M&As, Covid-19 and South East Asia: Take the plunge or wait it out?

By: Oxford Business Group

During this unprecedented outbreak, while work continues on our annual economic assessments, our short-term editorial focus is on keeping subscribers up to date on developments related to Covid-19 in our markets. This ensures you have specific insights that the widespread global coverage of the outbreak may not provide, especially in countries which, fortunately in so many ways, are not at the forefront of the headlines.

The economic fallout from the coronavirus pandemic has had a significant impact on business investment. However, while the volume of investments has plunged worldwide, there are hints that South East Asia could see new mergers and acquisitions (M&As) in specific sectors.

With large sections of the global economy shutting down in recent months and the medium-term outlook still uncertain, most companies have been cautious in their future planning.

In its “World Investment Report 2020”, released in June, the UN’s trade body UNCTAD predicted that global foreign direct investment (FDI) flows would fall by 40% this year, while both greenfield investments and M&As had fallen by more than 50% year-on-year (y-o-y) in the first quarter of 2020.

Not only has the pandemic forced many companies to reassess their future investment plans (https://oxfordbusinessgroup.com/news/will-covid-19-spur-mas-gcc-banking-sector), but it has also placed a number of previously approved deals at risk of collapse.

For example, US aircraft manufacturer Boeing recently abandoned a US$4 billion deal to acquire 80% of Brazilian company Embraer’s commercial fleet, as well as a 49% stake in a joint venture to produce a new military cargo jet.

Elsewhere, after agreeing to a US$1.65 billion deal to buy Canadian movie theatre company Cineplex in December last year, UK-based Cineworld announced in mid-June that it was walking away from the agreement.

The situation in Asia has largely mirrored global trends. Greenfield investment projects fell by 37% y-o-y in the first quarter, while the number of M&As was down by 35% y-o-y in April alone. In terms of FDI flows in the region, UNCTAD expects full-year values to contract by 30-45%.

Executives eye opportunities

While the immediate impact of Covid-19 on investment activity is clear, there have been some differing opinions on how sentiment will develop as restrictions ease and economic activity picks up.

On the one hand, ongoing uncertainty, combined with falling valuations, is likely to make many firms resistant to offloading previously strong assets to the market if they have the capital buffers to retain them.

On the other hand, these same factors provide opportunities for investors looking to acquire once profitable firms at an attractive price or consolidate strategic businesses.

Although such acquisitions can be high-risk, they offer the potential for significant long-term returns. In the emerging markets of South-east Asia, this provides opportunities for diversified legacy groups in particular.

“In the Philippines, it will be the big conglomerates that will be capable of expanding, consolidating their operations and making acquisitions of companies that are having difficulties or need new investors,” Protacio T. Tacandong, chief operating officer of professional services firm Reyes Tacandong & Co., told OBG.

“There may be some opportunities for companies capable of buying now and waiting for the recovery.”

This view is backed by a global survey of more than 2900 C-suite executives, published by multinational consultancy EY in May. In this survey, 47% of South-east Asian respondents said they would actively pursue M&As in the next 12 months, above the 10-year average of 43%, while three-quarters said they were anticipating an increase in competition for assets within the next year.

Notably, UK-headquartered law firm Bird & Bird says M&A could be the “perfect marriage” between start- ups in South-east Asia with financial issues and larger companies (https://oxfordbusinessgroup.com/news/how-will-covid-19-affect-start-funding-emerging-markets) looking for cheaper opportunities for strategic consolidation.

Sector-specific activity

Any increase in M&A activity is expected to be mainly focused on specific sectors with distressed assets.

Given that Covid-19 lockdowns have halted travel and imposed limitations on physical contact, many operators in the tourism and hospitality industry have come under severe financial strain.

As a result, some underperforming companies, or those with underperforming assets, are facing pressure to sell.

"Hotels and hospitality is one area where I see the potential for significant M&A activity. Bangkok and the major resort areas have a lot of hotels that have been closed for several months due to the pandemic and not all of them will have the financial capacity to weather this sudden downturn," Paul Ashburn, co- managing partner at business consultancy BDO Thailand, told OBG.

"It was already very competitive before the pandemic so those operators that are more leveraged could now be looking to exit, and I would expect to see some consolidation in this sector."

Parallel to this, companies in the e-health, ed-tech and e-commerce segments have all benefitted from an increase in consumer and investor interest (https://oxfordbusinessgroup.com/news/covid-19-and- digitalisation-can-latin-america-catch-other-emerging-regions) since the outbreak of the pandemic, which could in turn lead to a rise in acquisitions or investment moving forward.