2016 Review: Singapore sees higher M&A volume driven by tech sector, deal value declines

Sunset sets over Singapore's central business district

If 2015 was the year for M&As in Singapore, the momentum continued over last year, where the country witnessed a 16 per cent increase in deal volumes, but smaller ticket sizes meant that transaction values in total fell by about 18 per cent in 2016,  to a little over $88 billion across 800 deals.

In comparison, according to data compiled by corporate finance advisor Duff & Phelps, Singapore had recorded a total of 685 deals (M&A, PE/VC and IPOs) worth $103.8 billion for 2015, a significant jump in transaction value compared to $55.4 billion for 2014.

Srividya Gopalakrishnan, managing director, Duff and Phelps Singapore, explains: “While Singapore has come down, Malaysia and Indonesia has gone up from 2015’s low-level of deal activities. In Singapore, 2015 was historic in terms of M&A activity in value terms, while 2016 improved on volume terms.This shows that smaller companies have became active in deal making – average size of deals have come down.”

“2015 numbers were boosted by Avago Technologies Ltd’s acquisition of wireless chip maker Broadcom Corp for $37 billion – Avago – this US-based company has a dual headquarters in Singapore, and that drove overall deal values to be skewed. We did not see such large deals in 2016, even though there were 20 deals that were upwards of a billion dollars in this period, compared to only 13 in 2015,” she adds.

Similar to the previous fiscal period, the city-state’s deals space is dominated by sovereign wealth funds, which contributed to about 46% of total Singapore M&A value, but only 7% of the volume in 2016. This factor continues to be unique to the city-state, and in 2015, deal making by its state fund Temasek Holdings, and its sovereign wealth fund, GIC, globally, had accounted for a third of Singapore’s M&As.

The disproportionate contribution by the sovereign wealth funds to Singapore M&A activity, also indicates that a bulk of deal making is outbound. In value terms, outbound transactions accounted for 65% of all M&A activity here last year, compared to about 14% each for both inbound and domestic deals.

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Source: Duff & Phelps Singapore Pte Ltd

 

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Source: Duff & Phelps Singapore Pte Ltd

Real estate accounted for 30 per cent of the sectoral pie in value terms, with large transactions such as GIC acquiring a logistics portfolio in Czech Republic worth $ 2.7 billion. Industrials accounted for approximately 19% of the total value. The technology sector also accounted for a substantial portion at 16 per cent to total deal value, followed by BFSI, the Duff & Phelps report added.

A notable property investment was the Qatar Investment Authority’s acquisition of a 43-storey office building in Singapore from BlackRock for $2.49 billion, at a time when the the Middle Eastern sovereign wealth fund has been increasing its focus on Asia. In terms of M&A, real estate was the leading sector in both volume and value, with 150 deals worth $24.8 billion.

Temasek and GIC accounted for five of the top seven deals in value terms last year.

Temasek Holdings, DBS Bank and consortium investors’ acquisition of a minority stake in Postal Savings Bank of China was the top ranking M&A deal in Singapore 2016, valued at US$ 7.0 billion. Other major deals include GIC and consortium investors’ acquisition of Asciano for $ 6.8 billion, followed by their acquisition of Nova Transportadora Do Sudeste SA for $ 5.2 billion.

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Source: Duff & Phelps Singapore Pte Ltd

 

This trend is set to continue in 2017. Last week, this portal had reported that GIC and NYSE-listed Paramount Group, Inc. (Paramount) had formed a 95/5 joint venture (JV) to acquire 60 Wall Street – the building that serves as the US headquarters of Deutsche Bank – for $1.04 billion.

Earlier, this month, an affiliate of Singapore’s sovereign wealth fund GIC, made a substantial investment alongside L Catterton, the largest consumer-focused private equity (PE) firm in the world, and had acquired Leslie’s Holdings, Inc. (Leslie’s), the world’s largest retailer and online marketer of swimming pool and spa supplies and services.

In early January, GIC had also picked up a 50 per cent stake in the Watermark, a newly-opened mall in Southampton from European property developer Hammerson, for an estimated S$86 million.

GIC is also awaiting approvals to complete its investment in Bank for Foreign Trade of Vietnam JSC, that country’s biggest lender by market value.

Similarly, Temasek, which last week joined China Investment Corporation (CIC), Silk Road Fund, Singapore’s Temasek Holdings, ARM Holdings plc and launch an innovation fund, that targets to raise $800 million, has already completed some mega deals in the first month of this calendar year.

Last week, Temasek Holdings had invested $800 million for a minority stake in Verily Life Sciences LLC, the medical arm of Alphabet Inc. Alphabet Inc is the holding arm of global internet services major Google. Again, as reported by this portal last week, Mexican tequila maker Jose Cuervo is seeking to raise more than $700 million in an initial public offering, with Temasek Holdings poised to pick 20 percent of the offer.

Earlier this month, Temasek was among the investors in UK fintech firm Funding Circle’s $100 million equity funding round.

PE-VC investments at five-year high, technology takes top slot

“The PE/VC investments in Singapore have seen the highest investment value in the last 5 years with 100 deals with an aggregate value of US$ 3.5 billion in 2016 compared to 81 deals valued at $2.2 billion for 2015. Unlike 2015 and 2014 when PE/VC transactions were mostly buy-outs, most of the top PE/VC transactions in 2016 have been investments in minority stakes. Technology continues to be the top sector attracting investments this year,” the Duff & Phelps report said.

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Source: Duff & Phelps Singapore Pte Ltd

In fact, 2015 had marked the first instance of technology taking the top slot – both in terms of M&A transactions and well as PE deals, and that was led by  Temasek and GIC undertaking a gradual shift to this asset class, when compared to their earlier preferences for sectors such as real estate, retail and banking and insurance services. But in the overall M&A context, the technology sector slipped to the third slot in 2016, behind real estate and BFSI.

Gopalakrishnan noted that while technology sector deals will continue to drive M&A and investments globally and particularly in Asia, there will also be price corrections, with company valuations declining. However, this will be a gradual process and not a bust like the 2001 dotcom crash.

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Source: Duff & Phelps Singapore Pte Ltd

Notable investments in Singapore’s technology sector are the $1 billion acquisition of a controlling stake in Lazada by Alibaba, the $750 million investment in ride-hailing app Grab led by Japan’s Softbank, and Khazanah Nasional’s $170 million investment in Garena.

In a separate interaction, Gopalakrishnan explained that even as Singapore’s tech sector continues to see an upward surge with robust funding rounds from PE and VCs, there was its nascent ecosystem could learn from the likes of India and China, as it navigates this phase.

“The first learning is to understand that tech firm valuations are not always based on non-financial parameters such as MAU (monthly active users), GMV (gross merchandise value), subscriber base, etc. While such measures set thumb rules for tech company valuations, the real basis of valuation goes deeper to look at financial parameters, business plan and concept viability,” she said.

She continues, “For example, firms such as Amazon and Alibaba could differ significantly on GMV multiples, but will converge on Ebitda (earnings before interest, taxes, depreciation and amortization) multiple. The company’s objective should be to make profits and positive cash flows sooner than later. Else, we will start seeing a correction in valuations and down-rounds.”

“Secondly, a related belief among some start-ups is that any tech start-up is valuable. Entrepreneurs should understand that the business should be commercially viable and perceptibly unique enough to be valuable. Thirdly, we should remember that for those few successful unicorns that we see in China and India, there have been many more which have failed. Statistics show 25% of start-ups fail in the first year, 55 per cent by the fifth year and 71 per cent by the 10th year. If we embed this learning into our thinking and planning, the probability of failure can be reduced,” she added.

At the same time, Gopalakrishnan also pointed out that while technology and Internet startups may be a new phenomenon in South-East Asia, investors here had significant experience and maturity of investing in similar firms in the US, China and India. “They are more seasoned and have the hindsight experience of what works and what does not. It will be important for startups to leverage on that learning,” she said.

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Source: Duff & Phelps Singapore Pte Ltd

In terms of PE activity, 3Q16 saw a staggering $1.3 billion raised by the region’s two ride-hailing apps. Indonesia’s Go-Jek closed a $550 million  led by KKR and Warburg Pincus that also saw participation from Farallon Capital, Capital Group Private and existing shareholders, valuing the company at over $1 billion, while SoftBank Group lead the deal that saw GrabTaxi raise $750 million in September.

“What the two investments do show is the fast evolution of the technology sector in Southeast Asia. According to CB Insights, there are now four unicorns (the others are Garena and InMobi, with Lazada having been acquired by Alibaba), three of which are in Singapore; the sixth highest number of unicorns in any country. This underlines the region’s vast potential for technology-based business models. Given that Southeast Asia is behind markets such as Japan, Korea and China in the tech maturity curve, it means that market is ripe to bring in business models that are proven elsewhere and can be rolled out in the region,” Ernst & Young said in a December 2016 report titled ‘Private Equity briefing: Southeast Asia’.

On a region-wide basis, PE and VC deals transacted in 2016 amounted to 160 deals with combined deal value of about US$ 6.1 billion. Singapore was the largest contributor to PE and VC investments with total deal value of approx. US$3.5 billion, the Duff & Phelps report said.

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Source: Duff & Phelps Singapore Pte Ltd

Last year, a study by Google and Temasek had said predicted that South East Asia’s internet economy was expected to grow to $200 billion by 2025 from $31 billion in 2015, while adding that investments of US$40-50 billion were expected in this region over the next 10 years to capture these opportunities.

That study had quoted the Google spokesperson as stating: “South East Asia is the world’s fastest-growing Internet region, with a user base of 260 million expected to grow to about 480 million by 2020,” even as the Temasek spokesperson added: “While investment levels in South East Asia shot up tenfold from 2011 to last year, the region still lags behind India and China. As we have more success stories coming out of the region, I think that will start attracting more capital.”

IPOs in Singapore see recovery in 2016 

IPOs in Singapore saw a recovery from relatively muted performance in 2015, with capital raised at $ 1.9 billion compared to $ 451 million in 2015. Frasers Logistics & Industrial Trust was the largest IPO in the region with a total capital raised of $ 664 million, followed by the public offering of Manulife US REIT which raised approx. $ 519 million, the the Duff & Phelps report added.

 

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Source: Duff & Phelps Singapore Pte Ltd
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Source: Duff & Phelps Singapore Pte Ltd

The recovery in IPOs – to nearly a fourfold jump last year, when compared to 2015, however masks the reality. The top 3 listings, which accounted for a little over 86% of the total IPO proceeds were from REITs ((real estate investment trusts) – Manulife US REIT, Frasers Logistics and Industrial Trust and EC World REIT – a space that is more known for its stable dividend yield.

But the recovery may continue, despite global uncertainties in 2017, especially if the Singapore exchange were to allow dual-class share. The Listings Advisory Committee (LAC) has already approved this policy change, which could help the city-state attract several mega listings, that may otherwise go to markets such as Hong Kong and New York.

January 2017 saw Dasin Retail Trust kicking off the process by raising S$121 million ($102 million), where both the international placement tranche as well as the public offer were oversubscribed,  while Singapore Telecommunications Ltd is also reported to be readying a listing for NetLink Trust later this year, in a mega offering that see the company raise as much as $2.5 billion.

A recent report by Bloomberg had stated that ‘Viz Branz Pte., a coffee and cereal beverage maker, is seeking to relist on the Singapore stock exchange with a valuation of at least S$700 million ($494 million)’.

Another Bloomberg report, quoting sources had said that ‘PappaRich Malaysia Sdn., a food chain selling local cuisine from nasi lemak to curry laksa noodles, is also considering a Singapore listing.

As reported by this portal, Malaysia’s Samurai 2K Aerosol’s placement for 20 million shares of 20 Singapore cent each, earlier this month, was fully subscribed, ad the listing allowed the company to raise $1.63 million in net proceeds.

Bill & Melinda Gates Foundation-backed Liquidia Technologies, is also reportedly working towards a listing in Singapore, and is aiming for a valuation of about $121 million.

In comparison, Hong Kong, which Singapore had always aimed to compete with, has moved into a different orbit. Last year, Hong Kong almost upstaged New York in the global IPO rankings, with companies raising $24.5 billion there, when compared to with $24.6bn on the New York Stock Exchange, while Shanghai came third with about $16bn,  according to data complied by Dealogic. Tokyo and Copenhagen are the other two exchanges in the top five with $9.6 billion and $5.9 billion of new listings respectively.

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Source: Duff & Phelps Singapore Pte Ltd

“Now, Singapore not only faces competition from other global exchanges like Hong Kong, there is also competition from the domestic market exchanges as well as other forms of fund-raising like PE. Several foreign listers are risk averse to listing overseas—in Singapore or other global exchanges—due to currency volatility. While the Singapore dollar has been fairly stable, some of the regional currencies have depreciated, making the cost of capital higher for such listers,” explained Gopalakrishnan.

“Having said that, we expect to see some REIT listings on the mainboard as well as more listings on Catalist by the new-economy companies. SGX as well as the Singapore government are taking several initiatives to promote the tech ecosystem. We also expect to see a few listings through RTO (reverse takeover) in 2017,” she added.

At the same time,  the managing director, Duff and Phelps Singapore Pte. Ltd., also pointed that Singapore continued to face the reality that more listed entities may be taken private.

“Privatization of listed companies could happen due to various reasons such as—the shares trading at a low price, giving the main shareholder(s) a good opportunity to take it private; acquisition or buyout; and, third, companies facing operational, business or financial issues. We expect to see more privatizations of companies listed in the Singapore exchanges in the near future,” Gopalakrishnan said.

Looking ahead to 2017

In its forecast for 2017, Duff & Phelps states that in terms of deal making, the outlook for Singapore and Southeast Asia  remained sombre in the coming months. This is due to negative market sentiments, with restructuring contributing to changes in the transactions landscape. This is coupled with geopolitical and macroeconomic uncertainty, given political shifts in Europe, the US and the larger Indo-Asia Pacific region.

However, Gopalakrishnan observes that even if there is an M&A slowdown due to economic uncertainty, corporates would be more inclined to pursue strategic growth opportunities. She attributes this to restructuring and regulatory changes, which will drive transactions.

Also Read:

Vietnam tech major FPT to grow top line riding on active M&A strategy

Exclusive: IFC to invest $16.7m in IHH Healthcare-owned Acibadem’s M&A bid

Indian startup M&As yet to scale though consolidation is on rise

Asia-Pac M&A deal activity to rise in Q1 2017: Intralinks

Singapore’s M&A momentum drops in 2016: KPMG

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.