Insights, Q3 2016

Insights, Q3 2016

allenovery.com/mainsights

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24

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Regional insights8 Western Europe9 AsiaPacific(IncludingGreaterChina)11 U.S. 11 CEEandCIS12 MiddleEastandNorthAfrica13 Sub-SaharanAfrica14 India15 Latin America

A global snapshot24 Top20globalinboundtargetmarkets

andoutboundacquirers26 Toptargetmarketsforthe

world’slargestacquiringcountries

Sector insights16 Privateequity16 Consumer 18 Energyandinfrastructure18 Financialservices19 Lifesciences20 Mining21 Telecoms,mediaandtechnology

6In focus6 Cyberbecomesabigdeal

4Executive summary4 Inaholdingpattern5 GlobalM&AinnumbersQ32016

Contents

M&A Insights | Q3 20162

© Allen & Overy LLP 2016


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In most regions and sectors the values of deals continued to shrink in the third quarter, although deal volumes have fared better. While some investors are ploughing on with significant transactions, others appear to be holding back while they try to make sense of current political and economic uncertainties.

In a holding pattern

Q3 KEY THEMES INCLUDE:

DEALVALUESDOWNFROM2015HIGH

Dealvalueshavefallenby24%intheyeartodatecomparedtolastyear’srecordbreakingroundofhugetransactions,althoughtheyremainrelativelysteadywhencomparedtothesameperiodin2014.Thenumberofdealsheldupbetter,indicatingthat wearenowseeingalargerspreadofsmallerdeals.Confidentinvestorscontinuetopressahead,aswehaveseenwiththeBayer/Monsantodeal(thebiggestcashonlytakeoverinhistory),SoftBank’sacquisitionofARMandDanone’stakeoverofWhiteWaveFoods.

ASTEADYQUARTERFORPRIVATEEQUITY ANDINFRASTRUCTURE

Theprivateequitysectorremainsactiveandpipelinesforthecomingquarterlookstrong,withfundsmakingaflightforscaleandquality,andtransactionvaluesincreasing,althoughdealvolumeshavedeclined.ThevalueoflifesciencesandTMT dealshave,asexpected,droppedfromtheirrecordlevelsofrecentyearsandBrexitishavingaparticularlystrongimpactonthefinancialservicessector.Othersectorshaveheldupbetter,includinginfrastructurewhereanincreasinglybroadrangeofinvestorsarechasingyieldinalow-interestrateenvironmenthelpedbyanabundanceofcheapfinance.

WITHDRAWNDEALSALSO ONTHERISE

Thenumberoftransactionsthathavefailedtocompletehasalsorisensharply,atotalofUSD687billionsofarin2016,largelyduetoincreasedscrutinybycompetitionregulatorsandthestricterrulesontaxinversionsannouncedbytheU.S.TreasuryDepartment.Abigproportionofthatfigureisattributableto twodeals–Pfizer/AllerganandUnitedTechnologies/Honeywell–butsettingthesedealsaside,thevalueofwithdrawndealshasalreadyoutstrippedthe2015totalandthevolumeofwithdrawndealshasreachedasix-yearhigh.

POLITICALANDECONOMICWORRIESMOUNTINQ3

AlthoughQ3istraditionallyaquietquarter,thedeclineintheoverallvalueoftransactionshasbeenparticularlymarkedthisyear.Itisclearthatinvestorsaretryingtocometotermswithsignificantpoliticalandeconomicworries–notleastthelong-termeffectofBrexit,theimpactofafractiousU.S.presidentialrace,on-goingpressureoncommoditypricesandcontinuedconcernaroundeconomicslow-downinChina.

ALLREGIONSSEEINGADECLINE INDEALACTIVITY

Theslowdownindealactivityisbeingfeltacrossallregions, withtheU.S.–forsolongtheengineroomofglobaldealmaking– seeinga32%declineintransactionvaluescomparedtothesameperiodlastyear,Chinaa26%fallandWesternEurope an18%contraction.Chineseoutboundinvestmentcontinuesapace,however,asinvestorscontinuetopursueanincreasinglydiverserangeofassetsinmarketsacrosstheworlddespitegrowingsensitivityinsomejurisdictionsovernationalsecurity. Intheyeartodate,outbounddealshavesoaredandarealreadyatUSD141bncomparedwithUSD110bnforallof2015.

INCREASEOFINBOUNDINVESTMENT TOTHEUKPOST-BREXIT

TheUKisnowthesecondmostattractiveglobalinbound targetmarketbehindtheU.S.,overtakingSwitzerlandinQ3. TheplungeinthevalueofsterlinghasmadeUKassetsincreasinglyattractivetointernationalinvestors,asevidenced bytheGBP691mtakeoverofPremierFarnellbyAvnet,Inc.aftertheU.S.companytoppedanofferfromSwissgroupDaetwyleratthelastminute.



Global M&A in numbers Q3 2016

Note:Thesefiguresrepresentthetotalnumberofdealsannouncedbetween1January2016and20September2016.

Deal volumes by region

Region %ofdeals byregion

U.S. 43%

Western Europe 20%

GreaterChina 19%

AsiaPacific(excl.China) 10%

Latin America 2%

MENA 2%

CEEandCIS 1%

Sub-SaharanAfrica 1%

Other 2%

Over 25%

Less than 10%

Between 10% and 25%

2%

2%

1%

1%

43%20%

19%

10%

Dataprovidedby

Top 6 sectors by value (USD) Global deal values (USD) Q1toQ3

240bnFinancialservices

232bnRealestate

214bnLifesciences

782bnEnergyandinfrastructure

236bnConsumer

508bnTMT

2012 2013 2014 2015 2016

2.26

tn

2.99

tn

2.32

tn

1.63

tn

1.64

tn


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Cyber becomes a big deal

It was probably not the most comfortable piece of news to come out just before the biggest ever social media M&A deal was unveiled in June – the giant USD26.5bn takeover of the professional social network,

LinkedIn, by Microsoft.

Butafewweeksearlier,itemergedthatahackerwasactiveonthedarkwebtryingtosellsome117millionemailaddressesandpasswordsstolenfromtheLinkedInsite.InSeptember,itwastheturnofYahoo!,intheprocessofbeingboughtbyVerizon, toannounceanevenbiggerhack–thistimeinvolvingthedataofsome500millionusers.

Thetwoannouncementsserveasyetanotherreminderofthespeedatwhichthecyberthreat isgrowing.Ifeventhemostsophisticatedtechcompanies–forwhomdataisliterallytheirmostvaluableasset–arestrugglingwithsuchthreats,whatchancedoothercompanieshave?

Butthenewsalsoshinesalightonanotheraspectofthecyberthreat–thefactthatitisbecomingavitallyimportantriskmanagementissueinthecontextofM&A.

A growing threat

Mostcompaniesarenowawareofhowfastthis riskisgrowing.Despitethisrealisation,thesheerscaleoftheproblemisstillhair-raising.

Symantec’s2016InternetSecurityThreatReportsuggeststhatoverhalfabillionpersonalinformationrecordswerestolenorlostin2015.Thisyearalso

sawanew“zero-day”vulnerability–onewherehackersexploitanotherwiseundiscoveredflaw insoftwarebeforeafixhasbeencarriedout–discoveredeveryday.Therewasalsoa55%increasein“spear-phishing”campaignstargetingemployees.“Ransomware”attacks,wheremalicioussoftwareblocksaccesstoacomputeruntilafeeispaid,wereupby35%.Wehavealsoseenanunendingstreamofhigh-profilecorporatesecuritybreachesbeingreported.

Allthismeansmorecompaniesarelearningthe painfulpriceofsufferingacyberbreachfirsthand–tarnishedreputation,lossofcustomerconfidence,theftofvaluablecorporateinformation,regulatoryactionandfines,legalactionbyemployees,customersandinvestorsandseverebusinessdisruption.AndmanycompaniesarealsolearningitsimportanceinthecontextofM&A.

Morecompaniesarelearningthepainfulpriceofsuffering acyberbreachfirsthand.

Due diligence is not an archaeological exercise

Understandingthecybervulnerabilitiesofatargetcompanyisnowanincreasinglyimportantaspect oftheduediligenceworkwearedoingforclientsandithasarealbearingonwhetherthedealgoesaheadandatwhatvalue.Whilepartofthatwork isaboutidentifyingperhapsundisclosedpastbreaches,thisisnotanarchaeologicalexercise.

Justasimportantisdiscoveringhowwellthetargetcompanyhasprepareditselftofacefuturethreats,whathiddenliabilitiesmightcometolightinthe faceofchangesindataprotectionregulationandhowcompatibletechnicaldefencemechanisms,policiesandproceduresmightbewhentwoITarchitecturesaremerged.

Cybersecurity is now an increasingly big concern in M&A, sometimes a deciding factor in whether a deal actually goes ahead and on what terms, and a crucial concern in the vital integration phase that follows completion. More companies are aware of the risk. Not all are managing it well.



Sufferingacyberattackmaynotbeadealbreaker.Whatthebuyerwillwanthelpinascertainingis:whatisthenatureandthelikelyscaleoftheliability?Whatwillthecostbe?Whatarethechancesoffurthersanctionsorinvestigations?Andwhathasbeenandshouldhavebeendonebythetargetcompanytostrengthenitsdefencesandriskmanagementprocedures?

Sufferingacyberattackmaynotbeadealbreaker.

Allthesequestionsarebecomingmorefraught inthefaceofchangingregulation.ThenewEUGeneralDataProtectionRegulation,duetocomeintoforceintwoyearstime,includespunitivefinesforbreachesofpersonaldatasetatbetween 2%and4%ofagroup’sannualglobalturnover (andpostcompletion,thatwouldlikelybethe newlyenlargedgroup’srevenue).

Makingtheduediligenceprocessreallyeffectiverequiresaholisticapproach,bringingtogethermultipleworkstreamsincluding,crucially,operationalexpertise.Thebuyer’sITandsecurityteam,oftenworkingwithexternaladvisers,needtobeabletocheckthatthetargethaseffectivetechnology, suchasencryption,andtherightpoliciesandproceduresinplace.

Well-runcompanieswithanambitiontogetboughtoutatalaterstageneedtothinkstrategicallytomakesuretheywillpassmusterwhenputunder thespotlight.

Mid-deal security and the integration challenge

Therearemanypointsofvulnerabilitythroughoutthedealprocessandbeyond.Withcrowdsofadvisersworkingonboththebuyandsellside,includinginvestmentbanks,lawyers,techadvisersand

PRandcommunicationsteams,itisimportant tohaverobustsecurityproceduresinplacewhilethedealisnegotiated,withsensitivematerialappropriatelysafeguarded.

Perhapsthebiggestchallengecomesafteradealhascrossedthefinishingline.BringingtwoormoredifferentITinfrastructurestogetherandcreatingacommonsecurityculturepresentsanopportunity forbusinessestoaddressfundamentalissues.

Buthighlyacquisitivecompaniesaren’talwaysgoodatthistaskanditisnotuncommonforthemtoendupwithapatchworkofsystemsthatleavethemveryvulnerable.Alltheevidenceshowsthatexternalhackersareincreasinglytargetingthisintegrationphase,knowingtheremaywellbeweaknessestoexploit.Andtheremaybebiginternalthreatstoo, forexamplefromdisgruntledemployeeswhofeelthedealisnotintheirinterests.

There’sbeenagrowingtrendinthelastfiveyears formorecomplicatedprocedurestobeputinplacetosafeguardthispartofthetransaction.Transitionalserviceagreementsnowtendtohaveaheavyfocusoncyberissues,andthisislikelytoincrease.

Cybersecurity M&A – consolidation likely

Investmentincybersecuritybycompanies,governmentsandotherpublicbodiescontinues tomultiply.Securitycompanies,oftensmallboutiqueoperations,haveattractedbillionsofdollarsofventurecapitalinvestmentinrecentyears,buttheirprogresstowardspossibleIPOorre-investmenthasslowedinthelastyearorso.

Asaresultthisremainsahighlyfragmentedsector,ripeforconsolidation.Forestablishedplayersthisistendingtotaketwoforms–consolidationamongstpeers,aswesawintherecentAVG/Avastcombination,orbigplayerstakingoversmalleroperators(Symantec/BlueCoat).

PEfundsarealsoactiveespeciallywheretheyseeanopportunitytoexploitstrongcashflowsfromthecorporatecustomersofestablishedcybercompanies.VistaEquityPartners,forinstance,recentlyboughtPingIdentity,acloud-basedidentitymanagementsoftwaregroup.

Thisspikeinactivitywillcontinuewithplentyoftargets,particularlyintheU.S.,UKandIsrael, likelytocomeintoplay.


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Regional insightsWhile Q3 saw a pretty steep decline in deal values in nearly all regions, we still saw a raft of significant transactions across the board with Chinese outbound investors remaining by far the most active of all.

WESTERN EUROPE Wait and see

GiventhepotentialdisruptioncausedbytheUK’svotetoleavetheEuropeanUnion,it’sperhapssurprisingthatM&Aactivityacrosstheregion,andintheUK inparticular,didnotsuffergreaterdeclinesinQ3.

Overalldealvalueshavefallenquitesharplyand, incontrasttothelastfewyears,therewasaverysignificantslowdowninM&Aactivityduringthesummer.However,thefeedbackwehavereceivedfromclientsindicatesthatinvestorsarenotabandoningthemarketbutareinsteadassessingthelikelylonger-termimpactofBrexit.IndeedactivitylevelsreboundedquicklyinthefirstfewweeksofSeptember.

AcrossEurope,bothinboundandoutbound,strategicdealsarestillgettingdoneasshownbyBayer’sdecisiontocompleteitsUSD66bntakeoverofMonsanto,thelargestcash-onlyofferonrecordandDanone’sUSD12.4bntakeoveroftheU.S.organicandnaturalfoodsgroup,WhiteWave,thebiggest dealbytheFrenchfoodgiantin10years.

Investorsarenotabandoningthemarketbutareinsteadassessingthelikelylonger-termimpactofBrexit.

InbounddealsintotheUKhavebenefitedfrom theplungeinthevalueofsterlingfollowingthereferendumvoteandtheUKisnowthesecondmostattractiveglobalinboundmarket.Avnet,Inc oftheU.S.,forexample,outbidtheSwissgroupDaetwyler,totakecontroloftechgroupPremier

Farnellatthelastminute,and,atGBP691m, paidconsiderablylessintothebargainthanks tothemuchweakerpound.

OutsidetheUK,otherEuropeanmarketsremainedsurprisinglyactiveanddealpipelinesarestillstrong.

TheNetherlandsforinstancewasbusyoverthesummer,withPEfundsremainingonthefront foot.OnesignificantdealwasPAIPartners’acquisitionofthehotelsandresortsbusiness,Roompot,fromGildeBuyOutPartners.

TheBayertransactionaside,theGermanmarketisalsofulloflifewithsomeobserverspredicting2016couldstillbearecordyearfortransactions.Dealmakersappeartoremaininconfidentmood, arewellfundedandconvincedthatM&Aisstillthebestwaytoachievegrowth.ChineseinvestmentinGermanycontinuestogrowexponentially,with27dealsworthUSD10.6bnalreadyrackedupbytheendofAugust.

GermanoutboundinvestorshavebeenparticularlybusyandthereisalargepipelineofdealsbuildingwithsignsthatdealmakerstargetingtheU.S.wanttoorganisefinancingbeforetheU.S.presidentialraceendsortheFederalReserveraisesinterestrates.StandoutdealsincludedVonovia’s USD3.1bnbidforAustrianrealestategroup,Conwert,Henkel’sUSD3.6bnacquisitionof SunProductsCorp,FreseniusbuyingSpanishhospitalsgroup,Quironsalud,forUSD6.5bnandVW’spurchaseofaUSD256mstakeinU.S.truckmaker,Navistar.

Inboundwasonlyslightlyquieteroverall, withChinesebuyerscontinuingtheirinvestmentspree.ThebiggestChineseinvestmentinGermanyever,Midea’sEUR4.5bnbidforrobotmakerKuka,hasnowreceivedforeigninvestmentcontrolclearance.BigPEfundswerequieteroverthesummer,butsmallerfundsremainedhighlyactive.



Politicaldeadlockhasledto abottleneckindealsintheSpanishregulatedsector.

InSpain,therealestatemarkethasbeguntosparkbackintolifeforthefirsttimesincethefinancialcrisis,and,withthebankingsystemstronger, itsrecoveryshouldbeonamorestablefooting.Evidenceofreturningconfidencecamewiththecreationofthecountry’slargestpropertygroup,followingthemergerofMerlinandMetrovacesa toformanentitywithEUR5bnofcombinedassets.

PoliticaldeadlockhasledtoabottleneckindealsintheSpanishregulatedsector,althoughsomeenergyandinfrastructuretransactionslooklikelytogoaheadintheautumn.ThereisalsolittlepublicM&Aactivity,although,withanumberofPEfundslookingtodisposeofportfolioassets,thisshouldleadtobothtradesalesandIPOsinthenearfuture.

Italy’smobilephonemarketisbeingreshapedfollowingtheEuropeanCommission’sdecisiontocleartheEUR20bnmergerofVimpelCom’sWindsubsidiaryandHutchison’s3,thelargestmerger intheItalianmarketsince2007.

MeanwhiletheENAVIPOinJulywasthefirstlistingofanairtrafficcontrollerinEuropeandthefirstdirectprivatisationof2016,ayearinwhichthegovernmentaimstoraiseEUR8bnfromsell-offs.FinancialserviceslookssettobebusierinthecomingmonthsasItalianbanksseektodisposeofnon-performing loanportfolios,anareawhereweareseeinggrowinginterestfromPEfunds.

ASIA PACIFIC (INCLUDING GREATER CHINA) Outbound dominates

Acontinuingstreamofincreasinglydiverseoutbounddeals–particularlyfromChina,butalsoJapan–haskeptthetideofM&Aactivityatrelativelyhighlevels,despiteasharpfallintheoverallvalueofdealsintheregionintheyeartodate.

Dealvolumeshaveheldtheirown,withoutboundactivitycontinuingatarapidpace,eventhoughinboundanddomesticdealswithinChinahaveshownclearsignsofsofteninginrecentmonths.

ThatslowdownreflectsinvestorworriesaboutslowergrowthinChina,thebubblebuildingupinChina’soverheatedpropertymarket,moredistantfearsabouttheoutcomeoftheU.S.presidentialelection,alikelyincreaseinU.S.interestrates,and,toalesserextent,Brexit.Noneofthesefearsseemtobeaffectingoutboundinvestorsunduly,however.

OneofthelargesttransactionsofthequarterwasSoftBank’sGBP24.3bnacquisitionofUK’sARM, aboldmovebytheJapanesetechnologygroup tobuildacommandingpositionintheglobalsoftwaresector.

Dealvolumeshaveheld theirown,withoutboundactivitycontinuingata rapidpace,eventhoughinboundanddomestic dealswithinChinahave shownsignsofsoftening.

ButtheincreasingoutboundactivitybyChineseinvestors,bothstate-ownedandprivate,acrossadiverserangeofsectorscontinuestobeastandoutfeatureoftheglobalM&Amarketthisyear.

Q3sawagroupofChineseinvestors,ledbyGiant,payUSD4.4bntotakecontroloftheIsraelionlinegaminggroup,Playtika.Thelifesciencessectorisalsoahotbedofactivity,whereFosunPharma’sUSD1.3bnbidforGlandPharmainIndiaisjustonemanifestationofgrowingactivityinthisareaaswellasanexampleofanexpectedbuildupofM&AactivitybetweenChinaandIndia.

InAustralia,wesawChinaResourcesandMacquarieagreetobuyupto74%ofthecancerandcardiacservicesgroup,GenesisCare. ThiscontinuesatrendofChineseinvestmentinAustralia’slifesciencessectorwhichhasseen astringofdealsinthelastyear,includingLuyeMedical’sacquisitionofprivatehospitalsgroupHealtheCare,andHongKong-basedBiostime’sacquisitionofSwisseVitamins.

Chineseoutboundinvestmenthasitscomplicationsand,increasingly,nationalinterestandsecurityissuesarehighamongthem.ThenewUKgovernmenthasraisedsecurityconcernsoverChineseinvolvement


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intheUKnuclearindustry.InAustralia,ChinesebidsforKidman&Co.,thegiantlandholdingandcattlefarmconcern,andAusgrid,theNewSouthWaleselectricitygrid,havebothbeenblocked.

U.S.PEfund,Carlyle,hasappointedBrianWilson,chairmanofAustralia’sForeignInvestmentReviewBoard,asanadvisertoitsAsiabuyoutteam. Themovehighlightstheimportanceofunderstandingthepoliticaldecision-makingprocesssittingbehindAustralia’sforeigninvestmentregime.NotwithstandingtheKidmanandAusgriddecisions,theoverwhelmingmajorityofforeigninvestmentapplicationscontinuetobeapproved.

Chineseinvestorsarebecomingmuchmoreadeptatplanningandexecutingoutbounddealsandcompetitionbetweenthemforsought-afterassets isnowmorecommon.AuctionprocesseswilloftenattractseveralChinesebiddersamongtheroster ofpotentialbuyers.

Chineseoutboundinvestmenthasitscomplicationsand,increasingly,nationalinterestandsecurityissuesarehighamongthem.

ChinaisnowthelargestforeigninvestorintotheASEANregionandQ3sawdealsinIndonesia,Singapore,CambodiaandMalaysiaaspartofthegovernment’sprogrammeofsoftpowerdiplomacytosupportitsinterestsintheSouthChinaSea.

Recenthigh-profileinvestmentsincludethoseby DidiChuxingintoGrabandAliBaba’sinvestmentintoLazada,theSingaporebasedregionalonline

shoppingplatform.However,China’sslowdownandreportedmovestocontroltheoutflowofRMBisexpectedtoimpactdealsintheASEANregioninQ4.

InSoutheastAsia,techcompanieshavebeendoinglargefund-raisingsthisyear.InAugust,Go-Jek, theIndonesianmobileride-hailinganddeliveryplatform,raisedUSD550mfrominvestorswhichincludeKKR,WarburgPincus,FarallonCapital andCapitalGroupPrivateMarkets.Itscompetitor, Grab,immediatelyfollowedsuitwithaUSD750mfundraisinginSeptember.

ThisalltookplaceunderthebackdropofUbersellingitsChinaoperationstoDidiChuxingandpotentiallyfocusingmoreofitsresourcesonSoutheastAsia. Italsosignalsgrowingconfidenceintheconsumersectorandrelatedinfrastructure,notablywarehousing,distributionandlogisticsthroughouttheregion.

ThisisexpectedtobearecordyearintermsoftotalvalueofM&AtransactionsinVietnam,attributedtotheaggressivenessofforeigninvestorsfromThailand,SingaporeandJapan,withrealestate,retailandconsumergoods,bankingandfinance allactivesectors.

Lookingahead,weexpecttoseestronggrowth inM&AactivitiesinVietnaminthenearfuture,especiallyinState-OwnedEnterprises(SOE). Agrowingbudgetdeficit,plungingstaterevenueduetolowoilprices,poorperformanceintheagriculturesectorandcapitalneedsforinfrastructurehavepromptedthegovernmenttoacceleratethesaleofSOEshareholdings.Targetsectorsattractinginterestfromforeigninvestorsincludethedairy,brewing,technologyandinsuranceindustries.

InthePhilippines,outbounddealflowstilllooksstrong,withthelikesofEmperador,Aboitiz,URC,Ayala,JollibeeandICTSI,thelatterhavingjustraisedsomeUSD300mtodeveloptheVictoriaInternationalContainerTerminalinMelbourne,Australia.

China is now the largest foreign investor into the ASEAN region and Q3 saw deals in Indonesia, Singapore, Cambodia and Malaysia.”



Inbounddealflowisstillconsistentwhencomparedtopreviousquarters.InthelargestforeignequityinvestmentintothePhilippinesfinancialservicessector,theBankofTokyo-MitsubishiUFJacquiredapproximately20%ofSecurityBank,thePhilippines’fifth-largestlenderbymarketvalue.TotalisrestructuringitsPhilippinesbusinessandrelateddownstreamfuelsalesjointventurewithFiloil, whilethepowersectoralsoremainsactive.

Weexpecttheinfrastructuresectorwillpickup nowthattheDutertegovernmenthasmadeitacentrepieceofitseconomicpolicyandannouncednewdeals.ButitremainstobeseenifPresidentDuterte’scontroversialrhetoricgetstoneddown orhasanegativeimpactonFDI.

U.S. Mixed messages

WhiletheU.S.marketisstillshowingsomesigns ofresilience,M&Aactivitydiddeclineslightlyafter astrongfirsthalf.Asolidsecondquarterdeliveredreasonsforoptimism,buttheresultsofthethirdquarterhavebeenmarkedlymixed,and2016overallislikelytobewellbelowtheleveloftherecordyearof2015.

TheU.S.M&Amarketisfacingclearheadwinds.LongertermfactorssuchasloweconomicgrowthhavebeencompoundedbymorerecentglobaluncertaintyfollowingtheBrexitvoteintheUK,continuingconcernsaboutaneconomicslowdowninChinaandacontentiouspresidentialelectionintheU.S.

Inaddition,someofthedriversofdealvolumeinpastperiods,suchastaxinversions,are,fornow, nolongerafactor,andthevolumeoflargepubliccompanymergershastailedoff.

Amonghighprofilepublicdeals,therehavebeen asmanyfailuresassuccesses.Forinstance,justasBayersucceededinitspursuitofMonsantowithalandmarkcross-borderstrategicacquisitionvaluedatUSD66bn,Mondelezendeditsoverture forHersheyaftermakingafirstofferinJune.

TheabandonedMondelez/Hersheytie-upisafurtherexampleofarecenttrend:thegrowingnumberofabandoned,withdrawnorterminateddeals.Infact,2016willlikelywindupbeingarecord-breakingyearforbrokendeals,withthevalueofwithdrawnU.S.dealsstandingatUSD533bnfortheyeartodate.

OnefactorbehindthistrendistheincreasinglyaggressivestandbeingtakenbyU.S.antitrust

regulators.TheU.S.JusticeDepartment,forexample,filedsuittoblocktwolargedealsintheinsurancesector–Anthem’sUSD54bnacquisitionofCigna,andAetna’sUSD37bnacquisitionofHumana,althoughthepartiesarevigorouslydefendingbothdeals.

PoliticaluncertaintiesarelikelytobeacontinuingdragonM&Agrowthintheshortandmediumterm.

Nevertheless,strategicconsiderationsarecontinuingtodriveM&Aelsewhere,despitecurrentuncertainty.Intheretailandconsumerproductssectors, forexample,Unilever’sacquisitionofDollarShaveClubandWalmart’sacquisitionofJet.comillustratehowtraditionalbrick-and-mortarenterprisesareseekingtoadjusttheirbusinessmodelsinthefaceofdisruptionsinthee-commercesector.

M&AintheU.S.bankingsectorisalsoincreasing.Analysisofthesetransactionssuggeststhatcostpressures,spurredbyincreasingbankregulation, ispushingbankstowardsmoreM&Aactivity, withsomecommentatorspredictingthatdealvaluesinthesectorwillreachlevelsnotseensince1999.

WhilepoliticaluncertaintiesarelikelytobeacontinuingdragonM&Agrowthintheshortandmediumterm,investorsatleastseemtoberelaxedaboutinterestratepolicy.TheconsensusisthatU.S.ratesareunlikelytoriseuntiltheendoftheyear, andthere’sagenerallyacceptedviewthattheFederalReservewilltakeacautiousapproachtoraisingratesthereafter.

Overall,despitesomeconcernsaboutthepresentenvironmentfordeals,thereisagoodchancethepipelineoftransactionswillcontinue,particularlyascompanieslookforsolutionstoacontinuingquandaryfacingtheminthecurrentlow-growthenvironmentprevailingintheU.S.andglobally–namely,howtoputexcesscashtouseandgrowfasterthanthemarket.

CEE AND CIS Poland shows the way

Whilethevalueandvolumeofannounceddealsacrosstheregionremaineddepressedinthethirdquarter,therearesignsofasignificantpickupinactivityinsomemarkets,particularlyinPoland.


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Araftofgood-sizeddealsacrossseveralsectorsincludinge-commerce,retail,TMT,financialservicesandhealthcarearecurrentlyinthepipelineinPolandwhich,ifsuccessfullycompletedinthecomingmonths,couldhaveacombinedvalueofmorethanEUR5bn.

PendingdealsincludeNaspers’plantosellAllegro,thehighlypopularonlineauctionsite,withPEfundsreportedtobepotentialbiddersforthebusiness.

ThesaleofPlay–Poland’sfourthlargestmobilephoneoperator–couldnowbebackontheagendahavingbeenpostponedbyitsownersearlierthisyear,whileMidEuropaisexploringthedisposaloftheZabkachainof2,600conveniencestores.

WiththeimpactofU.S.andEUsanctionscontinuingtobefelt,Russia’ssearchforalternativesourcesofforeigninvestmentcontinuesbothinAsiaandtheMiddleEast,asearchthathasalreadyresultedinsomesignificantenergydealsin2016.

VladimirPutinopenedSeptember’sEasternEconomicForuminVladivostokwithanappealforgreaterco-operationbetweenRussiaanditsAsianneighboursandaninvitationtoinvestorstohelpinthedevelopmentofRussia’sresource-richFarEastregion.Some60significantinvestmentagreementsweresignedattheevent,mainlyinvolvinginvestorsfromChina,KoreaandJapan.

WiththeimpactofU.S.and EUsanctionscontinuingto befelt,Russia’ssearchforalternativesourcesofforeigninvestment continues.

Meanwhilethegovernment’splanstoprivatisepartofitsstakeinoilgiantRosneftanditssmallerrivalBashneftareonceagainbeingtalkedabout–althoughtheyareprovingtobebothcomplexandpoliticallycontroversial.Thetimingofthesesales,andthelikelyinvestorsinvolved,remainunclear, buttherearesuggestionsthattheprivatisationofthestakeinBashneftmaynowbethefirsttotakeplace.

InSouthEasternEurope,overallactivityremainsmixedbutbroadlypositive.Non-performingloantransactionsaregatheringsteamacrosstheregion,andthereisspeculationaboutwhetherleadingPEfundswillholdontoassetsacquiredinrecentyearsintheshorttermormoveaheadwithdisposals.

Privatisationsremainatalkingpointintheregion, butCroatianelectionsinevitablymeanahiatusonprojectsthereasthecountrytakesstockandforms

anewgovernment.Elsewhere,policymakersarere-evaluatingsell-offplans,insomecasestryingtomovethingsforward,andinothers,manylong-talkedaboutprojectsarequietlybeingshelved.

RumoursaboundthattheSerbiangovernment istakinganotherlookatprivatisingTelekomSrbija.Somelong-talked-aboutprojects–suchasthesaleofupto25%ofthestate-ownedpharmaceuticalsgroupGalenikamightbegainingsome(albeitlimited)traction,butotherwiseprojectsareslidinginto2017.

InHungary,thegovernmentandtheEBRDclosedtheirinvestmentintoErsteBankHungaryinAugust,withthemarketotherwisedominatedbymedium-andsmaller-sizedtechnology,servicesandmediadeals.

IntheCzechRepublic,fundsarefacingtoughcompetitionfromCzech-ownedinvestmentgroupswhotendtobedominatinganyauctionprocesses.

AsthegiantABInBev/SABMillermergernearsfinalisation,themarketisstillwaitingtohearifSABMillerbeerbrandsinPoland,theCzechRepublic,Slovakia,RomaniaandHungarywillbesoldasoneblockortwo.Thedisposals,whichincludetheCzechmarketleader,PilsnerUrquell,wereproposedtowinapprovalfromtheEuropeanCommissionforthemerger.

AraftofPEfunds(KKR,BCPartners,MidEuropaPartners,CVCandCzechinvestmentvehicleR2Ghaveallbeenmentioned)andinternationalbrewersarecirclingthesevaluablebrands–saidtobeworthmorethanEUR5bn.Amongstthem,JapanesebrewerAsahiissaidtobeintheframe,havingalreadyboughtthePeroni,GrolschandMeantimebrands.OtherAsianbiddersmentionedincludeKirinandChinaResourcesEnterprise.

MIDDLE EAST AND NORTH AFRICA Signs of promise

Traditionallyaquietperiodintheregion,thethirdquarterbroughtaconsiderabledipinthevolumeofdeals,bothagainstthepreviousquarterandthesamequarterlastyear.Overallvalueswereup,withthehighestintheUAEasaresultofseverallargedeals.

IntheUAE,FirstGulfBankandNationalBankof AbuDhabi,bothofwhicharelistedontheAbuDhabistockexchange,announcedtheirproposedmergerinJuly.Thenewlycombinedbank,whichwillretainthenameNationalBankofAbuDhabi,willbethelargestbankintheMENAregion,withUSD175bn ofassetsandacombinedmarketcapitalisationof



USD29.1bn.Itwilloperateaninternationalnetworkofbranchesandofficesthatspans19countries. ThemergeristhefirsttobeimplementedunderthenewUAECommercialCompaniesLawandisexpectedtobecomeeffectiveinthefirstquarterof2017.

InAugust,Dubai-basedadvertisingcompany Media.net,anadvertisingtechnologystart-up, wasacquiredforapproximatelyUSD900mbyaconsortiumofChineseinvestorsledbyZhangZhiyong,thechairmanoftelecomfirmBeijingMitenoCommunicationTechnology.Thedealgives Media.netaccesstotheChineseonlineadvertisingmarket,whichiscurrentlythesecondlargestintheworld.

Notwithstandingthecontinuedvolatilityintheglobalmarkets,theregionisseeingactivityinconsumer-ledsectors,aswellasintechnology,financeandhealthcare.Thereisalsomovementintheenergysector,asgovernmentsfocusonrenewableenergysources,and,evenwiththepersistenceofloweroilprices,therehasbeensomeoilandgasdealactivitythisquarter.

Thetrendofconsolidation thathasbeenseenacross theGCCregioncontinues.

ThetrendofconsolidationthathasbeenseenacrosstheGCCregioncontinues,asgovernmentslookforsynergiesandoverlappingobjectivesin anattempttocutcosts.Longtermdevelopmentplansaimtoreducedependenceonoilrevenues, andpolicymakersareincreasinglyrecognisingtheimportanceofboostingtheprivatesectorandthepositionofSMEs.Thisstrategyofdiversification,alongwithafocusonremovingthebarrierstoprivatesectordevelopment,suchasprovidingaccess tofinanceandclarityontheregulatoryframework, arelikelytoincreaseopportunitiesforM&A.

SUB-SAHARAN AFRICA Looking out

Withaneconomicslowdownaffectingkeyeconomiesacrosstheregionandwithinboundinvestmentslackeningoff,thetransactionsmarkethasbeendominatedbyoutboundinvestment, mostnotablybySouthAfricaninvestorslookingtobuildtheirbusinessesinmorestablejurisdictions.

Thetransactionsmarkethasbeendominatedbyoutboundinvestment,mostnotablybySouthAfricaninvestors.

SouthAfricanretailgiant,Steinhoff,continued itsspreeofinternationaltransactionsduringQ3, notonlycompletingtheGBP597macquisitionofbargainretailerPoundland,butalsolookingtosnapupthelargestbeddingmanufacturerintheU.S.,MattressFirmHoldings,inadealworthUSD3.8bn,includingdebt.

ThetwodealsfollowitsthwartedattempttotakecontrolofHomeRetailGroupintheUK,ownerofArgos,whereitlostouttoSainsbury’sinaGBP1.4bnbidbattle.

ThetrendforincreasedlevelsofoutboundinvestmentbySouthAfricancompanieshasbeenbuildingprogressivelyoverthelast18monthsorso, withretailandrealestateparticularlyhotsectors forthisactivity.Elsewhere,theinternetandmediaconglomerate,Naspers,continuesitssteadyacquisitionofassetsacrosstheworld,notablyin theonlinepaymentspace.

Levelsofinboundinvestmenthavedroppednoticeablyacrossthecontinent.Nigeria–Africa’slargesteconomy–wentintorecessioninthesecondquarteroftheyear,withGDPshrinkingby2.06%.It’sclearthatforeigninvestorsaretakingamorecautiousattitudetothismarketasaresult.ButSouthAfricahasfelttheeffectsevenmoresharply,withforeigninvestmentfallingbysome74%,comparedwitha31%declinefortheregionasawhole.1

Somemarkets–includingEthiopiaandSierraLeone– continuetoseeactivity,andit’snotablethattheUSD305macquisitionofSouthAfricanplasticsmanufacturer,Safripol,byKAPIndustrial(whoselargestshareholderisSteinhoff),alsoattractedinterestfromforeigninvestors.

Keysectorsarealsoshowingsignsoflife,includingfinancialservices.Q3sawRabobank,FMOandNorfundcreateaUSD660minvestmentcompanyspecificallytargetingopportunitiesintheunder-developedbankingsectorinEasternandSouthernAfrica.Telecomsremainsabusysectortoo,bothintermsofinfrastructureandoperatingnetworksandweexpectactivitytocontinuestronglyinthisarea.

Theeconomicandpoliticaloutlookfortheregionlookslikelytoremainrelativelychoppyintheshortterm.Withoilpricescontinuingattheircurrentlow

1_KPMG, What influences foreign direct investment into Africa, 2016


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level,thiswillcontinuetoputpressureonNigeria,whichdependsonoilforthemajorityofitsincome.SouthAfricaiscontinuingtoexperiencesignificantpoliticalturmoilamidanumberofcorruptionscandals,andalthoughtheRandhasstrengthenedalittle,thiscouldbeshortlived.

Moroccocontinuestobeahubforinvestment. OnestandoutdealwastheUSD100minvestmentbyAfricanDevelopmentPartners(ADP)inAtlanticBusinessInternational.TheinvestmentwillallowADPtofurtherdevelopitsnetworkthroughout WestAfricaandacrossSub-SaharanAfrica,ultimatelycontrolledandmanagedbymajorityshareholderBanqueCentralePopulaire.

INDIA Growth and reform

Propelledbyanumberofsignificantdomesticandinbounddeals,thevalueofIndianM&Atransactionsgrewstronglyinthethirdquarterand,withthegovernment’sreformprogrammeaccelerating, weexpectthistrendtocontinuestrongly.

ThestandoutdealofthequarterwasthecomplexrestructuringofinterestscontrolledbytheBirlafamily,wherebyGrasimIndustriesandAdityaBirlaNuvowouldmergetocreateaconglomeratewithannualrevenuesofsomeUSD9bn.Aspartofthedeal,AdityaBirlaFinancialServicesissettobespunoffandlistedandthedealislikelytobecompletedin2017.

Anothersignificantdomesticdealsawtherelativelysmallcementmaker,Nirma,launchaUSD1.4bnbidforLafargeIndia,oneofastringofdisposalsLafargewasforcedtomaketowinantitrustclearanceforitsownmergerwithfellowcementgiantHolcim.

ForeigninvestmentcontinuestoriseasIndia’seconomicrecoveryprogresses.

ForeigninvestmentcontinuestoriseasIndia’seconomicrecoveryprogresses,helpedbyrecentimportantmovesbyNarendraModi’sgovernmenttorelaxFDIcontrolsinkeysectorsincludingdefence,civilaerospaceandpharmaceuticals,wherethelimithasbeenliftedto74%forbrownfieldpharmainvestments.

ThereissomeconcernthattheunexpectedleavevoteintheBrexitreferendumcoulddampeninvestmentbyUKandotherEUinvestors,butIndiaisnowenjoyingforeigninvestmentfromanincreasinglydiverserangeofsources,themostimportantofwhichisChina.Q3sawthebiggest-everChineseinvestmentinIndiawithFosunPharmaagreeingtopayUSD1.26bnforan86%stakeinGlandPharma.

Furtherimportantreformsareunderway,notleasttheintroductionofanewGeneralSalesTaxtoreplaceamyriadofregionalandnationallevies.ThemovehasnowbeenapprovedbyIndia’sUpperHousehavingbeenstalledthereformonths.

NewguidelinesonthesaleofstressedbankassetshavealsobeenintroducedwhichshouldhavetheeffectofspeedingupsalesprocessesandtheoverallurgentworkofriddingIndianbanksoftheconsiderablebaddebtstheyhaveontheirbooks.

Therewassomeconcernattheresignationofthesuccessfulbutsometimescontroversialgovernor oftheReserveBankofIndia,RaghuramRajan, afterjustonethree-yeartermofoffice.Butmostinvestorsseemhappythathehasbeenreplacedbythedeputygovernorinchargeofmonetarypolicy,UrjitPatel.Theexpectationisthatthiswillmeancontinuityratherthanupheavalinpolicyterms.

OverallweremainoptimisticthatM&Aactivitywillcontinuetogrowthisyearandnextwithagoodmix

The economic and political outlook for the region looks likely to remain relatively choppy in the short term.”



ofsectorscontinuingtobeactive.ItwouldalsonotbesurprisingtoseeChineseactivityinIndiaincreasestillfurtherinthemonthsahead.

LATIN AMERICA Time for a rebound?

Afterableak18months,withmuchoftheregionovershadowedbyeconomicandpoliticalturmoil,therearenowsignsthatconfidenceisreturning tothemarketwitheverylikelihoodthatM&Atransactionswillreboundduringtheremainder of2016andespeciallyintonextyear.

Muchofthatisdowntopolitics.ThepainfulimpeachmentofBrazil’sformerpresident DilmaRousseffisnowcomplete.InArgentina, theMacriadministrationisgraduallyre-establishingthecountry’scredentialsasasafeplacetoinvestandPedroPabloKuczynski’snarrowpresidentialelectionvictoryinPeruhasalsoreassuredinvestorsthankstohispromisetocontinuefavouringforeigninvestmentintothecountry.

ChileandColombiameanwhilecontinuetobenefitfromgreatereconomicstabilityandrelatively stronggrowthforecasts,whileMexico,webelieve, willincreasinglybenefitfromrecenteconomicreforms,attractinginvestorsfromboththeU.S. andEurope,particularlySpain.

AgainstthatbackdropwebelieveM&Aactivity couldsoonreturntolevelsnotseensince2012,helpedbythefactthatbuyerandsellerpriceexpectationsarealsonowmuchmorecloselyaligned.Forinstance,Statoil,theNorwegianoilgiant,hasexploitedlowervaluationstobuyPetrobras’s66%stakeinanoffshoredevelopment intheSantosBasin,adealworthUSD2.5bn.

It’searlydays,ofcourse.Butsomeofthestatisticsmakeencouragingreading,notleastfindingsthatinvestmentinArgentinagrewby436%betweenJanuaryandAugust–admittedlyfromaverylowbase.

ThesurgeofinvestmentinArgentinashouldbe evengreaterin2017,ifthegovernmentholdsitscurrentcourse.PetrobrashasagreedtosellassetsinArgentinatoPampaEnergia,andCitiispressingaheadwithplanstosellitsretailbankingandcreditcardbusinessesinBrazil,ColombiaandArgentina,withSantanderrumouredtobeafrontrunner inArgentina.

Brazil’sinfrastructureandpowersectorswillseeasignificantnumberofdeals.Anestimated25GWofpowergenerationand24,000kmofpowertransmissionassetsareupfordisposalcurrently,eitherbyprivatisationortradesaleorbusinesscombination.

Chineseinvestorsareincreasinglyactiveinthemarket.China’sStateGrid,forinstance,isrumouredtobeconsideringafulltakeoverofSaoPaolopowerdistributor,CPFLEnergia,havingspentsomeUSD1.8bnforastakeinthecompanyinJuly.China’sThreeGorgeshasalsoinvestedintwohydro-electricprojectsinBrazil.

Manyoftheseenergydisposals(andothersintheinfrastructuresector)havebeendrivenbyBrazil’slong-running“CarWash”corruptionscandal, whichisforcingimplicatedcompaniestomakedisposalsathomeandelsewhereintheregion toimprovetheirliquidity.

CanadianinfrastructurefundBrookfieldisactiveacrosstheregionandhasagreedtobuya57%stakein aPeruviantollroadprojectcalledRutasdeLimafromOdebrecht.TheBraziliangroupismakingsignificantassetdisposalshavingbeencaughtup intheCarWashscandal.

Separately,andaspartofabroadexpansionprogrammeinLatinAmerica,theFrenchconstructiongroup,Vinci,hasagreedtopayUSD1.4bntotakeoveratollroadconcessioninLimafromBrazil’sInvepar.

Brazil’sinfrastructureandpowersectorswillseeasignificantnumberofdeals.

WiththeexpectationthatBrazilwillstartedgingoutoftherecessionin2017,theanticipatedeconomicrecoveryisalsoexpectedtolifttransactionsinothersectors,notleastconsumerproducts.KelloggisrumouredtobenegotiatingtheacquisitionofParti, aprocessedfoodcompanyfromthesouthofBrazil,inaUSD1bndeal.

Somedealsarebeingseenasamarkofconfidenceintheregionasawhole.That’scertainlythecasewiththeUSD613minvestmentbyQatarAirways inLATAM,SouthAmerica’sbiggestairlinesgroup, itssecondsuchinvestmentaftertakingasimilarstakeinIAG,ownerofBritishAirwaysandIberia.


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Sector insightsDeal values in many sectors, most notably the 2015 star performers, TMT and life sciences, are sharply lower, not helped by current political and economic uncertainties, which are weighing particularly heavily on the financial services sector.

PRIVATE EQUITY Seeking scale and quality

ItwasalwayslikelythatPEfunds–mostnotablyintheUK–wouldtakesometimeouttodigestthesurpriseoutcomeoftheBrexitvote,and,asexpected,wesawanumberofprocessessloweddown,thoughnotabandoned,duringthesummer.

ButdespitethefactthatthepreciseeconomicimplicationsoftheLeavevoteremainunclear, fundshavereturnedtothefrayandtheautumnpromisestobeagooddealbusier,withanumber oflargetransactionsalreadyintheoffing.

Fundsappeartobemakingaflightforscaleandquality,withtransactionvalueslikelytoincreaseinthemonthsaheadevenifdealvolumesdecline.Biginternationaldealstendtobewellhedgedagainstthesort ofcurrencyvolatilitythathasoccurredsincethereferendumandfundsareprobablytakingtheviewthatitmakessensetoproceed–withcaution.

Interestingly,otherEuropeanmarketshaveremainedprettyactiveduringtheusuallyquietsummerperiod,withtheBeneluxcountriesbeingparticularlybusy inQ3.

AmongstthestandoutdealsweretheUSD1.3bnacquisitionofcybersecurityfirm,AVG,byitsrivalAvast,whoseinvestorsincludeCVCCapitalPartnersandSummit.ThisfollowsagrowingtrendforgreaterPEinvestmentinthecyberandsoftwaresectors,withVistaEquityPartnersaparticularlyactiveinvestor.

Fundshavereturnedtothe frayandtheautumnpromisestobeagooddealbusier.

PAIPartnersisalsoacquiringRoompot,theDutchhotels,resortsandholidaycampbusiness,fromGildeBuyOutPartnersinasecondarydeal.

MeanwhileQSRBelgium,asubsidiaryoftheSwissPEfundKharisCapital,hasboughttheQuickBelgiumandLuxembourgfastfoodrestaurantchainfromFrance’sGroupeBertrand,adealthatwillseeQuick’soutletsturnedgraduallyintoBurgerKings.

Thevalueofsecondarybuyoutshasrisensharply intheyeartodateandthismakessensegiventheoveralleconomicenvironment.FundsstillhaveplentyofcapitaltodeploybutitmakesmoresenseinuncertaintimestobuyassetsfromanotherPEfundthantotrytomountacomplexcorporatecarve-out.

WhileequitymarketshaveremainedsurprisinglycalmintheimmediateaftermathoftheBrexitvote,greatervolatilityremainsadistinctpossibilityinthemonthsahead.Forthatreason,weexpecttoseefewerIPOexitsintheshortterm.

CONSUMER The pace steadies

Asummerofheightenedpoliticalandeconomicuncertaintyhas,asexpected,ledtoadeclineinconsumer-relatedM&Aactivity,withthevalueofdealssignificantlylowerthanlastyear’srecordlevels.

WhiletheBrexitvoteintheUKhasnot,sofar, hadtheimmediatenegativeimpactonconsumerconfidencethatsomehadpredicted,thesectorremainsvulnerabletosuddenswingsinsentimentandspending.ConcernsabouttheoutcomeofNovember’sU.S.presidentialelectionalsoappear tobeweighingoninvestors’minds.



Soitisperhapsnotsurprisingthatdealmakershavetakentimeoverthesummertoreflectandwewouldexpectthemtoremaincautiousfortherestof2016.

Thedeclineindealvaluesalsoreflectsthefactthat ahighnumberofbigtransformationaldealswereexecutedin2015.Itwasalwayslikelythataperiodofreducedactivitywouldfollow,withthefocusshiftingtosmallerdealsortidying-uptransactions.Forexample,ABInBev’sdisposalofSABMiller’sbeerbrandsinCentralandEasternEurope– saidtobeworthsomeEUR5bn–isstillpending.

However,Frenchfoodgiant,Danone,choseQ3tolaunchaUSD12.4bnacquisitionoftheU.S.naturalandorganicfoodgroupWhiteWaveFoods–itslargestdealinadecadeandonethatwilldoubleitsU.S.revenues.Thischimeswithawidertrendthathasseenfoodmanufacturersandretailerstrytotapintorisingconsumerdemandforhigh-valuenaturalandhealthyproducts,atrendalsoevidentinothersegmentssuchasbeautyandbabyproducts.

Steinhoff,theSouthAfricanretailgroup,continuesitstirelesseffortstodiversifyoutofitshomemarketandtargetgreaterrevenuegrowthinEuropeandtheU.S.

InacaseofthirdtimeluckyinEurope,SteinhoffacquiredPoundland,theUK-baseddiscountstoresbusiness,forGBP597minQ3,havingrecentlymissedoutincontestedbidsforHomeRetailGroup,ownersofArgos,andtheelectricalgoodsretailer,Darty.SteinhoffhasalsopropelleditselfintothefrontlineoftheU.S.homefurnishingsmarketbybuyingNorthAmerica’sleadingbeddingmanufacturer,MattressFirm,forUSD3.8bn.

Equally,smarttechnologyandonlineretailingremainactiveareas,akeyexamplebeingtheproposedacquisitionofSMARTTechnologiesbyTaiwan’sFoxconnTechnologyGroup,supplychainsynergiesreportedlybeingthemaindriver.

TheAsiaPacificregionhasalsoseenaspateofdealsintheclothingandapparelsector.

SouthKorea’sHansae,suppliertobigbrandslikeGAPandNike,hastakena40%stakeinMKTrend,whosebrandsincludeTBJandBuckeroo.BurberryhasrespondedtorecentdisappointingsalesinChinabytakingdirectcontrolofitsfranchisedoutletsthere,followingsimilarmovesinotheroverseasmarketsincludingJapan.Australianfashionretailer,NoniB,hasexpandeditsretailnetworkbybuyingthePrettyGirlfashionchain.

Therehavealsobeensomenotabledealsatthetopendoftheluxurymarket,notleasttheUSD233minvestmentinSotheby’sbyTaikangLifeInsurance,whichhastakena13.5%stakeintheartauctioneer.Thisispartofagrowingdiversificationtrendthat hasalreadyseenChineseinsurersinvestinareas asdiverseasmoviemakingandsoccerteams.

AnotherfeatureontheChinalandscapeisanumberoflarge,pendingdealsinthefoodandbeveragesectorincludingtheauctionbyMcDonald’sofitsbusinessinChinaandHongKong,andthesalebyYumBrands(ownerofKFCandPizzaHut)ofastakeinitsChinabusiness.WeexpectthepipelineofactivityintheconsumersectorinChinatoremainstrongintheshorttomediumterm.

It has been encouragingto see investors with well thought through plans persevering with strategic transactions.”


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ENERGY AND INFRASTRUCTURE Business as usual

AnyinvestornervousnessfollowingtheUK’sBrexitvoteseems,sofar,tohavepassedtheinfrastructuresectorby,withfundscontinuingtoaccumulatefinancetopourintothesectorandadecentpipelineofdealsbuildingupbothintheUKandacrossEurope,evenifQ3itselfwasalittlequietfortransactions.Inpartsoftheenergysector,activityalsoremainedsubdued.

Inthecomingmonthsanumberofimportant dealsaresettogoaheadasplannedintheUK,despitethereferendumresult,includingNationalGrid’sproposedsaleofitsgasdistributionbusinessandtendersfortheM6tollwayconcession.

Suchdealsreflecttheenduringattractionofenergyandnon-energyinfrastructureassetstointernationalinvestorsandthedisproportionateweightofcapitalbuildinguptoinvestinrelativelyscarcetargets. Inthatsense,itisacaseofbusinessasusual.

ThearrivalofanewUKgovernmenthas,however,raisedsomeuncertaintyoverkeygreenfielddevelopments,theexpansionofHeathrowairportandtheHS2high-speedrailproject,tonamebuttwo.Butsuchissuesarelongtermandarenothavinganimmediateimpactondealactivity.

Therearealsoquestionmarksovertheintentions ofChineseinvestorsinanumberofmarketswherenationalsecurityissueshavebeenraisedoverplannedgreenfieldorbrownfieldinfrastructuretransactions–namelyintheUKovertheHinkleyPointnuclearpowergenerationproject,whichisnowgoingahead,andinAustralia,whereaproposedChinesebuyoutofAusgrid,theNewSouthWaleselectricityinfrastructurenetwork,wasblocked.

ItremainstobeseenifChineseinvestorswillnowtakeamuchmorecautiousapproachtootherinvestmentsinpotentiallylesssensitiveareassuchastheUKwaterindustry,orifnationalsecuritywillbeanissueinotherplannedAustralianprivatisations.

Offshorewindcontinuestoattractinterest, withtechnologicaladvancesinbatterystorage andfloatingoffshorewindpromisingfurther futuredevelopment.

Moregenerallyweareseeingthecontinuationofnowwell-establishedtrends.Infrastructurecontinuestoattractanincreasinglybroadrangeofinvestorschasingyieldinalow-interestrateenvironmentwhereaccesstocheapfinanceremainsabundant.

Witharelativeshortageofgoodinvestmentopportunitiesinclassicregulatedassets,weare alsocontinuingtoseethedefinitionofinfrastructurestretchedbyinvestorstoincludebusinessesthatofferinfrastructure-likereturns.Hereclosed-end andPEfundsareincreasinglymeetinginthemiddleintermsofthesortofassetstheyaretargeting.

Thejointacquisitionofairportground-handlingleasingbusiness,TCR,by3iandDeutscheAssetManagementisacaseinpoint–anunregulatedbusinessofferinglong-termcontractedreturns– thathasattractedinterestfrombothinfrastructureandPEinvestors.

Infrastructurecontinuestoattractanincreasinglybroadrangeofinvestorschasingyield.

Theretentionbymanagementofanequityinterest inthebusiness–inthepastrarelyseenininfrastructureinvestments,thoughcommonin PEtransactions–isnowbecomingincreasinglydiscussedwherethesectorsconverge.

Itremainstobeseenwhetherthistrendwilltakehold–particularlygiventhechallengestomanagementliquiditypresentedbythelongerinvestmenthorizonsandprevalenceofconsortiuminvestmentsininfrastructuredeals.Overall,weexpectmanagementequitystakestoremaintheexceptiontotherule.

Q3sawapartialrecoveryandstabilisationintheoilprice.Whilethisiswelcome,itisunlikelytoleadtoanincreaseinM&AactivitywhilethepriceremainsbelowUSD60perbarrel.

FINANCIAL SERVICES Putting a price on Brexit

UncertaintiesthrownupbytheUK’sBrexitvote areundoubtedlyweighingheavieronthefinancialservicessectorthananyother,asinstitutionstry toplanforan,asyet,hardtopredictfuture.

Whilethat’sthecaseit’shardlysurprisingthatdealactivityinthesectorhascontinuedtoshrinkquitedramaticallyintheimmediateaftermathoftheUKreferendum,withvalueandvolumeofdealsfallingsharplyinthethirdquarter.



Dealactivityinthesector hascontinuedtoshrinkquitedramaticallyintheimmediateaftermathoftheUKreferendum.

WithpassportingrightstotradeacrosstheEUatstake,EuropeanandU.S.bankswithbigpresencesinLondonandclientsthroughoutContinentalEurope,havebeenscenarioplanningformonths.Butfewexpectedthereferendumtoresultinavotetoleaveorthattheywouldneedtoputthoseplansinto action.

Theirtasknowistorevisitthoseplansandtotestthemagainstanumberofscenarios–theworstcasebeingthattheirLondonoperationswilllosetheircurrentaccesstotheSingleMarket.Forsomethatwillinvolvesignificantrestructuring,withjobslikelytobemovedoutoftheUKtootherEUmarkets.

ThedifficultyisthatnoneofthiscanbeplannedpreciselyuntiltheUKgovernmentmakesitsaimsclear,theEUgivesitsreactiontothatposition andArticle50–thetreatymechanismforamemberstatetoleavetheEU–istriggered.

Manybanks,whichhaveinvestedheavilyinLondonoverrecentyears,worrythattheprocessofdisengagingfromtheCitywillalsotakeconsiderablylongerthanArticle50’sprescribedtwo-yeartimetable.Soitwouldnotbesurprisingtoseethempressingfortransitionalarrangementstobeputinplace.

Otherpoliticaluncertaintiesarealsobesettingthe FSsector,notleastNovember’sU.S.elections. TheprospectofaTrumppresidencyisnotahappyoneformostbanks,althoughanti-WallStreetrhetorichasalsobeenafeatureoftheHillaryClintoncampaign.

TheseissuesareimpingingonothermarketstoalesserextentandQ3hasseenactivitycontinueatarelativelybriskpaceinboththeMiddleEastandinAsia.

ThequartersawagreementreachedonthebiggestMiddleEasternbankmergerever–theUSD29bntie-upbetweenGulfFirstandtheNationalBankofAbuDhabitocreateanationalgiantwithsomeUSD175bninassets.

WearecontinuingtoseegoodlevelsofactivitywithintheAsiaPacificregion,withahealthypipelineofdealsbuildingupinkeymarketssuchasIndonesia,Malaysia,thePhilippinesandVietnam.

Astandouttransactioninthequarterwasthe movebySingapore’ssovereignwealthfund,GIC, totakea7.7%stakeinVietnam’sbiggestbank,Vietcombank,inadealrumouredtobeworth

betweenUSD400mandUSD500m.Japan’sMizuhoBankalreadyhasa15%stakeinthebusiness.

Elsewhere,Japaneseinstitutionsaredigestingbankingandinsurancedealsalreadydonebutcontinuetoscouttheregionforfurthertransactionsintheregion’sdevelopingmarketswheretherapidgrowthofamiddleclasscustomerbasepromiseslong-termgrowth.

ConsolidationinChina’sfinancialservicessectorcontinues,atrendwe’venotedinpasteditions.Whilethesedealscansometimesbesizeable, we’veyettoseemuchsignificantactivitybyChinesebanksinthewiderAsiaregion.

LIFE SCIENCES A return to the cutting-edge

It’sfairtosaythatfiscalconsiderations–notablytheefforttocompletetaxinversiondeals–wereabigfactorintherecord-breakingexplosionoflifesciencestransactionsinthelasttwoyears.

Withtaxloopholesincreasinglytightlypolicedwe’veseenasignificantdeclineinthevalueofbig-ticketcross-bordertransactions,andareturntosignificantdealsdrivenbyindustriallogic–oftenatthecuttingedgeofproductdevelopment.

Thebioelectronicstie-upbetweenGSKandVerily,formerlyGoogleLifeSciencesandasubsidiaryofGoogle’sparentcompany,Alphabet,isacaseinpoint.

TheventureisfocusedonbuildingonGSK’swork inusingminiaturisedimplantedelectronicdevicestomanipulatesignalsbetweenthebrainandthenervoussystemasanalternativetodrug-basedremedies.Thetechnologyisbeingusedtotackleconditions asdiverseasasthma,arthritisanddiabetes.

ThenewUK-basedventure,calledGalvaniBioelectronics,willseeGSKtakea55%holding intheventure,andVerily45%butwiththepartnerspledgingtoinvestsomeGBP540moverseven yearsinresearchanddevelopment.

Morebroadly“connectedhealth”–thegrowinginteractionbetweenthehealthcareandtechnologysectors–continuestobeaveryactivesegmentofthemarket.

Here,asinothersectors,Chineseinvestorsareincreasinglybusy,bothathomeandabroad. Inthelastfewyears,China’sthreeinternetgiants– Baidu,AlibabaandTencent–haveallenteredthehealthcaremarket,inasuresignoftheincreasingpromiseofhealthtechnology.


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Othershavealsojoinedtherace,includingGloriaPharmaofHarbin,China,whichearlierthisyearinvestedUSD40minProteusDigitialHealth,aU.S.companyspecialisinginremotehealthmonitoring,andhasanexclusive18-monthoptiontoestablish aJVwithProteusinChina.JilinZixinPharmaceuticalhasalsorecentlyacquiredU.S.genemappingcompany,Nabsys2.0.

Perhapsthemostsignificantindicatorofactivity inthisarea–andfutureM&Atransactions–isthevolumeoffinancebeingpumpedintoconnectedhealthbyventurecapitalfunds,withinvestmentinthefirsthalfofthisyearsaidtoberunningonaparwithtotalfundingin2015.Thisprocesscontinued inQ3withBeijingAllcureMedical,acloud/bigdataradiologystartup,raisingUSD27minitsSeriesA.

Chineseinvestorshavealsobeenattheforefront ofdealmakinginothersegmentsofthelifesciencesmarket.Chinesecross-borderdealscompletedinthequarterincludedtheacquisitionofGlandPharmainIndia,CordlifeGroupinSingapore,DiaMedicaandLipoMedicsintheU.S.andInflaRxinGermany.

Lookingforward,weexpectincreasingtransactionalactivityamongcompaniesoperatingintherelatedfieldsofgenemappingandnewgenetherapies.

InMay,GSK’sStrimvelisgenetherapy–designedtotreatseverecombinedimmunedeficiencyor“boyinthebubble”syndrome–becamejustthesecondgenetherapytobeapprovedinEurope.Q3sawAllerganacquiregenetherapy-basedeyecaregroup,RetroSenseTherapeutics,andPfizertakea78%stakeinBambooTherapeutics.

FollowingSanofi’sfailedbidforMedivation,itnowlookslikelythatPfizerwilltakeoverthebiotechbusinesswithitsmuchhigher,allcashUSD14bn bidforthegroup.InterestinMedivationislargelydowntotwoproducts–Xtandi,thebest-selling

prostatecancertreatment,anditsexperimentaltumourinhibitordrug,Talazoparib.Withreports ofwidespreadinterestinthebusinessfromotherleadingplayersincludingMerck,AstraZenecaandRoche,itremainstobeseenwhereMedivation’sfailedsuitorswillturntheirM&Afirepowernext.

MINING Equilibrium in sight?

Thevalueofminingtransactionscontinuedtodeclinesharplyinthethirdquarter,withadearthofbigticketdealsreflectingacontinuingmismatchbetweenvendorandpurchaserpriceexpectationsasbuyersrefusetopayovertheoddsforassets.

Intheyeartodate,dealvolumeshaveremainedrelativelystable,however,buoyedupbyafairlygoodspreadofsmallandmediumsizedtransactions.

Thepictureisslightlysurprisingasanumberofthemajorplayersarelookingtosellnon-coreassets toreducehighlevelsofdebt.It’sclear,however, thattheyremaindeterminedtoachievedecentvaluesandareinnomind,nor,giventherecentstrengtheningofcommoditypricesandtheuptick inequitymarkets,inanyneedtodohurriedordistressedtransactions.

Themajorsarealsounderpressuretoprovetothemarketthattheyareachievinggoodvalueandthemostobjectivewaytodothatistosellassetsthroughauction.ButPEandspecialistminingfundscontinuetoshunsuchprocesses,preferringinsteadtodobilateraldeals.

Q3didseesomesignificantandinnovativedeals,notleasttheUSD670mventurebetweenGlencoreandEvolution,whichwillseethelattertakea30%

A return to significant deals driven by industrial logic – often at the cutting edge of product development.”



relativelyfewnewprojectscomingonsteaminthelastfiveyears.That’sleadingtoanoticeablerevivalofinterestinthesectorbyequityinvestorsandcouldbe a precursor to more transactions.

MininglookstobeasectorthatwillberelativelyuntroubledbyBrexitintheshortterm,apartfromgoldbecominganobvioussafehavenatatimeofheightenedcurrencyvolatility.Furtherdowntheline,however,thereisachancethatminerscouldfindithardertoraisedebtfinanceinLondon,traditionallyaglobalhubforsuchtransactions.

TELECOMS, MEDIA AND TECHNOLOGY Some clarity returns

WhilethevalueandvolumeofTMTdealshasfallenwellbelow2015’srecordlevelsintheyeartodate,thetechnologysectorcontinuestoseeastringofsignificanttransactionsandconsolidationinEurope’smobilesectorhasrestartedfollowinganimportantrulingbytheEuropeanCommission.

TheCommissionhasclearedtheEUR20bnmergerbetweenHutchison’s3ItaliaandVimpelCom’ssubsidiary,Wind,tocreateItaly’slargestmobileoperatoraheadofTelecomItaliaandVodafone. Themoveprovidessomeclarityonthethinking ofCompetitionCommissionerMargretheVestager incaseswheremergersreducethenumberofoperatorsinanyonemarketfromfourtothree.

AlthoughsimilardealsinGermanyandIrelandhadbeenallowedtoproceedinearlierrulings,Vestagersignalledachangeoftackwhensheblockedthe

stakeinGlencore’sErnestHenrygoldandcoppermineinAustralia.Inaso-called“streaming”deal,Evolutionwillreceiveallthegoldoutputofthemineaswellasathirdofthecopperoutput.Glencore,lookingtoreduceitsdebtstoUSD17bnthisyear,willcontinuetobetheoperator.

WecouldwellseeapickupinM&Aactivityinthesectorinthecomingmonthsastheoutlookfor avarietyofcommoditiescontinuestoimprove.

Theflighttogoldcontinuestoliftpricesinthissegmentasinvestorsworryaboutcurrencyinstabilityandeconomicuncertainty,andhigher goldpricesarealreadydrivingdealactivity.Lithiumis alsoexperiencingsomethingofabubblethankstodemandfromthebatteryindustry.

But,moresignificantly,it’sclearthatsomemoresophisticatedinvestorsarepositioningthemselvesforanexpectedrecoveryincopperprices.Althoughpriceshavestrengthenedonlymarginally,copperisseenassomethingofabellwethercommoditywhenpricesareonthewayupordown.

Theoutlookforavariety ofcommoditiescontinues to improve.

Ironorehasalso,unexpectedly,stabilisedabove theUSD55mark,whichistranslatingintobetterprofitmarginsforproducersthathavereduceddebtandslashedcosts.

Moregenerallyweareseeingsomeequilibriumrestoredbetweensupplyanddemandinkeysegmentslikecopper,thankstothefactthattherehavebeen

Consolidation in Europe’s mobile sector has restarted following an important ruling by

the European Commission.”


21

proposedtakeoverofTelefonica’sO2by3intheUK.Atie-upbetweenDenmark’sTeliaSoneraandTelenoralsocollapsedaftertheyfailedtoagreesuitableremedies.

TheCommissionapprovedtheItaliandealfollowingthecommitmentof3/WindtosellspectrumandinfrastructuretoIliadofFrance,whichwillallowIliadtoentertheItalianmarket.

ThestandouttechdealofQ3wasSoftBank’sGBP24.3bnacquisitionoftheUKsoftwaremakerARM.ThedealisbeingdrivenbytheJapanesecompany’sdesiretoownalargeshareofthetechnologypoweringinternetofthings(IOT) devices.Othersarealsopositioningthemselvesfor themomentsuchdevicesreachmassadoption.

SomesawthedealasavoteofcontinuingconfidenceintheUKM&AmarketfollowingtheBrexitvote.ButothersruedthelossofUKcontrol ofARM,seeingitasproofthattheUKisfailingtoprovidetherightinfrastructuretoallowstart-ups todevelopintoglobaltechnologybusinesses.

WhiletheUK’strackrecordonnurturing“scaleups”remainsquestionable,twofurtherdeals,Informa’sacquisitionofU.S.eventsandpublishingcompanyPenton,andMicroFocus’takeoverofthesoftwarebusinessofHewlettPackardEnterprise,offerfirmevidencethatUKtechisholdingitsownintheinternationalmarket.

Thefragmentedcybersecuritysectorisgettingbusier,withtheIOTagainadriverfordeals.Avast’sUSD1.3bntakeoverofAVGandSymantec’sUSD4.65bntakeoverofBlueCoatareexamplesofconsolidationbetweenestablishedplayers.

ButPEfundsarealsobecomingmoreactiveboth incybersecurityandthewidersoftwareindustry.VistaEquityPartnerscontinuedafreneticround ofcyberandsoftwaredealsbybuyingPingIdentityinQ3,andalthoughHPIncsoldastringofsoftwarebusinessestoOpenText,itisnotablethatthesaleprocessesattractedwidespreadPEinterest.

ChineseinvestorscontinuetobeactiveoutboundinvestorsinTMT,withaparticularfocusonmobilegaming,aswesawwiththeUSD4.4bnacquisitionofIsraelionlinegamesgroupPlaytika,byaconsortiumofChinesebuyers.Butincreasedscrutinybyoverseasregulators,notablytheCommitteeonForeignInvestmentintheUnitedStates(CFIUS),andmuchstrongerinterventionfromChina’sowncompetitionauthority,MOFCOM,meanssuchdealsarenotalwaysplainsailing.

TheproposedtakeoverofNorway’sOperaSoftwarebyChineseinvestorsfellthroughafterfailingtoachieveregulatoryapprovalandtheproposedtie-upbetweenDidiChuxingandUber’sChinesearm– thetoptwoplayersinChina’sride-hailingmarket–hasbeencalledinforMOFCOMreview.

PE funds are becoming

more active both in cybersecurity and the wider software industry.”



Insights, Q3 2016


23

Switzerland

Netherlands

Luxembourg

Spain

France

Jersey

Ireland (Republic)

UK

Canada

Mexico

U.S.

A global snapshotTop 20 global inbound target markets and outbound acquirers

Note:thesefiguresrepresentthetotal numberofdealsannouncedbetween 1January2016and20September2016.

KEY

Numberof inboundacquisitions

Numberofoutbound acquisitions

Dataprovidedby

Brazil

Bermuda

1,119 1,567

735 698

235115

446381

115229

310 490

276 234

14

180

78

126

32

35



Israel

South Africa

Germany

Japan

India

China

Hong Kong

Singapore

Australia

Finland

Taiwan

Top 20 global inbound target markets – Q3 2016

Rank Country Volume of deals

Value of deals USDm

1 U.S. 1,119 361,516

2 UK 735 87,356

3 Switzerland 115 60,726

4 France 381 33,815

5 China 471 27,125

6 Germany 525 24,538

7 Spain 229 20,241

8 Italy 265 19,588

9 Canada 310 18,178

10 Netherlands 276 16,631

11 Sweden 149 15,070

12 Israel 59 14,133

13 HongKong 234 11,634

14 Jersey 14 11,519

15 Finland 94 11,381

16 Australia 270 10,924

17 Brazil 180 10,430

18 Singapore 144 10,000

19 India 220 9,659

20 Japan 112 8,354

Top 20 global outbound acquirers – Q3 2016

Rank Country Volume of deals

Value of deals USDm

1 China 599 141,502

2 Germany 341 125,190

3 Canada 490 118,600

4 U.S. 1,567 110,253

5 Japan 479 62,577

6 UK 698 40,898

7 France 446 40,389

8 HongKong 470 31,633

9 RepublicofIreland 78 30,646

10 Luxembourg 126 14,752

11 Singapore 237 12,750

12 Switzerland 235 12,231

13 Bermuda 32 10,695

14 Sweden 256 10,269

15 Netherlands 234 9,444

16 Taiwan 85 7,744

17 Australia 198 7,726

18 SouthAfrica 89 7,203

19 Spain 115 5,953

20 Mexico 35 5,818

599471

341525

265

149 256 Sweden

59

470234

94

198270237114

220

112 47985

89

Italy


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A global snapshotA global snapshot – top markets for the world’s largest acquiring countries

China Germany

Hong Kong 8,234U.S. 31,712Germany 9,956Singapore 2,601UK 3,658

Switzerland 48,626Israel 5,489Brazil 3,569Finland 8,955Dem Rep of the Congo 2,804

Value of deals (USDm)

U.S. 78,056UK 14,840France 12,795Netherlands 1,454Spain 7,204

Austria 3,221Switzerland 883Sweden 1,557Luxembourg 2,100Morocco 799


U.S.Canada

U.S. 103,363UK 1,949Australia 591Colombia 3,184Germany 361

Mexico 1,277France 366India 719Switzerland 3,659Spain 1,672


UK 23,628Canada 11,392France 6,562Australia 4,436Italy 4,121

Spain 5,326Sweden 11,395Switzerland 3,612Singapore 3,636Jersey 9,331


*Thesefiguresrepresentthetotalnumberofdealsannouncedbetween1January2016and20September2016.



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France Hong Kong

UKJapan

U.S. 18,782UK 31,443France 1,981Germany 1,273India 601

Canada 592Italy 3,108Philippines 827Netherlands 1,179Ethiopia 510


U.S. 19,874France 1,027Italy 2,975Netherlands 7,393Spain 1,192

Denmark 908Norway 969South Africa 827Canada 1,663China 396


U.S. 26,862Germany 4,225UK 410Italy 2,511Spain 885

Netherlands 806Switzerland 385Portugal 791Singapore 322Peru 1,662


China 16,701U.S. 8,657Australia 806South Korea 322UK 583

Singapore 511Canada 1,217Germany 251Malaysia 220Belgium 1,100


UK 397U.S. 29,085France 111Germany 24Italy 21

Japan 349Canada 116Brazil 203Switzerland 287Denmark 45


Italy 3,990France 2,725Netherlands 147U.S. 3,609Germany 128

Portugal 82Switzerland 1,341Jersey 1,930Sweden 493Israel 226


Republic of Ireland Luxembourg

About the research TheunderlyingdataforthisresearchcomesfromThomsonReuters.–Thedatacontainedinthispublicationspans1January2016and20September2016inclusive.

Dataprovidedby


27

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