Singapore M&A value set for a record-breaking year

Investors are looking to logistics and technology in Southeast Asia’s financial, trade and innovation hub, with sovereign wealth funds and Chinese firms acting as the keenest bidders

When year-end numbers are tallied in a few months, Singapore in 2017 will have set a record for M&A transactions by value, as investors continue to be drawn to one of the most investor-friendly destinations in Southeast Asia.

In the first three quarters of 2017 alone, the city-state was involved in US$26.21 billion worth of M&A deal activity, which is above the full-year deal value totals for every year from 2010 through 2017, excepting 2012. Transactions recorded for the first two months of Q4 have already put 2017’s total ahead of 2012’s US$31.59 billion, for the record.

While the rapid growth of neighboring developing markets such as Indonesia and Vietnam continues to draw significant investor interest, Singapore’s fundamentals are unmatched within the region. The country boasts the highest GDP per capita and lowest sovereign credit risk of any ASEAN nation, and has an advanced investment-friendly corporate law and tax regime. These characteristics also make it a prime staging post from which non-Asian companies and investors can access the rest of the region.

Logistics logic

The real story so far in 2017, however, is that buyers have shown a keen interest in larger assets. While overall deal volume remained in line with previous quarters, Q3 value shot up on the back of the US$15.9 billion buyout of Global Logistic Properties (GLP) by a Chinese private equity consortium.

This deal eclipsed the value of the remaining top ten deals in Q3 combined, the next closest being the proposed US$2 billion takeover of CWT, another SGX-listed logistics firm, by Hong Kong’s HNA Holdings. It marks the largest Asian buyout on record and the second-largest transport and logistics buyout after Ferrovial’s takeover of BAA in 2006.

The rationale for the GLP deal is clear. The company is Asia’s largest warehouse operator and is benefiting from rising demand for logistics facilities in lockstep with the e-commerce boom spearheaded by the likes of Amazon and China’s equivalent,

Digital drive

Investors are also showing strong interest in Singapore’s TMT sector, which accounted for the highest volume of M&A activity in Singapore in Q1-Q3 2017. Three tech companies claimed spots in the country’s top ten deals of the year: digital ride-hailing service Grab, digital entertainment and financial services firm Sea Ltd. (with its IPO on the New York Stock Exchange) and online retailer Lazada. The US$2 billion raised by Grab from investors makes it the most valuable Southeast Asian internet company financed to date.

There is much to be excited about in Singapore and the wider region’s technology and internet space, which is set to boom in coming years. A report by Google and Singapore’s sovereign wealth fund Temasek says that growth in the region’s web usage is unparalleled, with the existing internet base of 260 million people expected to reach 480 million by 2020. This, they say, will help to propel the region’s internet economy to more than US$200 billion by 2025, led by e-commerce (CAGR 32 percent), online media (CAGR 18 percent) and online travel (CAGR 15 percent).

Sovereign giants

Temasek recognizes this huge potential. Its venture capital arm Vertex Venture Holdings has completed the biggest fundraising specifically for Southeast Asian technology deals, having raised US$210 million from external investors in October. The sovereign investor is looking to repeat the success it had with Grab, the Uber rival in which Temasek was an early institutional investor.

Indeed, one of the defining characteristics of Singapore's M&A market is the influence of its two largest sovereign wealth funds, Temasek and GIC. Naturally both have geographically diversified portfolios, but they have a significant presence in Singapore. Domestic assets in Singapore currently constitute the single largest component (29 percent) of Temasek’s holdings, while GIC was the largest shareholder in GLP prior to its landmark US$15.9 billion sale. The presence of these investors will help ensure there is continued demand for large-scale deal-making in Singapore over the medium to long term.

One Belt, One Road

China is Singapore's largest trading partner. The country was the most active overseas acquirer of Singaporean companies by both value and volume in the first three quarters, with 15 deals worth US$19.5 billion announced.

Despite diplomatic tensions stemming in part from Singapore's military cooperation with Taiwan and the US, there are signs of closer economic union between the two countries. Talks between Chinese Foreign Minister Wang Yi and Singaporean counterpart Vivian Balakrishnan earlier this year resulted in Wang stating: “Against the background of a backlash against globalization, China and Singapore, as the champions of regional integration, need to work together to address challenges and uphold common interests.” The two have signalled an intention to cooperate as part of China’s One Belt, One Road initiative, which calls for massive investment in and development of trade routes in the region.

As Asia, with China at its economic heart, looks to become a more self-sufficient, consumption-based economy, companies like GLP will facilitate trade and growth among Asian countries. At the same time, Singapore is uniquely positioned as a gateway into the rapidly growing ASEAN sub-region and stands to benefit from rising trade between countries such as Malaysia, Vietnam and Indonesia.

China’s M&A squeeze

Yet recent developments present some cause for concern. Motivated by market uncertainty in 2015 and 2016 that served to weaken the renminbi, China is selectively taking steps to stem capital outflows from the country. One measure has been to restrict sectors in which Chinese companies can invest. Regulators have already curbed dealmaking in the insurance space, and China’s State Administration of Foreign Exchange said it will focus its attention on cross-border deals in real estate, hotels, entertainment, cinemas, and sports clubs.

Given that Chinese companies and investors have accounted for a high proportion of Singaporean M&A in 2017, there is a risk of these measures dampening regional M&A activity. However, given the persistence of the factors that have led to Singapore being a first port of call in Southeast Asia for foreign investors, and in light of the financial dry powder that regional and international private equity houses have at their disposal and the booming tech sector, we expect M&A activity to remain robust moving into 2018.

Receive M&A Explorer quarterly email updates when new data is available.