Investment banking is all about building relationships and providing that personal touch. With the coronavirus rippling through China, bankers confined to home offices can’t do much of either, meaning deals are grinding to a halt in the world’s second-largest economy.
The virus outbreak, whose death toll has topped 1,700, has barred many dealmakers from travelling to China, making client meetings and on-site due diligence nearly impossible. Announced mergers involving a Chinese company dropped to $25.9 billion (Dh95.1bn) so far this year, the lowest for the period since 2014, according to data compiled by Bloomberg. It’s a similar story on the equity front, with just one initial public offering in the last 30 days in Hong Kong.
“It’s inevitable that there are delays in deal execution as a result of restrictions on travel and office closures which continue to disrupt business activities,” said Sze-shing Tan, a principal in the mergers practice at law firm Baker McKenzie Wong & Leow in Singapore.
The list of delayed deals is growing. Auto parts maker Chongqing Sokon Industry Group said in a filing to Shanghai’s stock exchange that the virus outbreak “has had a direct impact” on its planned takeover of Dongfeng Motor Corporation’s joint venture through a 3.85 billion yuan (Dh2bn) stake sale. The target firm, based in the hard-hit Hubei province, hasn’t been able to update its financials as onsite audit and verification has been suspended.
First Quantum Minerals has delayed the sale of its Zambian operations because the virus outbreak is preventing face-to-face meetings with potential Chinese buyers, the Canadian company said last week. The asset has drawn interest from companies including Jiangxi Copper, sources have said.
In Hong Kong, where many bankers and lawyers are also confined to home offices, restaurant operator Daikiya Group Holdings cancelled its IPO, while Chinese biotech firm InnoCare Pharma postponed investor meetings for its planned Hong Kong listing. The move, which could delay the entire share sale, doesn’t bode well for other IPO candidates in the pipeline. 58 Home, the maid and home-maintenance service owned by China’s Craigslist equivalent 58.com, delayed its planned US IPO as the coronavirus outbreak cripples customer demand.
China’s domestic IPO market has charged forward though. Twelve companies have priced offerings this month, with a combined value of $2.8bn, according to Bloomberg data. The momentum might not last long as these listings were cleared before the Lunar New Year holiday, when concerns over the virus surged.
For dealmakers, the deadly virus is exposing the limits of technology. In an era of digital banking and lightning-fast electronic trading, some transactions still require a hand shake and face-to-face contact. Pitch meetings, due diligence and regulatory reviews are best done in person. It’s a service industry after all, much like the restaurant business: You can’t do a billion-dollar deal over WeChat, said one banker, referring to China’s popular communication app.
Tales from the frontline include an investment banker surnamed Chan, who used to spend three of five days in the mainland, but is now grounded in Hong Kong as his firm has temporarily prohibited employees from visiting China. The travel ban has put his prospective client meetings on hold and he’s returning to a half-empty office as some of his colleagues who previously travelled to China are on a 14-day quarantine. He’s been trying to follow up with clients on deal proposals over emails but he’s not getting much response.
A Beijing-based banker, surnamed Sheng, shares similar frustrations. He is working from home but said it’s impossible to pitch deals over the phone. Worse still, the travel ban could delay fund-raising because auditors and bankers aren’t able to carry out on-site due diligence in China.
Meanwhile, an IPO lawyer based in the former British colony said he’s been conducting video calls with clients to get some early preparation work done. However, deals that were more advanced and nearing a listing hearing or marketing stage are being held up. It’s tough to prepare accounts without travelling.
Still, outside China, some deals are progressing. British supermarket chain Tesco is inviting suitors to the second round bidding of its operations in Thailand and Malaysia worth more than $7bn. Central Group, a conglomerate with businesses spanning from department stores to hospitality, raised more than $2bn through a spin-off of its retail arm in Thailand.
“In southeast Asia our M&A pipeline is as strong as it has been over the last five years and we continue to see a number of billion dollar-plus IPOs,” said Gregory Thiery, head of Southeast Asia investment banking at Morgan Stanley.
Central Retail, controlled by the Chirathivat family, is among several companies pursuing billion-dollar IPOs in Southeast Asia. Billionaire Charoen Sirivadhanabhakdi, Thailand’s richest person, is also considering a listing of his brewery business in Singapore, while PTT Oil & Retail Business plans to kick off its IPO process this year.
“Having a strong Asean franchise is a good hedge against any potential China slowdown,” said David Biller, head of Asean banking, capital markets and advisory at Citigroup, who added that its revenue in southeast Asian investment banking has increased by double digits in the last year.
The M&A activity is centered on energy, consumer, transportation as well as banking and insurance, according to Morgan Stanley’s Mr Thiery. That’s partly because global private equity firms are becoming more active and multinational corporations are selling their non-core assets in this part of the world.
KKR, for example, is exploring a potential sale of a Singaporean provider of intermediate bulk container Goodpack for about $2bn. Malaysia’s sovereign fund and Norwegian telecoms firm Telenor have revived talks on a potential deal involving Malaysia's Axiata Group, just a few months after the carriers scrapped negotiations on a broader merger of their Asian operations.
The strong presence of wealth management clients in the region also means there’s significant cash to be deployed, underpinning deals, according to Nicolo Magni, head of global banking for southeast Asia and India at UBS Group.
“Logistically in the current context, it may take longer for these cross-border deals to proceed but they will get done,” Magni said.
Back in Hong Kong and China, even as dealmakers extend their holidays or stock up on masks, they remain optimistic that a second-half rebound is likely once the virus subsides and travel resumes. Yet the threat of a washed-out 2020 looms if the impact drags on for months.
“With the travel ban in and out of China, we are expecting to see a decline in China inbound and outbound deals,” said Grace Tso, a partner at Baker McKenzie in Hong Kong. “Whether it is a matter of short-term investment sentiment or will have a rippling effect to other sectors will depend on whether the epidemic can be contained in a shorter period of time.”
