By Vinicy Chan, Julia Fioretti and Ken Wang
(Bloomberg) -- Investment banking is all about building relationships and providing that personal touch. With the coronavirus rippling through China, bankers confined to home offices can’t do much of either, grinding deals to a halt in the world’s second-largest economy.
The virus outbreak, whose death toll has topped 1,700, has barred many dealmakers from traveling to China, making client meetings and on-site due diligence nearly impossible. Announced mergers involving a Chinese company dropped to $25.9 billion so far this year, the lowest for the period since 2014, according to data compiled by Bloomberg. It’s a similar story on the equity front, with just one initial public offering in the last 30 days in Hong Kong.
“It’s inevitable that there are delays in deal execution as a result of restrictions on travel and office closures which continue to disrupt business activities,” said Sze-shing Tan, a principal in the mergers practice at Baker McKenzie Wong & Leow law firm in Singapore.
The list of delayed deals is growing. Auto parts maker Chongqing Sokon Industry Group Co. said in a filing to Shanghai’s stock exchange that the virus outbreak “has had a direct impact” on its planned takeover of Dongfeng Motor Corp.’s joint venture through a 3.85 billion yuan ($553 million) stake sale. The target firm, based in the hard-hit Hubei province, hasn’t been able to update its financials amid the suspension of on-site audit and verification.
First Quantum Minerals Ltd. has delayed the sale of its Zambian operations because the virus outbreak is preventing face-to-face meetings with potential Chinese buyers, the Canadian company said last week. The asset has drawn interests from companies including Jiangxi Copper Co., people familiar with the matter have said.
In Hong Kong, where many bankers and lawyers are also confined to home offices, restaurant operator Daikiya Group Holdings Ltd. canceled its IPO, while Chinese biotech firm InnoCare Pharma Ltd. postponed investor meetings for its planned Hong Kong listing. The move, which could delay the entire share sale, doesn’t bode well for other IPO candidates in the pipeline. 58 Home, the maid and home-maintenance service owned by China’s Craigslist equivalent 58.com Inc., delayed its planned U.S. IPO as the coronavirus outbreak cripples customer demand.
China’s domestic IPO market has charged forward though. Twelve companies have priced offerings this month, with a combined value of $2.8 billion, according to Bloomberg data. The momentum might not last long as these listings were cleared before the Lunar New Year holiday, when concerns over the virus surged.
For dealmakers, the deadly virus is exposing the limits of technology. In an era of digital banking and lightning-fast electronic trading, some transactions still require a hand shake and face-to-face contact. Pitch meetings, due diligence and regulatory reviews are best done in person. It’s a service industry after all, much like the restaurant business: You can’t do a billion-dollar deal over WeChat, said one banker, referring to China’s popular communication app.
Some tales from the front lines:
An investment banker surnamed Chan, who used to spend three of five days in the mainland, is now grounded in Hong Kong as his firm has temporarily prohibited employees from visiting China. The travel ban has put his prospective client meetings on hold and he’s returning to a half-empty office as some of his colleagues who previously traveled to China are on a 14-day quarantine. He’s been trying to follow up with clients on deal proposals over emails but he’s not getting much response.
A Beijing-based banker, surnamed Sheng and working from home, shares similar frustrations. He said it’s impossible to pitch deals over the phone. Worse still, the travel ban could delay fund-raising because auditors and bankers aren’t able to carry out on-site due diligence in China.
An IPO lawyer based in the former British colony said he’s been conducting video calls with clients to get some early preparation work done. However, deals that were more advanced and nearing the listing hearing or marketing stage are being held up. It’s tough to prepare accounts without traveling.
Still, outside China, some deals are progressing. British supermarket chain Tesco Plc. is inviting suitors to the second round bidding of its operations in Thailand and Malaysia worth more than $7 billion. Central Group, a conglomerate with businesses spanning from department stores to hospitality, raised more than $2 billion through a spinoff of its retail arm in Thailand.
“In southeast Asia our M&A pipeline is as strong as it has been over the last five years and we continue to see a number of billion dollar plus IPOs,” said Gregory Thiery, head of Southeast Asia investment banking at Morgan Stanley.
Central Retail, controlled by the Chirathivat family, is among several companies pursuing billion-dollar IPOs in Southeast Asia. Billionaire Charoen Sirivadhanabhakdi, Thailand’s richest person, is also considering a listing of his brewery business in Singapore, while PTT Oil & Retail Business Pcl plans to kick off its IPO process this year.
“Having a strong Asean franchise is a good hedge against any potential China slowdown,” said David Biller, head of Asean banking, capital markets and advisory at Citigroup Inc., who added that Citigroup’s revenue in southeast Asian investment banking has increased by double digits in the last year.
The M&A activity is centered on energy, consumer, transportation as well as banking and insurance, according to Morgan Stanley’s Thiery. That’s partly because global private equity firms are getting more active and multinational corporations are selling their non-core assets in this part of the world.
KKR & Co., for example, is exploring a potential sale of Singaporean provider of intermediate bulk container Goodpack Ltd. for about $2 billion, Bloomberg News reported previously. Malaysia’s sovereign fund and Telenor ASA have revived talks on a potential deal involving Axiata Group Bhd., people familiar with the matter have said, just a few months after the carriers scrapped negotiations on a broader merger of their Asian operations.
The strong presence of wealth management clients in the region also means there’s significant cash to be deployed, underpinning deals, according to Nicolo Magni, head of global banking for southeast Asia and India at UBS Group AG.
“Logistically in the current context, it may take longer for these cross-border deals to proceed but they will get done,” Magni said.
Back in Hong Kong and China, even as dealmakers extend their holidays or stock up on masks, they remain optimistic that a second-half rebound is likely once the virus subsides and travel resumes. Yet the threat of a washed-out 2020 looms if the impact drags on for months.
“With the travel ban in and out of China, we are expecting to see a decline in China inbound and outbound deals,” said Grace Tso, a partner at Baker McKenzie in Hong Kong. “Whether it is a matter of short-term investment sentiment or will have a rippling effect to other sectors will depend on whether the epidemic can be contained in a shorter period of time.”
© 2020 Bloomberg L.P.