KPMG sees rise in cross-border M&A activity for Chinese firms
KPMG sees rise in cross-border M&A activity for...
Multinationals are increasingly looking further afield for acquisition opportunities to markets in Asia, in particular China, according to the latest KPMG International Global M&A Predictor.
According to KPMG's analysis, globally, forecast net debt to EBITDA ratios are set to tumble 18 percent over the next year. Net debt in absolute terms will fall by ten percent, showing extensive de-leveraging, as M&A capacity continues to increase.
Jeremy Fearnley, Head of M&A, KPMG in Hong Kong, says: "MNCs are facing a slow and difficult recovery in their domestic markets, whereas Asia and in particular China, offers exciting growth opportunities to put their cash to work. Contrasting with the situation prior to the global financial crisis, where a China presence was a “nice to have”, for many businesses it is has now become an urgent strategic imperative. Now, sitting on large cash reserves and with ample borrowing capacity, they have the means to act on that imperative."
Already relatively unleveraged, Hong Kong companies will continue to be highly cash generative, with net debt levels set to reduce by 49 percent over the next 12 months, according to the Global Predictor analysis. This positions them well to take advantage of acquisition opportunities overseas.
Conversely in Mainland China, net debt levels are expected to rise over the next twelve months, increasing average gearing from 14.8 percent to 16.0 percent, compared to global averages which are moving the other way, from 16.2 percent to 14.6 percent. This is notable as most emerging economies tend to be less geared, more equity funded and growth driven.
Fearnley explains: "This demonstrates the support by Chinese banks for domestic enterprises and is key in assisting the latter with their overseas expansion plans. The general market sentiment is very positive and we are seeing a huge amount of activity and appetite for Chinese businesses to do deals overseas. This is driven both by Western vendors, who see a strategic acquirer as the best exit for their investment, and by, domestic Chinese companies which are also looking to take advantage of reasonably attractive asset prices in Western economies."
Resource-driven deals have continued to rise over the past two years and KPMG analysis points to a continuation of that trend.
Fearnley concludes: "In addition to M&A activity, we also see more happening through direct investment. China is increasingly going to deploy its cash through direct investments, collaborations and partnerships, at a more strategic level with resource rich governments and companies. We see this increasingly in South America, the Middle East and Africa."
Notable highlights from the latest Global M&A Predictor include:
- Companies in Hong Kong continue to be highly cash generative, with net debt levels set to reduce by 49 percent over the next 12 months. This positions them well to take advantage of acquisition opportunities overseas.
- In Mainland China, net debt levels are expected to rise over the next twelve months, increasing average gearing from 14.8 percent to 16.0 percent.
- While Europe's forward PE ratios are in line with the global figures, the fall in North America's ratio stands at just six percent, thanks to markets being up 13 percent and earnings expectations being a more modest 20 percent (compared to 26 percent globally).
- Africa and the Middle East boasts the shallowest appetite decline at just four percent; Japan has the steepest at 29 percent.
- At an industry level, M&A appetite is highest within the Telecommunications sector where forward PE ratios are up by two percent, thanks to the increase in markets (nine percent) outstripping expected earnings (eight percent). It is the only sector whose PE is in positive territory, although Non-Cyclical Consumer Goods is not far behind at zero.
- On the net debt to EBITDA ratio, the Technology sector has long been the superstar of the Predictor, with its ratio of-1.1x representing a net cash position. However, an improvement in the Healthcare sector ratio (down from 0.3x to 0.1x) means that it may soon be the second sector to move to a net cash position.
Notes to Editors
About the Global M&A Predictor:
KPMG's Global M&A Predictor tracks 12 month forward Price to Earnings (PE) multiples and estimated net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratios to track and establish the potential direction of M&A activity.
Where possible, earnings and EBITDA data is on a pre-exceptionals basis with the exception of Japan, for which GAAP has been used.
KPMG's Global 1,000 Index (against which the Predictor is calculated) comprises 1,000 of the largest companies in the world by market capitalization.
All raw data within the Predictor is sourced from Thomson Reuters. KPMG Corporate Finance calculates 12 months forward PE data for each region and sector. This tool is used due to its transparency, the ready availability of data and widespread acceptance in the investment community. Our PEs test for "paper appetite" i.e. the relative preparedness of companies, sectors and regions to originate deals on the basis of share values only.
Net debt to EBITDA is a respected ratio which indicates capital structure and financial gearing. This ratio tests for "debt capacity" - that is, the relative ability of companies, sectors and regions to originate deals using debt only.
KPMG's Global M&A Predictor attempts to identify changes over time that could imply trends in appetite for deals and indeed capacity for deals. It also attempts to compare and contrast sector regions to highlight possible areas of deal flow. (Note: Net debt/EBITDA ratio calculations are considered not relevant (for the Predictor's purposes) in the financial services and property sectors. These sectors have therefore been excluded from this analysis.)
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