Activity in M&A market may just be picking up

Two cases in Singapore and a spate in the US signal strong interest

Somewhere, someone is making money, so the old stock market ditty goes. That "somewhere" may well turn out to be our own backyard, as the recent spate of mergers and acquisitions heats up in the stock market.

Earlier this month, Dutch beverage giant Douwe Egberts made a $1.45 billion offer to buy Super Group, the maker of the three-in-one coffee mix. This gives investors an eye-popping hefty 34 per cent premium per share over the counter's pre-takeover announcement price.

Shortly after that, ARA Asset Management announced that its group chief executive and founder John Lim was leading a group of investors in a $1.8 billion buyout of the company. That offer was priced at a hefty 26 per cent premium over its undisturbed price.

But there is one important difference between these buyouts and earlier takeovers. In both the latest cases, new players and new money were involved, and they demonstrated a willingness to pay top-dollar for their trophies.

As one financial writer observed, Super Group had been struggling. In its most recent results, its first six-month bottomline earnings fell by double digits in percentage terms. So Douwe Egberts' willingness to pay such a large premium came as a bit of a surprise. In ARA's case, if the buyout goes through, two private equity funds - Warburg Pincus and Avic Trust - will become the company's two largest shareholders. ARA says their entry would boost the firm's access to capital - allowing it to operate "more nimbly".

Still, the generosity displayed by the buyers of the two firms stands in stark contrast to earlier buyouts initiated by big shareholders which wanted to delist the target companies. Temasek Holdings, for example, offered a premium of only 8.7 per cent over SMRT's pre-offer price when it took the rail operator private.

Earlier this month, Dutch beverage giant Douwe Egberts made a $1.45 billion offer to buy Super Group, the maker of the three-in-one coffee mix. This gives investors an eye-popping hefty 34 per cent premium per share over the counter's pre-takeover an
Earlier this month, Dutch beverage giant Douwe Egberts made a $1.45 billion offer to buy Super Group, the maker of the three-in-one coffee mix. This gives investors an eye-popping hefty 34 per cent premium per share over the counter’s pre-takeover announcement price. PHOTO: LIANHE ZAOBAO FILE PHOTO

The buzz of excitement triggered by the two latest offers also gave the stock market a big shot in the arm, prompting traders to scour the market for fresh takeover targets which may interest foreign buyers.

These included stocks such as Global Logistic Properties (GLP), which had surged on a Bloomberg article that it could be a takeover target by a group of investors that includes China's sovereign fund, China Investment Corp. The company later denied this.

It begs the question: Is this recent spate of mergers and acquisitions a flash in the pan, or will there be more takeovers in the offering ?

The global scene offers hope of more action in the offing. Late last month, even before the US presidential election came to its nail-biting and unexpected conclusion, there had already been a succession of large M&A deals in the country.

This sudden acceleration in takeover activity follows an unremarkable first nine months of the year when choppy market conditions caused companies to scrap plans to do deals or raise money. The flurry of takeover deals in the US involved a wide swathe of sectors - from industrial conglomerate General Electric's US$25 billion (S$35 billion) buyout of oil and services provider Baker Hughes to AT&T's proposed US$85 billion acquisition of Time Warner.

There were also huge cross-border deals, with British-based British American Tobacco offering US$47 billion for full control of Reynolds American in a takeover that would create the world's biggest tobacco company

That so many major deals should take place in the closing days of a combative, hard-fought presidential campaign would seem to suggest that company bosses would have already taken the outcome in their stride. No matter which candidate won the White House, life would go on for them and they have to position their companies for the long term.

In the event, their hunches turned out to be right. True, many investors were taken aback when Republican nominee Donald Trump won the presidency. Financial markets across the globe initially shuddered at this stunning political upset. But stock prices have since regained their poise as investors focus on the positive side of his economic agenda rather than the threats he had been making about tearing up the US' trade pacts with the rest of the world.

During the election campaign, Mr Trump promised to spend heavily on programmes that would create jobs in construction, steel manufacturing and other sectors. He also promised to pump huge sums into building infrastructure such as bridges, highways, airports and of course his wall along the US-Mexico border - though he asserts Mexico will pay for that.

Mr Trump has offered few details on how he intends to pay for these programmes, while at the same time promising big tax cuts for companies and individuals in a simplified tax system. During the election campaign, economists projected that US national debt would surge astronomically under these proposals.

How some of Mr Trump's plans will sit with many traditional Republicans in Congress, for whom big government and protectionism are anathema, is another area of significant uncertainty.

Still, if Mr Trump manages to push through even a small part of his proposed fiscal stimulus of infrastructural spending and tax cuts, it may well unleash an economic boom in the US, which would stoke up a strong demand for raw materials. This will more than offset the loss of appetite from China as its economic growth slows down.

Commodities markets are already reacting favourably. Copper, a bellwether indicator for commodity demand, for instance, surged as much as 3 per cent immediately after Mr Trump's win.

And such developments, if they continue to snowball, will only be positive for a commodities-rich region such as South-east Asia.

The upshot of any surge in business activity would be a dramatic increase in M&As. This is the quickest means a company can use to expand its operations to take advantage of any economic boost given by the Trump administration.

For too long, share prices in Singapore have languished owing to tepid investor interest, even as some financial websites such as US-based Sovereign Wealth Man ask if the "dirt cheap stock market" offers a buying opportunity.

Many counters here have fallen well below their break-up values because of the uncertain business prospects. Yet, discerning investors are beginning to find them attractive.

Besides eye-catching M&A deals such as Super Group and ARA, there have been a number of somewhat smaller takeovers such as the $331 million buyout of precision-parts maker Innovalues by private equity makers which received little media attention.

On the flipside, there are a number of firms such as Fraser & Neave which are sitting on a huge pile of cash. Any improvement in the business climate will turn them into company acquirers too as they go on the prowl for fresh investment opportunities.

One thing is for sure. If Singapore's stock market continues to languish at current rock-bottom valuations, there will be plenty of M&A opportunities ahead. Stay glued to the screen.

A version of this article appeared in the print edition of The Straits Times on November 14, 2016, with the headline 'Activity in M&A market may just be picking up'. Print Edition | Subscribe