Natural selection

While we’re not out of the credit crunch woods just yet, M&A in the Asia-Pacific region is likely to continue to rise, as many seek safety in natural resources.

The rush of corporate activity in the energy and natural resources sector is perhaps not unexpected. Especially, when you consider natural gas prices are up over 25 per cent in the last year, gold and copper are up over 30 per cent, iron ore prices are up over 65 per cent and the share prices of many of the leading coal producers are up by as much as 50 per cent.

Given the concentration of these resources in Asia-Pacific and the fact that combined fuel and non-fuel commodities account for more than one-fifth of global trade, it is not surprising that Asia-Pacific has bucked the trend and seen the rush to acquire resources drive M&A in the region. According to ­figures from Thomson Reuters, the region contributed 20 per cent of worldwide M&A during 2009, up from 10 per cent in 2006.

While the rest of the globe saw decreases in M&A in 2009, the Asia-Pacific region finished the year with a gain of 5 per cent in value – in contrast with global declines of 27 per cent – and five of the top 10 deals in Asia were in the energy, mining and utilities sectors. What drove much of this activity was the depression in commodity prices in early 2009, which provided a brief window during which Chinese buyers were able to snap up many energy and resource ­companies overseas at very attractive ­valuations. Holman Fenwick Willan’s own major deal in the sector, advising from our growing Singapore, Hong Kong and ­Australian offices on the $1.48bn (£1bn) acquisition of PT Berau Coal – the largest ever coal M&A in South-East Asia – was fairly typical of corporate activity in the last eighteen months: Indonesia is the world’s biggest exporter of thermal coal and is a key supplier to North Asia, India and China. The deal took advantage of the increased accessibility of funds for new explorations and developments.

Against this backdrop, and bearing in mind the volatility and limited liquidity of the last year or two, financing deals has become an even more critical issue. Emerging market credit spreads are high, making pricing a real issue, while in many jurisdictions liquidity is a problem as the lack of local banking markets has slowed credit growth.

aterial adverse change clauses have therefore become increasingly ­common. Even in more developed markets, such as China and Australia, regional and international banks are now tied by the ­constraints associated with the various ­stimulus packages and government support they have received – meaning only the very best investments are able to be funded. ­Interestingly, contractor and supplier financing is an alternative that has been on the rise in recent years, if only to ensure reciprocal contract certainties. Private equity and equity sale are still there, but tighter structures, with security over cash flows, has constrained some investment opportunities.
All this has left it clear that there is a flight to quality assets, with some of the weaker assets likely to fail. Development and ­exploration funding has felt the impact of tighter liquidities, even though capital is still available if the returns look good. Banks are being very selective with whom they work.

So, what of the immediate future? Well, competition laws are gaining momentum across Asia-Pacific, as part of a move to align legislation to international standards. In China, foreign investors considering a deal with domestic companies must have a good understanding of the Unfair Competition Law, the Consumer Interests Protection Law, the Price Law, and China’s Anti-Monopoly Law, which came into force in August 2008. The latter allows Chinese authorities to implement a new merger-­control regime, including formal guidelines and draft filing rules for both local and foreign companies.

These pre-merger procedures have ­affected transaction schedules, but do not appear to have deterred foreign investment. Therefore, most observers expect a ­modest increase in M&A across Asia in 2010, but the markets remain volatile. ­Chinese ­companies are ­likely to increase their overseas M&A this year, due to the ever-rising needs for resources – a recent report by PwC ­indicated that there will be significant growth in the manufacturing sector.

However, a general lack of confidence still pervades and thus it is still likely that ­countries such as China, Indonesia and ­Australia will see most of the M&A action in the coming months in the region.

Insolvencies, and undervalued assets ­generally, are still driving acquisitions and it is not surprising that ’distress’ is also likely to account for a large part of this year’s M&A activity – whether that is transactions ­occurring after insolvency proceedings have started, transactions to avoid insolvency, or bailouts to attract fresh capital.

Therefore, while we are by no means out of the woods in relation to the credit crunch, M&A in Asia-Pacific is likely to continue apace, aligned to the economy particularly of China and the growing investment in ­natural resource assets to meet increasing ­economic demand. In this highly capital-intensive ­sector, cash is king, but there are some ­bargains out there right now that in the coming years many businesses may wish they had taken advantage of in 2010.

Alistair Mackie is a partner and head of the corporate practice at Holman ­Fenwick Willan