M&A 212 Review and 213 Outlook 3 January 213 China Beijing Advisory Leader: Nelson Lou Northern China Transaction Services Leader : Leon Qian
Foreword explanation of data shown in this presentation (1 of 2) The data presented is based on information compiled by ThomsonReuters, ChinaVenture and analysis unless stated otherwise Thomson Reuters and ChinaVenture record announced deals. Some announced deals will not go on to complete The deal volume figures presented in this report refer to the number of deals announced, whether or not a value is disclosed for the deal The deal value figures presented in this report refers only to those deals where a value has been disclosed (referred to in this presentation as disclosed value ) Domestic means China including Hong Kong and Macau Outbound relates to mainland China company acquisitions abroad Inbound relates to overseas company acquisitions of Domestic companies, Private Equity deals or PE deals refer to financial buyer deals with deal value over US$1mn and/or with undisclosed deal value but invested by PEs 2
Foreword explanation of data shown in this presentation (2 of 2) VC deals refer to financial buyer deals with deal value less than US$1mn and/or with undisclosed deal value but invested by VCs Strategic buyer refers to corporate buyers (as opposed to financial buyers) that acquire companies with the objective of integrating the acquisition in their existing business Financial buyer refers to investors that acquire companies with the objective of realizing a return on their investment by selling the business at a profit at a future date and mainly, but not entirely, comprise PE and VC funds In order to exclude foreign exchange impact, deal values from 28 to 211 were adjusted based on 212 average Rmb/US$ exchange rate 3
Overview
Key messages (1 of 2) Overall Overall 212 China M&A decreased 26% by volume and 9% by value, with only Outbound deals showing growth (in value terms); we expect M&A activity to rebound in all sectors in 213, with Outbound activity continuing to grow especially strongly China Outbound Although China Outbound deal volumes surprisingly showed a small decline, deal values grew by 54% to reach a new record high of US$65.2 billion comprising more than a third of overall M&A activity measured by value, by far the highest proportion ever; we see many more deals in the pipeline and expect this growth trend to continue strongly with another record year in 213 We are seeing privately owned enterprises (POEs) taking on larger deal sizes; we think that private sector companies will be key drivers in the future growth of China Outbound M&A The growing activity of private sector buyers in acquiring industrial technologies and consumer-linked businesses overseas is an important trend; many of these deals are aimed at bringing advanced western technologies, know-how, IP and brands back for use in the Chinese domestic market; we are also seeing some POEs using overseas M&A to go global in addition to concentrating on the domestic market 5
Key messages (2 of 2) Domestic and Foreign-Inbound Strategic Both Domestic and Foreign-Inbound Strategic buyer deal activity fell to their lowest levels in the last five years with declines greater than those seen after the global financial crisis We think activity will rebound in 213 as the direction of the Chinese economy becomes clearer, industry consolidation accelerates, domestic leadership changes take effect, and foreign economies start to emerge from their stressed states allowing MNCs to deploy cash reserves with greater confidence implementing their China market entry or growth strategies Private Equity In the PE sector there will be sharp consolidation across the industry, and the backlog of exits represents a real challenge for the sector PE has emerged as a key provider of capital to the liquidity starved private sector of the economy in China with real policy support - this demand for capital is driving strong market growth and activity; there are exceptionally strong tailwinds for the PE industry in China over the medium term We think new deal and exit activity will accelerate strongly from 2Q13 as pricing expectations adjust, 212 results become available, IPO markets re-open, and China s leadership transition takes effect; PE deal activity (new investments and exits by both IPO and M&A) will reach new record highs if not in 213 then in 214 6
Overall 212 China M&A decreased 26% by volume and 9% by value, with only Outbound deals showing growth (in value terms); we expect M&A activity to rebound in all sectors in 213, with Outbound activity continuing to grow especially strongly Total deal volume and value, from 28 to 212 28 29 21 211 212 Volume Value Volume Value Volume Value Volume Value Volume Value Strategic buyers (US$bn ) (US$bn ) (US$bn ) (US$bn ) (US$bn ) Domestic 3,6 1 5.5 2,7 7 4 1.3 2,947 1 4.1 3,262 1 1 7.6 2,667 88. -18% -25% Foreign 61 4 1 9.3 49 1 1.3 539 1 8. 482 1 7.3 286 9.1-41% -47% Total Strategic buyers 3,62 169.8 3,183 111.6 3,486 158.1 3,744 134.9 2,953 97.1-21% -28% Financial buyers Priv ate Equity 365 22. 254 22.3 425 24.9 52 32. 332 23.5-34% -27% VC 694 1.7 7 1 2 1.8 1,1 1 2.5 93 1.8 47 3.9-48% -48% Total Financial buyers 1,59 23.8 966 24.1 1,436 27.4 1,45 33.8 85 24.4-43% -28% China mainland Outbound SOE 27 6.8 45 26.3 64 34.5 48 33. 48 39.7 % 2% POE 99 3.6 99 6.5 1 24 6.4 1 58 9.4 1 43 25.5-9% 171% Total China mainland Outbound 126 1.3 144 32.8 188 41. 26 42.4 191 65.2-7% 54% HK Outbound 156 6.6 152 6.2 171 18.8 183 8.2 166 12.8-9% 55% Total 4,961 21.6 4,445 174.7 5,281 245.3 5,538 219.3 4,115 199.5-26% -9% % Diff volum e 212 vs. 211 % Diff value 212 vs. 211 Source: ThomsonReuters, ChinaVenture and analysis 7
Deal volumes decreased across all major categories... No. 5 Deal volume by main category 4 5 4 3 5 3 2 5 126 365 614 144 254 49 188 425 539 26 52 482 191 332 286 2 1 5 3 6 2 774 2 947 3 262 2 667 1 5 28 29 21 211 212 Domestic Strategic Buyers Foreign Strategic Buyers Private Equity Deals China Mainland Outbound Source: ThomsonReuters, ChinaVenture and analysis 8
... But China Outbound deal values grew by 54% and now comprise more than a third of overall M&A activity measured by value, by far the highest proportion ever US$ billion 25 Deal value by main category 2 15 1,3 22, 19,3 32,8 41, 24,9 18, 42,4 32, 65,2 1 22,3 11,3 17,3 23,5 9,1 5 15,5 1,3 14,1 117,6 88, 28 29 21 211 212 Domestic Strategic Buyers Foreign Strategic Buyers Private Equity Deals China Mainland Outbound Source: ThomsonReuters, ChinaVenture and analysis 9
Strategic buyers 1
Both Domestic and Foreign-Inbound Strategic buyer deal activity fell to their lowest levels in the last five years with declines greater than those seen after the global financial crisis; we think activity will rebound in 213 as the direction of the Chinese economy becomes clearer, industry consolidation accelerates, domestic leadership changes take effect, and foreign economies start to emerge from their stressed states Strategic buyer deals, from 28 to 212 No. US$ billion 4 3 5 15,5 14,1 16 14 3 12 2 5 2 1 5 3 6 1.3 2 774 2 947 117.6 3 262 88. 2 667 1 8 6 1 4 19,3 5 614 18, 17,3 11,3 9,1 49 539 482 286 28 29 21 211 212 Announced Deal Volume Inbound Announced Deal Volume Domestic Announced Deal Value Inbound Announced Deal Value Domestic Source: ThomsonReuters, ChinaVenture and analysis 2 11
Nearly all industry sectors posted declines, both in terms of volumes... 4 No. Strategic buyer deal volume by industry sector 3 5 52 698 3 2 5 2 1 5 1 5 241 877 272 762 358 252 45 248 432 384 23 253 137 16 264 369 372 44 395 273 32 352 522 31 5 446 381 42 529 575 475 428 439 664 539 614 668 57 Source: ThomsonReuters, ChinaVenture and analysis 28 29 21 211 212 Raw Materials Industrials Consumer Related High Technology Real Estate Financial Services Energy and Power Others 12
... And values Strategic buyer deal value by industry sector US$ billion 18 16 14 48,9 36,2 12 1 8 6 4 2 9,2 9,9 15,2 21,3 23,2 9, 33,1 23, 1,5 8,7 14, 2,3 1,4 11,9 12,7 11,3 11,3 19,4 22, 22,3 5,2 3,3 23,8 9,5 11, 18,1 22,2 16,1 13,7 12,2 12,6 6,3 8,6 1,5 12,5 16,1 22, 16,6 28 29 21 211 212 Raw Materials High Technology Financial Services Real Estate Industrials Consumer Related Energy and Power Others Source: ThomsonReuters, ChinaVenture and analysis 13
Japan remains the most active Foreign-Inbound M&A investor for the second year running, but we saw several deals put on hold in the second half year of the year in response to the Diaoyu Islands crisis; US and European deal numbers have steadily declined since their 21 high... No. 65 6 55 5 45 4 35 3 25 2 15 1 5 Foreign strategic buyer deal volume by region of origin 7 87 7 31 54 48 127 67 92 79 28 35 34 67 89 46 98 124 52 73 67 94 66 29 23 28 29 21 211 212 Japan SE Asia US EU Other Asia Oceania UK Canada Africa Other Europe Latin America Russia British Virgin/Cayman n.a. Source: ThomsonReuters, ChinaVenture and analysis 14
... However, the biggest deals are still coming from US and European buyers; we expect Foreign-Inbound deal activity to rebound 213 as European and US economies start to recover allowing MNCs to deploy cash reserves with greater confidence, implementing their China market entry or growth strategies US$ billion 25 Foreign strategic buyer deal value by region of origin 2 15 1 5,6 4,2 2,9 3,5,3 3,4 1,5 1, 2,3 1,3 1,5 1,9 5,2 2,9 4,5,8,8,2,4 1,7 2,1 1,8 28 29 21 211 212 US UK EU Other Asia SE Asia Japan Canada Oceania Africa Other Europe 2,1 1,2,7 1, 1,2 1,3 1,3 3,4 Source: ThomsonReuters, ChinaVenture and analysis 15
PE/VC deals 16
PE and VC fundraising for China investment in 212 trailed 211 s record levels by less than we expected; however, if we look closer we see much fewer individual fund raisings but there were some large funds raised by many of the leading and established PEs including KKR ($6bn), PAG ($2.5bn), Hony ($2.4bn), Bain ($2.3bn) and Fountainvest ($1.4bn); there will be winners and losers in the sector - high quality, professional PEs will thrive, but the bubble is already bursting for many of the plethora of renminbi funds raised over the last few years PE/VC fund raising for China investment * Excludes global funds investing in China US$ billion 6 28 No. 3 5 25 25 4 21,8 2 3 169 163 14,9 21,1 15 2 39,1 117 1 31,8 1 9,3 21, 2,3 5 4,4 6,6 28 29 21 211 212 Renminbi Fund Size Non-renminbi Fund Size Fund Volume Source: AVCJ and analysis 17
212 was a poor year for PE deal numbers, though deal sizes are trending upwards; we think that deal volumes will recover starting from 2Q of 213 and average deal sizes will continue to trend upwards; however, within China, the days where PEs could throw money at deals and expect a rising tide to float all boats have gone; careful and professional diligence is vitally important; fraud risk is high; PEs should be prepared to walk away from opportunities if sellers will not accommodate diligence Private Equity deals, from 28 to 212 No. US$ billion 55 5 45 24,9 32, 35 3 4 35 3 22, 22,3 23,5 25 2 25 2 15 1 5 365 254 425 52 332 15 1 5 28 29 21 211 212 Announced Deal Volume Announced Deal Value Source: ThomsonReuters, ChinaVenture and analysis 18
PEs tend to target industries that are on strategy for China, including consumer-linked, healthcare, media and entertainment, technology, and service industries No. 55 5 45 4 PE deal volume by industry sector 35 3 25 2 15 1 5 4 45 6 33 77 23 5 32 2 54 34 88 31 47 98 28 29 21 211 212 Consumer related Healthcare Media and Entertainment Industrials High Technology Real Estate Financial Services Energy and Power Raw Materials 54 9 72 3 124 32 42 45 46 73 Source: ThomsonReuters, ChinaVenture and analysis 19
Growth capital deals predominate, but PIPE (private investment in public equity) deals are important and we are seeing a buy-out market starting to emerge; we expect the nascent trend towards buy-outs to strengthen over the medium term PE deal value by type US$ billion 35 3 2,7 25 2 15 1,2,6 4,2 15,6,6 9,3 1,6 4,1 5,1 1 5 16,7 6,1 15, 18,6 14,2 28 29 21 211 212 Growth PIPE Buyout Source: ThomsonReuters, ChinaVenture and analysis 2
If we look at the same statistics in terms of deal volumes (rather than values) the dominance of growth capital is very evident; PE has emerged as a key provider of capital to the liquidity starved private sector of the economy in China with real policy support - this demand for capital is driving strong market growth and activity PE deal volume by type No. 55 5 16 45 4 35 15 21 13 85 118 18 3 25 2 15 1 329 4 51 199 327 368 68 246 5 28 29 21 211 212 Growth PIPE Buyout Source: ThomsonReuters, ChinaVenture and analysis 21
The PE industry in China is notable in that most exits have been by IPO; predictably, there has been a significant decline in 212; there is a growing pipeline of future exits, perhaps more than the market can handle this will be a challenge for the PE industry over the next few years PE/VC backed deal exit volume by type No. 35 3 25 8 83 6 2 15 1 5 91 5 8 84 62 7 212 171 44 88 98 46 28 29 21 211 212 IPO M&A - trade M&A - PE Source: AVCJ and analysis 22
PE backed IPOs in offshore markets such as HK and New York in 212 were the lowest in the last three years; we think that PE backed IPO activity must increase markedly in the short to medium term when capital markets return to normal functioning; the domestic A-share markets has been and will continue to be an important exit route for PE despite its many challenges 25 No. PE/VC backed IPO exit volume by bourse 2 15 14 3 11 39 1 11 18 1 5 26 4 2 6 11 7 11 7 27 118 16 2 4 12 48 7 21 28 29 21 211 212 Shenzhen Hong Kong Shanghai A NYSE/ NASDAQ Others Source: AVCJ and analysis 23
Overall, there is a huge overhang of Chinese PE and VC-backed enterprises waiting to come to market either by IPO or by M&A exit; the industry as a whole is moving into exit phase and the backlog of exits represents a real challenge; it is more than IPO markets can absorb, and trade and secondary sales by M&A will become more frequent; the quantum step-up in exit activity will be a key driver of future activity from this sector PE/VC deal volume vs. No. of exits No. 1 5 1 4 1 3 1 2 1 1 1 9 8 7 6 5 4 3 2 1 1 11 93 694 712 473 91 52 365 425 97 254 89 212 51 171 46 88 332 28 29 21 211 212 PE deals VC deals IPO exit M&A exit 7 98 Source: ThomsonReuters, ChinaVenture, AVCJ and analysis 24
China mainland outbound 25
Although deal volumes surprisingly showed a small decline, China Outbound deal values grew by 54% to reach a new record high of US$65.2 billion; we see many more deals in the pipeline and expect this growth trend to continue strongly with another record year in 213 No. China mainland outbound deals, from 28 to 212 US$ billion 25 2 65,2 7 6 15 41, 42,4 5 4 1 32,8 188 26 191 3 5 126 1,3 144 2 1 28 29 21 211 212 Announced Deal Volume Announce Deal Value Source: ThomsonReuters, ChinaVenture and analysis 26
We are seeing privately owned enterprises (POEs) taking on larger deal sizes; we think that private sector companies will be key drivers in the future growth of China Outbound M&A Strategic buyer deals, from 28 to 212 No. 25 US$ billion 45 2 34,5 33, 39,7 4 35 15 1 5 26,3 48 64 48 45 25,5 27 99 158 143 124 99 6,8 9,4 6,5 6,4 3,6 28 29 21 211 212 POE Announced Deal Volume SOE Announced Deal Volume POE Announced Deal Value SOE Announced Deal Value 3 25 2 15 1 5 Source: ThomsonReuters, ChinaVenture and analysis 27
Although the state sponsored push to secure energy and resources is evident from deal value statistics... US$ billion 4 35,7 China mainland outbound deals by industry sector By value of deals (US$ billion), 212 vs. 211 3 25 1,9 2 15 36,2 1 23,1 1,4 5 Energy and Power 1,7 1,3 Consumer related 8,5 4,6 4,1 5,4 1,2 1,1 1,1 1,6 Industrials Financial Services Raw materials Media and Entertainment 2,6,2 Others 212 SOE 212 POE 211 SOE 211 POE Source: ThomsonReuters, ChinaVenture and analysis 28
... The growing activity of private sector buyers in acquiring industrial technologies and consumer-linked businesses overseas is an important trend; many of these deals are aimed at bringing advanced western technologies, know-how, IP and brands back for use in the Chinese domestic market; we are also seeing some POEs using overseas M&A to go global in addition to concentrating on the domestic market No. 6 5 China mainland outbound deals by industry sector By number of deals, 212 vs. 211 4 37 3 2 1 33 13 19 33 6 1 34 13 22 16 5 28 19 17 32 4 1 7 5 2 3 4 3 2 2 14 Source: ThomsonReuters, ChinaVenture and analysis 212 SOE 212 POE 211 SOE 211 POE 29
Europe now challenges North America as the most important overseas destination for Chinese buyers; the importance of mature western markets reflects the search for advanced technologies and know-how ; Asian deals have declined sharply, primarily due to a fall in Japan transactions from 16 in 211 to just 3 in 212 Outbound M&A deal volume by region of destination 212 vs. 211 North America Europe Russia Asia 57 57 57 44 8 1 25 56 8 9 4 1 27 34 212 211 Source: ThomsonReuters and analysis South America Africa Oceania 3
PE is emerging as a player in Outbound deal activity; the TPGs and Bain Capitals of China will emerge to compete with their global peers; we are already seeing a step-up in Outbound M&A involving some of the pre-eminent Chinese PEs and the Outbound trend is happening much faster than many people predicted or even realise China mainland PE backed outbound deal volume by PE category No. 3 25 2 15 7 2 18 1 5 8 11 8 8 4 4 28 29 21 211 212 SWFs Other PEs Source: ThomsonReuters, ChinaVenture and analysis 31
Key messages 32
Key messages (1 of 2) Overall Overall 212 China M&A decreased 26% by volume and 9% by value, with only Outbound deals showing growth (in value terms); we expect M&A activity to rebound in all sectors in 213, with Outbound activity continuing to grow especially strongly China Outbound Although China Outbound deal volumes surprisingly showed a small decline, deal values grew by 54% to reach a new record high of US$65.2 billion comprising more than a third of overall M&A activity measured by value, by far the highest proportion ever; we see many more deals in the pipeline and expect this growth trend to continue strongly with another record year in 213 We are seeing privately owned enterprises (POEs) taking on larger deal sizes; we think that private sector companies will be key drivers in the future growth of China Outbound M&A The growing activity of private sector buyers in acquiring industrial technologies and consumer-linked businesses overseas is an important trend; many of these deals are aimed at bringing advanced western technologies, know-how, IP and brands back for use in the Chinese domestic market; we are also seeing some POEs using overseas M&A to go global in addition to concentrating on the domestic market 33
Key messages (2 of 2) Domestic and Foreign-Inbound Strategic Both Domestic and Foreign-Inbound Strategic buyer deal activity fell to their lowest levels in the last five years with declines greater than those seen after the global financial crisis We think activity will rebound in 213 as the direction of the Chinese economy becomes clearer, industry consolidation accelerates, domestic leadership changes take effect, and foreign economies start to emerge from their stressed states allowing MNCs to deploy cash reserves with greater confidence implementing their China market entry or growth strategies Private Equity In the PE sector there will be sharp consolidation across the industry, and the backlog of exits represents a real challenge for the sector PE has emerged as a key provider of capital to the liquidity starved private sector of the economy in China with real policy support - this demand for capital is driving strong market growth and activity; there are exceptionally strong tailwinds for the PE industry in China over the medium term We think new deal and exit activity will accelerate strongly from 2Q13 as pricing expectations adjust, 212 results become available, IPO markets re-open, and China s leadership transition takes effect; PE deal activity (new investments and exits by both IPO and M&A) will reach new record highs if not in 213 then in 214 34
Data compilation methodology: Key messages - disclaimer Statistics contained in this presentation and the press release may vary from those contained in previous press releases. There are three reasons for this: ThomsonReuters and ChinaVenture historical data is constantly updated as deals are confirmed or disclosed; PricewaterhouseCoopers has excluded certain transactions which are more in the nature of internal reorganisations than transfers of control; and exchange rate data has been adjusted. Acquisitions of private/public companies resulting in change of control Investments in private/public companies (involving at least 5% ownership) Mergers Buyouts/buyins (LBOs, MBOs, MBIs) Privatisations Tender offers Spinoffs Splitoff of a wholly-owned subsidiary when 1% sold via IPO Divestment of company, division or trading assets resulting in change of control at parent level Reverse takeovers Re-capitalisation Joint Venture buyouts Joint Ventures Receivership or bankruptcy sales/auctions Tracking stock Included Deals Excluded Deals Property/real estate for individual properties Rumoured transactions Options granted to acquire an additional stake when not 1% of the shares has been acquired Any purchase of brand rights Land acquisitions Equity placements in funds Stake purchases by mutual funds Open market share buyback/retirement of stock unless part of a privatisation Balance sheet restructuring or internal restructuring Investments in greenfield operations Going private transactions 35
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