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The third quarter of 2013 has continued to provide positive signs of a marked stabilisation of transactional activity in the offshore markets. The number of deals done and the value of those deals is broadly consistent with Q1 and Q2 2013. Crucially, a return of investor confidence is indicated by the tightening spread of deals, an increase in the number of acquisitions and a decrease in minority stake purchases. The findings are highlighted in the latest Offshore-i Report released today by Appleby, one of the world’s largest providers of offshore legal, fiduciary and administration services. The latest edition of Appleby‘s quarterly report, which provides data and insight on merger and acquisition activity in major offshore financial centres, focuses on the third quarter of 2013.
The third quarter of 2013 has continued to provide positive signs of a marked stabilisation of transactional activity in the offshore markets. The number of deals done and the value of those deals is broadly consistent with Q1 and Q2 2013. Crucially, a return of investor confidence is indicated by the tightening spread of deals, an increase in the number of acquisitions and a decrease in minority stake purchases. The findings are highlighted in the latest Offshore-i Report released today by Appleby, one of the world’s largest providers of offshore legal, fiduciary and administration services. The latest edition of Appleby‘s quarterly report, which provides data and insight on merger and acquisition activity in major offshore financial centres, focuses on the third quarter of 2013.
The Appleby report indicates that M&A activity offshore in the third quarter of 2013 has stabilised. In Q3 Jersey recorded 41 transactions, almost the same as the previous quarter with values also staying at a similar level. In eight deals Jersey registered companies were the acquirers in the transaction with a total value of USD720m.
Wendy Benjamin, Partner and Head of Appleby’s Corporate & Commercial group in Jersey comments:” The number of deals completed and their value remaining broadly steady overall compared with Q1 and Q2 2013, confirms our view that the market has now found a consistent level of transactional activity and investor confidence appears to be returning.”
During the third quarter of 2013 the value of deals completed in the offshore markets totalled USD34.5bn, broadly flat against the Q2 total of USD35.6bn. Given that the figures are a snapshot and further Q3 deals will be recorded in the coming weeks, Appleby states that it is likely Q3 will be slightly up on Q2 this year.
When it comes to volume, there were 538 deals in Q3 2013 as against 523 in Q2 and 504 in Q1. The trends identified in the Q2, 2013 Offshore-i report with quarterly volumes of around 500 deals, and quarterly values around USD30-35bn, are proving sustainable.
At these levels, businesses incorporated within offshore markets continue to be the target of transactions worth more than those of businesses incorporated in Africa, the Middle East, Oceania and South & Central America. The offshore market is one of only two global regions that saw deal volumes increase in the past quarter.
Cameron Adderley, Partner & Global Head of Appleby’s Corporate & Commercial group comments: "The offshore markets, which represent critical links in the global supply chain of trade and investment flows worldwide, are exhibiting signs of robustness after several years of volatility. That is a development we have been looking out for since we began our Offshore-i series, and we view it as a critical requirement of a sustainable macro-economic recovery.”
“Other trends from past reports are also reaffirmed by the Q3 figures, most notably the strong story that is emerging from average deal sizes. After nine months in 2013 the average deal value is USD65m which, if it persists for the remainder of the year, will be ahead of the average deal size for seven of the last ten years. Looking at just the third quarter, our average deal size (USD64m) means transactions in our markets were larger than those done in Western Europe and all other world regions except the Americas.”
“Finally, the 10 largest offshore deals now consistently represent a steady 30% of the cumulative deal value overall, in contrast to the choppy markets of 2012 when in one quarter the top 10 transactions represented 73% of all activity; a clear sign of figures being distorted by just a few so-called ‘mega deals’.”
“It is clear that offshore M&A markets are strengthening and deepening, with transaction levels in the mid-market gathering force after several years typified by many small deals and a limited number of multi-billion dollar transactions achievable only because of atypical circumstances.”
Frances Woo, Appleby’s Group Chairman added: "The evidence provided by the Q3 figures means that we continue to be cautiously upbeat about the prospects for our offshore region and therefore the wider economic landscape. However, we do not shy away from recognising that we are entirely interconnected to the global economy. The other major economic regions in which our clients operate are critical to the offshore revival, and whilst the signs from the United States economy have been broadly positive throughout 2013, the budgetary impasse that caused the shutdown of the federal government in October may yet seriously affect confidence and deal flow around the world.”
“Likewise, the international political climate remains unpredictable, as tensions surface over the handling of the Syrian conflict, for example, and stock markets and currencies, particularly in Asia, remain under pressure amid fears that the Federal Reserve might taper its quantitative easing programme. The Eurozone, though strengthening, still faces major sovereign debt challenges, particularly in the Southern European states.”
Global Offshore Market: Q3 2013
The key themes emerging from the report show that in the third quarter of 2013:
The changing M&A Environment
In the third quarter of 2013 there were 538 deals announced offshore, with a combined value of USD34.5bn, which puts the quarter just shy of Q2 2013 in terms of volume, and slightly behind it in terms of value. In Q2 there were 523 deals with a cumulative value of USD35.6bn, so volume is up 3% and value down 3%.
As delayed reports of deals are published, in the coming weeks Appleby expects the final Q3 2013 total will edge up to reveal a slight increase on the previous quarter in terms of both volume and value.
When comparing this third quarter against the same period last year, the number of deals has increased by 10% from 487 to 538, while the total deal value has fallen 9% from USD38bn.
A story is now emerging for 2013, first identified by Appleby at the end of the last quarter, and that is one of signs of stability returning to previously choppy M&A markets. In the Group’s Q2 2013 report it was noted that the offshore world is now settling on quarterly deal volume of about 500 transactions, with deal values now consistently converging around USD35bn. Deal values have exceeded USD40bn only once in the last nine quarters, and as such Appleby says it is confident that there are signs of a new norm emerging.
Financial services active but Manufacturing deals drive Q3 activity
The Appleby report reveals that Financial services and insurance is once again the most active sector dominating activity in the offshore M&A markets by both volume and value of deals, with 200 transactions worth a combined total of USD10.9bn. This is particularly significant from a volume perspective, where it accounts for an extraordinary 37% of deal flow and represents 32% of value in Q3.
One notable feature is that the average deal size is USD55m, smaller than the quarterly average at USD64m. Instead the sectors that are generating most value for the offshore deal flows are electricity, gas, steam and air (average deal size USD380m); administrative and support services (USD136m); manufacturing (USD118m) and construction (USD110m).
Of the 10 largest deals in Q3 2013, only two of them relate to financial services, both valued below USD1bn. Securities broker CLSA, which is a Hong Kong incorporated Taiwanese business, was acquired by Citic Securities, China’s largest broker by market value for USD940m, while Guernsey-based investment fund Riverstone Energy announced a planned IPO on the London Stock Exchange that it hopes will raise USD880m.
So while the financial services industry continues to be the engine room of our M&A markets, the star performers are elsewhere.
The standout sector for Q3 2013 is manufacturing, accounting for four of the five largest deals. Manufacturing businesses appear to be back in fashion, and often they are Chinese; certainly in two of the four biggest deals this quarter. Overall the manufacturing sector accounted for 77 deals with a cumulative value of USD9.1bn in Q3.
Many of the best performing sub-sectors are manufacturing related this quarter, most notably manufacture of basic metals (with USD1.3bn of deal value); manufacture of computer, electronic and optical products (USD2.8bn); manufacture of machinery and equipment (USD2.1bn); and manufacture of paper and paper products (USD1.4bn).
Cameron Adderley summarises “Q3 2013 now tells a different story from earlier in the year, in that the preponderance of natural resources deals with developing economies securing supplies has visibly diminished. Instead, Q3 is more about acquiring the means to make products, and acquiring interests in real estate. We believe this signals a shift of investor confidence toward marginally riskier sectors, and to investing for future growth.”
Shift to acquisitions highlights increasing investor confidence
Whilst minority stakes remain the most popular deal type in Q3, with 328 deals and a cumulative value of USD11.9bn, representing 61% of the number of deals done and 34% of the value, the contribution of minority stake deals to value has halved from 57% of dollars spent in Q3 2012.
In Q3 2013 the most money is spent on acquisitions, which at USD17.4bn accounted for a consistent 30% of deals but with 50% of the cumulative value the amount spent is up from 34% compared to a year ago.
Cameron Adderley continues: “We see the continuing shift of value into acquisitions to be a positive sign of confidence returning. Minority stakes are the accepted means of accessing new industries and geographical regions while minimising risk, but complete acquisitions require greater risk appetite, and this heralds good news for the market.”
“Indeed, five of the top 10 deals of the quarter were 100% acquisitions, and two further Top 10 deals were acquisition increases from minority stakes to 100% control. Looking ahead the top five pipeline transactions are 100% acquisitions, the largest being the anticipated USD4bn acquisition of Hong Kong-incorporated supermarket online grocery retailer ParknShop by Wal-Mart Stores of the US.”
Capital markets respond as companies raise funds for growth
In the second quarter Appleby noted the growing strength of the capital markets, with Initial Public Offering (IPO) activity looking increasingly bullish. In Q3 Offshore-i reveals that the same high levels of IPOs and planned IPOs are continuing, with 11 offerings completed in Q3 and a further 27 announced.
The biggest IPO to be announced in Q3 2013 was that of Riverstone Energy, an investment fund based in Guernsey that plans to list on the London Stock Exchange to raise at least GBP500m.
With USD3.5bn of planned IPOs announced in Q3 there are clear signs that confidence is returning to the capital markets as businesses seek to raise funds for growth. The average IPO size in Q3 2013 was USD115m, up from USD29m in Q3 2012, which appears to represent the bottom of the market.
Private equity larger acquisition deals are also back
Q3 2013 saw three institutional buyouts with a combined worth of USD834m. The return of these deals – the most common private equity structure for mid to large transactions – marks a positive step forward for the private equity industry, where offshore activity in recent years has been heavily focused on smaller management buyout deals. The biggest institutional buyout of this quarter saw Blackstone Group pay USD500m for Cayman Islands banking services software developer Pactera Technology, while in another deal Tides Holdings, a wholly owned subsidiary of Blackstone, agreed to buy Bermuda-incorporated construction piling company Tysan Holdings for USD320m.
In Q3 2012, there were six buyout deals with a combined worth of USD380m, and as such Appleby concludes that the offshore markets are seeing the return of sponsor-led M&A. Indeed, four such deals feature in Top 20 largest upcoming deals, including a planned USD750m institutional buyout of RDA Microelectronics Inc. of Cayman by Shanghai Pudong Science and Technology Investments.
Cayman Islands tops offshore M&A activity
Despite some close competition from Bermuda and the BVI in previous quarters this year, the Cayman Islands has consistently recorded the highest volume and value figures. In Q3 Cayman targets are emphatically out in front, with 140 of the 538 offshore deals, and USD13.5bn of the USD34.5bn deal value, accounting for 26% of all the deals done and 39% of the total deal value.
Q3 also saw growth in Guernsey and the Isle of Man. In 2012, Guernsey recorded just over $800m of deal activity but since then it has consistently posted well over USD1bn each quarter and in Q3 2013 this reached a high of USD3.6bn with associated growth in volume. The Isle of Man has typically delivered about 20 deals worth approximately USD275m however Q3 2013 saw an uplift to 35 deals and a cumulative value of USD721m.
Acquirer deals up in volume but reduced value – Mauritius & Seychelles benefit
Acquisition activity led by offshore incorporated companies increased from 451 in Q2 to 512 in Q3, but the money spent by offshore companies on M&A fell 21% to USD26.7bn.
BVI and Hong Kong continue to be the most acquisitive offshore markets by deal volume, each accounting for nearly 150 deals with the Cayman Islands stable at around 70 deals per quarter.
The standout performers of Q3, however, are Mauritius and the Seychelles, with 61 deals more than double their Q2 total. Typically minority stake deals involving Mauritius-based acquirers concerned targets in India. The largest saw HT Global IT Solutions, an affiliate of Baring Private Equity Asia, acquiring a controlling stake in Hexaware Technologies, a business-process outsourcing company in India. While Mauritius has historically been linked to the Indian market and the Seychelles to Indonesia, both centres are increasingly driven by their geography and their favourable tax treaties, as investment routes into Africa.
Strength of the offshore market globally
In Q3 2013 the offshore markets rank fifth globally in terms of cumulative deal value, with more money spent on offshore businesses than on those in Africa, the Middle East, Oceania and South and Central America. Average deal size is USD64m in Q3 compared to a global average of USD62m, ranking the offshore markets third globally. Only North America and South and Central America can boast larger average deal sizes this quarter and offshore compares well against Western Europe at USD46m and the Far East and Central Asia at USD48m.
In comparison with Q2 2013 only the offshore and Eastern Europe regions have an increased deal volume and only two other world regions saw cumulative deal values increase quarter on quarter, North America, up 23%, and Asia up 24%.
In Q3 2013 the global economy once again generated deal values in excess of a trillion dollars, having been below this level for a significant part of 2011 and 2012. In Q3 the total was USD1.12tr, and the offshore markets accounted for a healthy 3% global market share.
