China M&A Activity Plunges by a Third in First Half: PwC

Mergers and acquisitions activity in China plunged by a third in the first half of the year, as companies held back on deals amid uncertainty over the world’s second-largest economy. Still, the number of deals is expected to pick in the second half and set a new record for the full year, according to PricewaterhouseCoopers.

Jin Mao Tower and the Shanghai World Financial Center, in Shanghai.
Kohls Kohls|F1online RM|Getty Images
Jin Mao Tower and the Shanghai World Financial Center, in Shanghai.

The biggest drag on M&A activity was a 42 percent fall in the number of inbound deals into China by foreign buyers and a 25 percent decline in domestic deals, compared to the same period a year ago, the accountancy firm said on Tuesday. If not for the number of outbound deals – or Chinese firms seeking acquisitions overseas – which dipped just 6 percent, the fall would have been steeper, said David Brown, Great China Private Equity Group Leader, PwC.

According to the firm, the value of outbound deals tripled to $23.9 billion in the first half of the year from $7.9 billion in the year before, PwC said.

“The China outbound (activity) has stayed at the high levels we saw in 2011, and in our pipeline, we see a lot of activity coming through,” Brown told CNBC Asia’s “The Call”.“So, for 2012 full year, we actually see a record year for M&A.”

Deals in the resources and energy sectors continued to dominate, representing 44 percent of the number of outbound transactions in the first half of 2012, up from 36 percent last year. This sector also accounted for 69 per cent of the total deal value and 7 out of the 9 transactions valued at over US$1 billion.

Chinese companies are taking advantage of the weak global economy and depressed prices to buy resources and industrial technology assets overseas. The high-profile examples include China Minmetals’ $1.3 billion acquisitionof African copper miner Anvil Mining and State Grid’s purchase of a 25 percent stake in Portuguese power grid group REN for 592 million euros ($731 million).

The biggest deal announced in the first half was Wanda’s $2.6 billion acquisition of AMC’s US theatre chain, PwC said.

Dickie Wong, Executive Director, Kingston Securities, said he expects the pace of overseas acquisitions by Chinese firms to continue, especially as the financial turmoil in Europe and the U.S. depresses prices and presents lots of opportunities for cash-rich Chinese firms.

“But it is not easy to acquire major stakes in listed companies, especially those in the resources sector,” he said. “I think the state-owned companies won’t stop looking but they may not buy directly but use their Hong Kong-listed subsidiaries.” China Minmetals’ acquisition of Anvil through its Hong Kong-listed unit was a prime example of that, he said.

Inbound investors stayed away from China in the first half because of uncertainty over where the economy was headed, as GDP expansion continued to slow in the three months to June, growing 7.6 percent, the slowest pace in more than three years. While potential buyers still show interest in Chinese firms, they are taking things much more slowly, Brown said.

Over the longer term, what bodes well for M&A activity in China would be outbound deals as Chinese firms bring in technology from overseas and grow their foreign markets, Brown said, adding that China outbound deals is still at a “low level” and has a “long way to grow before it’s anywhere near the sizes of markets like the U.S.”

A lot of private equity money is also sitting at the sidelines, waiting to enter the market. PwC’s deal advisory pipeline suggests that there will be a recovery in the number of deals in the second half. The trend of domestic Chinese PEs looking to invest capital overseas – whilst still small in absolute terms – is starting to gather steam and will be a source of some growth in future years, the firm said.

- By CNBC's Jean Chua.