PETALING JAYA: There are bright spots emerging that may turn the tide in the country’s merger and acquisition (M&A) space this year after a slower hive of M&A activities last year.
Although there are stumbling blocks in the form of the ongoing US-Sino trade war, fear of global recession and weak consumer sentiment, analysts and industry watchers are still bullish on the country’s M&A activities.
OCBC Bank (M) Bhd managing director and senior banker, client coverage and head of investment banking, Tan Ai Chin told StarBiz that M&A activities last year were disrupted by the historic 14th General Election (GE 14), being the first change in power in the country’s history.
M&A activities have picked up since the later part of last year and the momentum is expected to continue going into the second half of this year (H2 19), she said.
On the whole, Tan feels the M&A and privatisation activities are expected to be higher this year compared with last year as the overhang from GE 14 dissipates.
“The current weak market sentiment, geopolitical uncertainties, trade issues and low share liquidity of certain listed counters present opportunities for potential privatisations.
“Furthermore, the low interest rate environment reduces the cost of borrowing, incentivising acquirers to undertake privatisations and/or acquisitions, Tan said.
According to global research firm Mergermarket Ltd, M&A activities in Malaysia rose 16.4% year-on-year to US$3.7bil (RM15.32bil) in H1 19. The surge was fuelled by the government paring down its stakes in state-owned companies and consolidation trends in selected industries.
Tan noted that investors continue to like defensive sectors, with potential for scale such as healthcare, education, consumer, manufacturing and logistics.
“The telecommunication, property and property-related, steel and plantation sectors continue to face issues of oversupply or low selling prices, and may be open to opportunities to monetise some of their non-core assets or undertake mergers to extract synergies and economies of scale.
Such companies may also present opportunities for privatisations given the low prevailing valuations. Following the change in government, government-linked organisations continue to restructure their investment portfolios, she noted.
George Koshy, Partner and Malaysia Transactions Advisory Services Leader, Ernst & Young (EY) anticipates a pick-up in deal counts following the next few months as companies revisit strategies, reconfigure their balance sheets and chase growth.
“We are eight months into 2019, and it seems unlikely that deal counts will overtake the 2018 figures. However, on a more positive note, we have observed higher transacted values in transactions that have taken place this year.
“The recent transaction news about the potential mega merger between telco giants Axiata and Telenor, the potential takeover bid of Edotco Group, with an estimated value of US$3bil, the attractive valuation of SoCar Mobility Malaysia at US$130mil by private equity investors, and the potential fund-raising by Carsome of US$40mil in the Series C round, valuing the company at US$110mil, will continue to attract more activities within this space, ” he noted.
Koshy noted that the firm is also seeing active fund flows from private equity (PE) and venture capital firms into the emerging markets, which means more possibilities for deals in the country.
PE firms are investing in legacy businesses to inject technology and help transform the business, creating long-term growth for the business to gain better valuation in the future, which is a win-win for investors and SMEs, he said.
“We expect to also see countries like Malaysia benefiting from the trade war because of our friendly business environment and excellent infrastructure, as companies look to relocate, ” Koshy noted.
Meanwhile, Deloitte Malaysia corporate finance advisory executive director Yap Kong Meng said he expected M&A deal volume to continue to trend lower this year relative to 2018.
“The protracted economic US-China trade war and slowing global economic growth are expected to be among the key causes. However, we still expect to see some level of M&A activities due to inbound M&A activities, given that Malaysia is still an attractive overseas market, as well as acquisitions or exits driven by private equity and investment firms.
“We think the construction sector will see more M&A activities in 2019 compared with 2018. We have already seen several acquisitions in H1 19, for example like the YTL Group acquiring LaFarge Malaysia and Sunway Group acquiring Blacktop Industries as the construction market consolidates further, ” Yap said.
Maybank IB CEO Fadl Mohamed said M&A activity for Malaysian corporates are expected in the second half of this year.
In the first half of 2019 (1H19), Maybank IB said M&A and privatisations stirred at a fast pace with a total of ten attempts as the broad market weakness unlocked values.
“Companies in the property, steel, plantation and technology sectors are among those that may see further M&A activity as these sectors are in the midst of a down cycle, ” he said.
Rakuten Trade Sdn Bhd head of research Kenny Yee felt that the ongoing proposed merger talks between Axiata Group Bhd and Norway’s Telenor ASA, if finalised, should pave the way for more M&A activities.
He was reported as saying that the proposed merger may threaten other telco’s position if a similar move is not adopted to at least expand regionally. Yee said that M&A could spill over to the banking sectors as well.
According to global valuation and advisory firm Duff & Phelps, in terms of M&A deals, Malaysia recorded 338 in 2018, valued at US$11.4bil, where inbound deals accounted for a majority of the deal value by capturing a share of 50%. This was lower than US$17.6bil in 2017.