Record quarter cannot prevent annual fall in M&A activity

The offshore markets experienced their largest quarter-to-quarter rise in mergers and acquisitions transactions during the past three years, according to a report on M&A activity in major offshore financial centres released by Appleby.  

As the latest edition of Offshore-I shows, both the volume and value of deals involving offshore targets increased considerably during the fourth quarter of 2012 with volume up 27 per cent and value up 202 per cent.  

However, the substantial increase in value is largely due to the biggest transaction of the quarter – the US$56 billion sale of British Virgin Islands-listed oil exploration business TNK-BP to Russian state-owned oil company Rosneft. 

Excluding this particular deal the quarter still contained a deal value of $45.8 billion, still placing it as the third highest three-month period of the last three years. 

But 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. Initial public offering activity was particularly low with only 28 recorded IPOs and planned IPOs, down from 43 in the same quarter of 2011. 

“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,” said 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.” 


Cayman Islands retains top  

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

The British Virgin Islands topped the table in terms of value, accounting for US$60.2 billion or 59 per cent of dollars spent offshore in the fourth quarter. This compares to 9 per cent in the third quarter of 2012 and 23 per cent in the fourth quarter of 2011. 

Meanwhile, Hong Kong saw further growth in deal activity, with 41 per cent higher volume and value up a considerable 123 per cent. Year-on-year, Hong Kong’s fourth quarter growth is even more impressive up 245 per cent, with $18.6 billion deals generated in the fourth quarter of 2012, up from $5.3 billion in fourth quarter of 2011. 

Frances Woo, Appleby’s Hong Kong-based chairwoman, predicts Cayman and Hong Kong will be the dominant players in 2013.  

“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,” she said. 


Average deal size increases  

Average deal sizes, the report said, indicate a slowly returning depth to the marketplace. The average deal size in the fourth quarter of 2012 of $173 million outstripped averages over the last 12 quarters. The average deal size for the year of $103 million exceeded 2011 ($63 million) and 2010 ($71 million). 

“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,” Ms Woo said. “Offshore jurisdictions generated two of the world’s largest transactions in 2012 – that of TNK-BP and Jersey-based Glencore’s [US$33 billion] 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 majority of M&A transactions involved the financial services and insurance industry, which represents 30 per cent of all deals in the fourth quarter, followed by manufacturing.  

During 2012, financial services deals accounted for almost one in four dollars spent on offshore transactions (24 per cent), and nearly a third of the volume (32 per cent). The increase in financial services M&A activity, by 5 per cent and 3 per cent, respectively, over 2011, is expected to continue, Appleby said.  


Global offshore market  

Globally the offshore M&A market ranks ninth in terms of deal volume and fifth by value, with an aggregate value of $101.8 billion. 

“It is encouraging to see that the offshore markets average deal size for the quarter, at [US$173 million], 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,” Ms Woo said. “The region’s cumulative deal value is on par with that of Eastern Europe, the Nordic states, Africa and the Middle East combined.” 

Ms Woo said Appleby expects that offshore financial centres will continue to perform strongly and relatively robustly on the international stage. “That said, as and when a deeper global recovery takes hold of the M&A market, we will not be surprised to see the performance of our markets rapidly eclipsed by the larger relative growth of onshore jurisdictions and bigger economies.” 

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