Merger and acquisition activity in Hong Kong rose by almost a half in 2017 compared to a year ago, driven by deals in the property and insurance sectors. And this has kept lawyers in the city extremely busy.
After relatively quiet year in 2016, mergers and acquisitions activity in Hong Kong rebounded emphatically last year as it rose by more than half, according to data from Thomson Reuters. A total of $204.8 billion of deals were inked in the year, up from $143 billion in 2016, an increase of 43.2 percent. However, the 2017 figure was still dwarfed by the year 2015, which set the record of $270.3 billion. Average M&A deal size rose to $138.1 million in 2017 from $96.2 million a year prior to that. There were two jumbo deals above $10 billion, and five above $5 billion.
According to the Thomson Reuters data, much of the growth in 2017 was spurred by mainland firms buying stakes into Hong Kong property and insurance firms, as well as internal restructuring of massive companies. More than a tenth of the deal value for the year came from a single deal in November, in which Wharf Holdings, a unit of Wheelock & Co, spun off the entire share capital of Wharf Real Estate Investment to its shareholders. That transaction was valued at $23.3 billion. And in August, China Unicom sold a 35.2 percent stake in HKSE-listed China Unicom (Hong Kong) to 14 large companies for $11.6 billion.
Another sector that was very active was insurance, with 2017 seeing a number of mainland firms buying stakes in Hong Kong companies in that sector, apart from the overseas deals carried out by insurers. For example, AIA bought Commonwealth Bank of Australia’s life insurance business in Australia and New Zealand for $3.05 billion. Overall, M&A involving Hong Kong insurers reached $2.84 billion in 2017, almost three times the $1 billion recorded in 2016.
However, the largest sector by far remained real estate, which made up a third of all deals. These included the Wharf deal, the purchase of the Centre tower in Hong Kong for $5.15 billion and the proposed sale of assets by the Link REIT at an estimated $2.95 billion. And if the rise in property prices is anything to go by, activity in the sector will not be cooling any time soon. According to Reuters, Hong Kong’s private home prices surged to a fresh peak for the 14th straight month in December last year, bringing the increase for 2017 to 16.7 percent. A government monthly index shows home prices rose 1.41 percent in December compared to November, extending a marathon trend of price increase that began in April 2016.
The provisional annual index rose 16.7 percent, while the December figure rose 14.8 percent year-on-year, said Reuters. Rents also shattered records for the 10th month, edging up 0.27 percent and rising 7.89 percent year-on-year. The 2017 figure increased 8.56 percent when compared to 2016. Analysts expect the financial hub’s property prices to lift a further 5 to 20 percent in 2018 partly due to high liquidity and a severe supply-demand imbalance. The Asian financial hub has one of the most expensive property markets in the world, says Reuters, with the average cost per square foot of an apartment about HK$12,100 ($1,547.31), according to property agency Midland Realty. On the prime Hong Kong Island, the average cost is about HK$16,200 per square foot.
LAWYERS BUSY
Of course, the busy M&A market is good news for the city’s lawyers, who do a lot of Greater China deal work. “Weil’s Hong Kong and mainland China offices saw strong deal flow in 2017, including deals involving principally Hong Kong as well as Mainland China assets,” says Henry Ong, a partner in the corporate department of Weil, Gotshal & Manges. “2017 also saw increased activity in the Hong Kong public markets although the underlying assets in many of those deals were mainland Chinese assets, or were businesses linked to the Chinese market. Because Weil’s Hong Kong and China offices specialise in M&A and private equity globally, we have also seen significant deal activity with respect to U.S.-listed Chinese businesses, as well continuing strong cross-border activity by Hong Kong-based financial sponsors and Asian sovereign wealth funds on their global investment strategy. While mainland buyers remain active in Hong Kong and elsewhere, they have been taking an increasingly strategic approach and have more prepared to play the ‘long game’ with respect to their investments.
Ong says that he expects these trends to continue well into this year. “Weil in Hong Kong, Shanghai and Beijing just had our busiest January in many years, and deal pipeline is strong,” he notes. “We do not expect the expected interest rate hikes ahead to impact significantly on the M&A market. Many of the deals we see are liquidity-driven and, in any event, growth in many industry segments, including in the tech and ‘new economy’ space, in particular, remains strong and hence we expect deals in this market to be less sensitive to interest rates rises ahead.”
So how different is Hong Kong as a market for M&A lawyer? Ong says that Hong Kong is a “melting pot” of different dealmaking cultures and approaches. “The reality is that, except for some of the more ‘chunky’ Hong Kong deals in the spaces mentioned (e.g. Hong Kong real estate and insurance businesses), a large proportion of the deals that are run from Hong Kong (whether public markets or private/cross-border) do not involve Hong Kong assets and many involve buyers, sellers or business partners from HK and elsewhere,” he says. “The approach to a given deal is driven to a large degree by the investor/buyer – and so, for example, deals led by a leading PE sponsor would generally be more ‘international’ in approach but, of course, aspects of the deal process often have to be tailored to the circumstances, deal dynamics and the counterparties. Deal terms, deal structures and funding structures continue to grow exponentially in complexity and sophistication. Good lawyering in this market means being practical, adaptable and super-responsive.”
Ong says that while MNC acquisition activity in Asia remained relatively soft last year, but there has been increasing private equity-led deal activity over the last few years, including in 2017, especially by the bigger Asia-based financial sponsors. “The number of deals leveraged deals continued in number and scale in 2017,” he says. “Deals in the ‘new economy’ – which includes Internet, new media and convergence – were ‘hot’ back in 2017 and remain that way. As mentioned previously, liquidity is one factor. The other major factor is Asia’s (including, in particular, China’s) fast-developing and growing ‘new economy,’ and China’s transformation from manufacturing to innovation and technology as key drivers.”
Looking forward, Ong is upbeat about dealmaking in the city. “Weil has been in Hong Kong for just over 10 years,” he says. “This market has changed and matured at an incredible pace over the last decade, and we expect that to continue over the next few years. Deal and funding structures will continue to increase in complexity and sophistication, and private equity will play an increasingly important role in shaping the deal market, governance practices, and overall business growth. Locally, the acceptance and development by Hong Kong’s SFC and the Stock Exchange of weighted voting rights will widen the appeal of HK as a listing venue for ‘unicorns’ and other businesses in the tech sector, and that would also give rise to interesting deal structures – and challenges – in dealmaking in this market.”
Brands in Hong Kong expand again as retail sales recover
By Donny Kwok of Reuters
Retailers in Hong Kong such as Chow Tai Fook, the world’s No. 2 jeweller after Tiffany’s by market capitalisation, are expanding again in a sign of confidence for a sector critical to the economy.
A pick-up in visitor arrivals from mainland China and strong local demand buoyed by robust stock and property markets have boosted consumer confidence, which translated into retail sales rising 2.2 percent in 2017, the first increase in three years.
Consultant PwC expects retail sales growth to quicken to 4-6 percent this year and to remain firm for several years after that. The volume of retail sales last year rose 1.9 percent after two straight years of decline.
Retail sales are critical for the economy. When 2017 GDP figures are published, analysts expect them to show that retail sales produced 17 percent of the economy’s growth and about a tenth of its jobs.
Like many other brands, Hong Kong-listed Chow Tai Fook had closed stores in recent years. It said it opened three new shops in Hong Kong between October and December 2017 and plans further openings, including in neighbouring Macau. Including mainland China, the brand increased its stores to 2,565 in 2017 from 2,377 in 2016.
“The outlook for the jewellery sector in Hong Kong this year is positive against the backdrop of a recovering economy in mainland China ... and the booming stock and property markets that create a positive wealth effect,” the company said in a statement to Reuters.
Other stores will follow Chow Tai Fook’s suit, figures from real estate services company Colliers International suggest. It predicts that 1.38 million square feet of new retail space will come onto the market in the core shopping districts of Hong Kong in 2018, a sharp increase from 327,000 square feet in 2017.
Chow Tai Fook’s smaller rival Luk Fook Holdings added two stores in Hong Kong in the final quarter of 2017 and jeweller Chow Sang Sang said it might open more shops in Hong Kong.
Skincare and cosmetics brand L‘Occitane International increased its stores in Hong Kong to 36 in 2017 from 34 in 2016 and rival Sa Sa International added four to take its total to 119 in 2017.
REBOUND IN TOURISM
Visitors to Hong Kong from the Chinese mainland are rising again, which has helped boost retail sales. Their numbers increased 3.9 percent in 2017 after falling 6.7 percent in 2016. Total visitors also increased in 2017 after declining in 2015 and 2016.
One attraction for Chinese mainland visitors to Hong Kong is that imported goods are often cheaper than in China due to lower tariffs.
A Hong Kong jobless rate of less than 3 percent - the lowest in nearly 20 years - is also boosting confidence and analysts said there is little pressure on retailers to pay higher rents, allowing them to keep costs under control.
“There are still many empty shops on the streets, absolutely it is not a time for raising rents,” said Joe Lin, executive director, advisory and transaction services, retail at property services group CBRE in Hong Kong.
“I don’t believe we will see a significant rebound in retail rent in the next 12 months,” he said.
Colliers said favourable rents on first-tier high streets were driving demand for shops in prime locations although brands, including Major League Baseball (MLB), Swedish watch brand Daniel Wellington and Swiss luxury watchmaker Carl F. Bucherer, were opting for smaller stores of around 1,000-5,000 square feet rather than bigger ones.
“International mid-market fashion and lifestyle brands are thriving, new F&B (food and beverage) concepts continue expansion, luxury watches and jewellery demand continue a slow recovery,” it said.