns.Like bonds, infrastructure usually has well-defined and stable returns over a long period of time. Traditionally, these types offacilitieswereconstructed, owned and managed either bygovernmentsorverylarge corporations,whichoftenre- ceived a regulated licence to operate or some other form of government concession. Individual investors seldom had the ability to invest in them at all, and if they did, it was usually only by being a shareholder in a broader enterprise, such as a railway, rather than as a direct owner of a physical asset. Over the past 20 years this haschangeddramatically,and there has been an explosion of direct investment in ‘hard assets’.Partly,thishasbeenthe result of governments decid- ing to privatise some of their facilities (eg airports, ports, railways, electricity distribu- tionnetworks,powerstations, water and sewage facilities), and partly because of the de- velopment of new technolo- gies which governments de- cided would be better served by private investment (wind and solar powered electricity generation facilities, natural gas liquefaction and regasifi- cation plants, etc). Today, investors in infra- structurearealargeandvaried group: hundreds of dedicat- ed investment funds (both publicly traded and private), pensionandinsurancefunds, sovereignwealthfunds,large corporations,familytrustsand individual investors. Investors are attracted to infrastructure investments because they are very stable over time, and don’t fluctu- atewiththebroaderfinancial market.Asaresult,theyhave been variously characterised as ‘patient capital’ or ‘defen- siveinvestments’.Whilelarger investmentportfoliosarestill dominatedbyequityanddebt investments in companies, infrastructure has become a critical component in strat- egies for diversification and the hedging of risks. In the developed world, new infrastructure oppor- tunities arise because older systems are wearing out or becomingoverburdened.The highwaysandpowerplantsof the 20th century have to be replacedorrebuiltforthe21st, andthistimeitisinvestors,not governments,whoarebehind them.Inthedevelopingworld, many of these systems are being built for the first time, and governments don’t have the wherewithal to build and financethem.IMAPmember companies around the world are helping clients invest in, buy or sell infrastructure as- sets, to the mutual benefit of consumers, government and investors. PelinoColaiacovoiswithMorri- son Park Advisors in Canada TherehasbeenaspikeinM&Aactivityoverthepastyear.Butwhichsectorsaregettingthemost attention?Here,fiveinternationalM&Aexpertsidentifya‘hot’industryandsectorfordeals