It has been a very active time in Asia Pacific M&A. This article discusses some of the trends and key issues in M&A in the region.
Return of Australian contested bids
The Australian market has recently seen competing bids for iiNet by TPG Telecom and M2 Telecommunications, Envestra Limited by APA Group and Cheung Kong Group as well as for Ambassador Oil & Gas Limited by Drillsearch Energy Limited and Magnum Hunter Resources Corporation.
The continued presence of competitive bid scenarios is a healthy sign for the Australian M&A market and a positive marker for M&A activity going forward. It also suggests that Australian deal protection mechanisms, when conducted within the current guidelines, will not necessarily act as a deterrent to alternative bidders.
Increased Australian M&A activity by Chinese acquirers
Negotiations have recently concluded for the China - Australia Free Trade Agreement (ChAFTA). The ChAFTA will relax the foreign investment review requirements for Chinese private investors, placing them on par with investors from Australia's other free trade partners.
The proposed changes to investment thresholds under the ChAFTA send a practical message of encouragement to Chinese private enterprises and, as a result, we expect to see an increase in inbound M&A in Australia by Chinese investors.
In addition, the simplification of China's outbound investment regime and the streamlining of the MOFCOM merger review process will continue to encourage Chinese outbound investment in Australia.
2015 saw a Chinese State owned enterprise launch a hostile takeover bid in Australia – the GRAM A$1.2 billion takeover of PanAust. This was a first in the Australian market.
Acquisition opportunities in Chinese SOEs
In 2014, the PRC government announced further measures to reform SOEs, which include a focus on mixed ownership structures creating potential opportunities for Hong Kong acquirers. The acquisition by Hong Kong listed CITIC Pacific Limited of CITIC Group's business shows one approach to implementing the reform measures. China Petroleum & Chemical Corporation (Sinopec), also Hong Kong listed, completed a capital injection for a 29.9% stake in its PRC subsidiary, with several Hong Kong investors participating. It is anticipated that the reforms will lead to further restructurings which will bolster acquisition activity in the PRC and Hong Kong.
Legal and regulatory developments in India
In terms of legal and regulatory matters in India, there were a number of interesting developments:
- Mr Modi's government increased permitted foreign direct investment in insurance from 26% to 49%, which we anticipate will lead to more M&A activity in this sector in 2015. In addition, the government has increased FDI limits in defence and railways to 49% and 100%, respectively.
- Last year saw the Competition Commission of India (CCI) flex its muscle on merger control issues. The CCI cleared Sun Pharma's acquisition of Ranbaxy, on the condition that 7 overlapping pharmaceutical products of the parties are disposed of. Whilst this is a relatively classic competition remedy, it is new in India and is likely to mean that parties to Indian M&A look more closely at their specific obligations to satisfy competition conditions in deal documents (e.g. "hell or high water" clauses, obligations to dispose of assets/products and the like).
Energy in Asia Pacific
- Australia - As evidenced by the lofty US$5 billion price tag for the Queensland Curtis Island LNG Pipeline, energy infrastructure assets with predictable returns are highly attractive in the current volatile market. We expect that the favourable price signals from the successful divestment of the Queensland Curtis Island LNG Pipeline, together with the LNG project participants' own cost pressures, make this year a prime time for divestment or consolidation that will strengthen the participants' balance sheets. As Australia moves into an interesting selling market, we are seeing growing interests from overseas buyers, including global energy majors, private equity investors and sovereign wealth funds.
- China - Despite a slowdown in M&A by Chinese state-owned enterprises (SOEs), we have seen an increase in acquisition activity by private Chinese companies not previously in the oil and gas business – for example the acquisition of Roc Oil by Fosun. LNG is increasingly a sector focus for Chinese energy companies. Both state-owned and private companies are looking at opportunities to acquire LNG assets and LNG offtake, driven by a series of regulatory reforms by the Chinese government, including the new rules on gas pricing and third party access to gas infrastructure.
- South Korea - Korean SOEs have been tasked with reducing their soaring debt levels. This prompted various divestment programmes and has operated as an effective freeze on new acquisitions by Korean SOEs. There is also an increasing drive to encourage the private sector to fund natural resource investment. The Korean pension funds are also likely to look for brownfield and greenfield energy infrastructure investment opportunities in OECD countries. We expect to see healthy investment flows to Australia and Canada in particular, both of which have recently activated Free Trade Agreements with Korea.
Developments in mining in Asia Pacific
A combination of slowing demand (in particular from China) and over supply of production (especially iron ore) saw commodity prices continue to fall and possibly bottom out (with iron ore and coal the most affected). Falling commodity prices have put substantial pressure on miners to cut costs.
Market participants focused on finding ways to generate cash flow and reduce or defer costs. Those producers with more marginal operations were forced to review their operations, reduce production or suspend operating.
The drive to improve margins through lower unit costs of production has seen a significant productivity drive – a drive which some commentators say had to come. The focus on productivity and innovation saw some collaboration between competitors – for example, miners jointly developing or operating adjoining fields to lower per unit production costs.
We have also observed consolidation amongst juniors in the Australian market – for example the acquisition of junior iron ore hopeful Rutila Resources by the Todd Corporation.
The Asia Pacific region has seen strong deal volumes so far in 2015. A number of important trends and issues suggest this will continue for the remainder of the year and into 2016.