Frances Woo, Appleby’s Hong Kong-based chairman

Appleby sees healthy uptick in offshore M&A activity in Q4 2102

The offshore markets experienced their largest quarter-to-quarter rise in M&A transactions in the last three years in quarter four 2012, according to a report by Appleby.

The latest edition of Offshore-i, the firm’s quarterly report which provides data and insight on merger and acquisition activity in major offshore financial centres, focuses on the last three months of 2012 while providing a review of the year as a whole and predictions for 2013.

Both the volume and value of deals involving offshore targets increased considerably in Q4 as against the preceding three months, with volume up 27 per cent and value up 202 per cent. While the substantial increase in value is largely attributable to the biggest transaction of the quarter - the USD56bn sale of British Virgin Islands-listed oil exploration business TNK-BP to Russian state-owned oil company Rosneft – it is encouraging to see that if this deal is excluded from the data, the quarter still boasts a deal value of USD45.8bn, placing it as the third highest three-month period of the last three years.

Nevertheless, despite the surge in activity for the last quarter, 2012 overall had 14 per cent fewer deals than 2011, and 26 per cent fewer than 2010.

“While we remain positive about activity levels going forward, there is no escaping the fact that 2012 was another challenging year for M&A in our markets,” says Cameron Adderley, global head of Appleby’s corporate and commercial department. “2012 was peppered with uncertainty, most notably around the Euro crisis, the US presidential election, and changes of leadership in China and elsewhere. Moving into 2013, the outlook is far from clear and the very real questions remain around the single European currency, America’s challenges related to the so called Fiscal Cliff and China’s continuing growth.”

Average deal sizes, meanwhile, illustrate a depth slowly returning to the marketplace. The average deal size this quarter stood at USD173m, outstripping averages over the last 12 quarters, while average deal size in 2012 surpassed the preceding two years, coming in at USD103m as against USD63m in 2011 and USD71m in 2010.

“We are optimistic that the M&A markets in which we operate will gradually strengthen, not least as a result of the relative health of strategic buyers, the emerging markets and the energy sector,” says Frances Woo (pictured), Appleby’s Hong Kong-based chairman. “Offshore jurisdictions generated two of the world’s largest transactions in 2012 – that of TNK-BP and Jersey based Glencore’s USD33bn purchase of Xstrata. We have plenty of reason to be cautiously hopeful going forward, with general robustness returning to deal value as well as the number of deals coming out of our region growing faster than any other world region apart from the Nordic States this quarter.”

The Cayman Islands remain the most attractive market in the offshore region for M&A targets, with 142 acquisitions of Cayman-incorporated businesses in the fourth quarter of 2012, as against 102 of BVI-targets, in second place.

In terms of value, the BVI tops the table, accounting for USD60.2bn or 59 per cent of dollars spent offshore in the fourth quarter; this compares to nine per cent in Q3 2012 and 23 per cent in Q4 2011.

Hong Kong, meanwhile, continues to attract investors to it shores, and in the fourth quarter of 2012, saw an uptick in deal activity as against the preceding three months, with volume up 41 per cent and value up a considerable 123 per cent. Moreover, examination of year-on-year growth reveals that value was up 245 per cent, with USD18.6bn deals generated in Q4 2012 as against just USD5.3bn in Q4 2011, signifying a general robustness returning to the Asian marketplace.

Woo says: “We expect that the Cayman Islands, closely followed by Hong Kong, will remain the driving forces for offshore M&A activity, with both jurisdictions plugged tightly in to the Asian economic growth story, while the Asia Pacific and Latin America will remain the most attractive world regions for M&A targets.”

The financial services and insurance sectors dominated activity in the fourth quarter of 2012 and to a considerably higher value than the previous quarter, accounting for 178 of the 590 deals done, worth a combined value of USD23.2bn. 

Across 2012, financial services deals accounted for almost one in four dollars spent on offshore transactions (24 per cent), and a third of the volume (32 per cent), with both proportions up on the year before, when the sector made up 19 per cent of deal values and 29 per cent of volume. Appleby predicts financial services will continue to dominate M&A activity in offshore markets in 2013.

Behind financial services, manufacturing was the next busiest sector of the quarter with 96 transactions, worth a combined value of USD3.3bn in Q4.

Meanwhile, the professional, scientific and technical services sector saw the highest deal value this quarter, with USD62bn worth of deals, attributable in large part to the TNP-BP acquisition. This deal, along with the USD2.4bn acquisition of the subsidiaries of iron miner and ore wholesaler Wuhan Iron & Steel Group Mining by Chinese parent Wuhan Iron and Steel, highlights the ongoing importance of energy and natural resources as a generator of transactions in the region and around the world. Insatiable demand from emerging markets continues to fuel activity, along with shale gas discoveries and technical innovations in the industry.

Yet again, acquisition of minority stakes led by deal type this quarter, accounting for 58 per cent of all deals done, or 342 out of the 590 transactions recorded in the period.

 “It is indisputable that minority stake transactions remain the deal types of choice, and that appears to be a clear function of the macroeconomic uncertainty facing investors as they embark on deals,” Adderley says.

Acquisitions overtook minority stake transactions in terms of value, accounting for 70 per cent of the money spent, or USD71.1bn. This dramatic increase in the amount of money being spent on these deals, from USD13bn in the third quarter, is again largely attributable to the two TNK-BP transactions which both saw 50 per cent stakes change hands.

IPO’s suffered a slight decline in Q4, with only 28 IPOs and planned IPOs recorded as compared to 43 in the same quarter of 2011. It is worth noting, however, that the money raised in IPOs in Q4 was over double that raised in the preceding quarter – USD992m as against USD450m - showing a general robustness returning to these listings.

There are also 14 planned IPOs in the pipeline, suggesting that conditions may improve in 2013.

“We hope to see IPO activities accelerate through 2013, initially with smaller offerings but probably gathering depth as the year progresses,” says Adderley. “There is no doubt that the outlook for 2013 is uncertain however, in view of the strengthening US economy, combined with reduced stock market volatility globally, assertive action from central banks and brightening economic prospects in both Europe and Asia, we are cautiously optimistic that companies will be tempted back to fundraising on the public markets.”

Looking at acquirers based offshore, the numbers are up significantly both in terms of volume and value, suggesting that buyers from the offshore markets are in rude health.

The BVI continues to produce the largest number of deals involving offshore acquirers, with 139 deals recorded in Q4 2012 as against 164 in the same period last year.

The Crown Dependencies, meanwhile, showed a considerable increase in acquisition value compared to a year ago, with Jersey topping the table by value this quarter at USD34.7bn. This value, however, was largely attributable to the Xstrata deal.

The offshore M&A market continues to fare positively against other global markets, with offshore this quarter ranking ninth on the list for deal volume activity and fifth by value, with an aggregate value of USD101.8bn.

“It is encouraging to see that the offshore markets average deal size for the quarter, at USD173m, far outstrips those of North America, Western Europe and the Far East and Central Asia and is second only to South and Central America’s,” says Woo. “The region’s cumulative deal value is on par with that of Eastern Europe, the Nordic States, Africa and the Middle East combined.”

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