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PwC M&A 2019 Review and 2020 Outlook

February 2020

PwC

Foreword – explanation of data shown in this presentation (1 of 2)

• The data presented is based on information compiled by ThomsonReuters, ChinaVenture, AVCJ, public news and PwC analysis unless stated otherwise

• Thomson Reuters and ChinaVenture record announced deals. Some announced deals will not go on to complete

• The deal volume figures presented in this report refer to the number of deals announced, whether or not a value is disclosed for the deal

• The deal value figures presented in this report refer only to those deals where a value has been disclosed (referred to in this presentation as “disclosed value”)

• “Domestic” means China including Hong Kong, Macau and Taiwan

• “Outbound” relates to mainland China company acquisitions abroad

• “Inbound” relates to overseas company acquisitions of domestic companies

• “Private Equity deals” or “PE deals” refer to financial buyer deals with deal value over US$10mn and/or with undisclosed deal value, invested mainly by private equity GPs but also including direct investments by financial institutions and conglomerates which are of the nature of private equity type investment

2

PwC

Foreword – explanation of data shown in this presentation (2 of 2)

• “VC deals” refer to financial buyer deals with deal value of less than US$10mn and/or with undisclosed deal value, but invested by financial buyers

• “Strategic buyer” refers to corporate buyers (as opposed to financial buyers) that acquire companies with the objective of integrating the acquisition in their existing business

• “Financial buyer” refers to investors that acquire companies with the objective of realising a return on their investment by selling the business at a profit at a future date and mainly, but not entirely, comprises PE and VC funds

• In order to exclude foreign exchange impact, deal values from 2015 to 2018 were adjusted based on the 12/31/2019Rmb/US$ exchange rate

3

Overview

PwC

China M&A fell 14% to US$559 billion, the lowest since 2014

5

Total deal volume and value, from 2015 to 2019

* Financial buyer-backed China mainland outbound deals are also included in financial buyer deals, but they are not double counted in the total deal volume and deal value in the table above

Source: ThomsonReuters, ChinaVenture and PwC analysis

*

*

Volume Value Volume Value Volume Value Volume Value Volume Value

Strategic buyers (US$bn) (US$bn) (US$bn) (US$bn) (US$bn)

Domestic 4,821 401.5 4,870 316.9 5,111 361.9 4,778 318.8 4,498 272.4 -6% -15%

Foreign 316 12.9 271 6.7 255 13.8 178 19.8 248 20.9 39% 6%

Total Strategic buyers 5,137 414.4 5,141 323.6 5,366 375.7 4,956 338.6 4,746 293.3 -4% -13%

Financial buyers

Private Equity 1,062 171.0 1,767 212.0 1,324 174.1 1,920 212.9 1,585 206.3 -17% -3%

VC 2,735 4.0 3,492 5.6 2,338 3.0 3,410 7.0 2,549 2.6 -25% -62%

Total Financial buyers 3,797 174.9 5,259 217.7 3,662 177.1 5,330 219.9 4,134 208.9 -22% -5%

China mainland Outbound

SOE 79 22.8 116 63.2 101 27.0 64 20.3 60 16.1 -6% -21%

POE 207 20.0 609 102.6 467 57.5 310 49.0 384 26.3 24% -46%

Financial buyers 94 12.3 195 36.2 238 33.1 253 21.0 223 14.9 -12% -29%

Total China mainland Outbound 380 55.2 920 202.1 806 117.6 627 90.3 667 57.3 6% -37%

HK Outbound 199 23.7 282 22.5 243 12.4 227 23.6 159 14.1 -30% -40%

Total 9,419 655.9 11,407 729.6 9,839 649.7 10,887 651.3 9,483 558.7 -13% -14%

20172015 2016 20192018% Diff vol.

2019 vs.

2018

% Diff val.

2019 vs.

2018

PwC

The principal drivers of the 14% decline in deal values were the domestic and outbound sectors; PE held up reasonably well, and there was strong foreign inbound M&A (although this sector is smaller)

6

401.5 316.9

361.9 318.8

272.4

12.9

6.7

13.8 19.8

20.9

171.0

212.0 174.1

212.9

206.3

23.7

22.5 12.4 23.6

14.1

55.2 202.1

117.6 90.3

57.3

0

100

200

300

400

500

600

700

800

2015 2016 2017 2018 2019

Domestic Strategic Buyers Foreign Strategic Buyers Private Equity Deals Hong Kong Outbound China Mainland Outbound

US$ billion


* US$14.8bn of financial buyer-backed China mainland outbound deals are also recorded in private equity deals, US$0.1bn are recorded in VC deals(excluded from this chart)

Deal value by main category (excludes VC)

PwC

There was a significant decline in deal volumes* for domestic and PE M&A (although PE did larger deal sizes on average), whilst outbound tracked at close to 2018’s lower levels; overall deal activity returned to volumes last seen in 2015* Excluding VC

7


* 111 financial buyer-led China mainland outbound deals are also recorded in private equity deals, 112 are included in VC deals(excluded from this chart)

4,821 4,870 5,111 4,778 4,498

316 271255

178248

1,062 1767 1324 1920

1,585

199

282243 227

159 380

920806 627

667

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2015 2016 2017 2018 2019

Domestic Strategic Buyers Foreign Strategic Buyers Private Equity Deals Hong Kong Outbound China Mainland Outbound

Deal volume by main category (excludes VC)

No.

PwC

The PE sector saw a significant number of mega-deals*, but there were much fewer big outbound transactions and the number of mega-deals overall fell to their lowest levels since 2014

8

*Defined as > US$1bn


Number of deals with value > US$ 1 billionNo.

67

34 39 42 37

1

2

35

4

27

19

19

2427

19

4828

20

12

0

20

40

60

80

100

120

2015 2016 2017 2018 2019

Domestic Strategic Buyers Foreign Strategic Buyers Private Equity Deals China Mainland Outbound

Strategic buyers

PwC

The considerable market uncertainties, together with a China-wide deleveraging process which restricted access to financing, resulted in a sharp decline in domestic M&A (both value and v0lumes) which fell to levels last seen in 2014; but foreign inbound M&A –although much smaller overall – increased to its highest ever with some big inbound transactions in the healthcare sector

10

Strategic buyer deals – Domestic & Foreign

No.


316 271 255 178 248

4,821 4,870 5,111 4,778 4,498

12.9 6.7 13.8 19.8 20.9

401.5

316.9

361.9

318.8

272.4

0

50

100

150

200

250

300

350

400

450

0

1,000

2,000

3,000

4,000

5,000

6,000

2015 2016 2017 2018 2019

Announced Deal Volume Inbound Announced Deal Volume Domestic

Announced Deal Value Inbound Announced Deal Value Domestic

US$ billion

PwC

Real-estate M&A values declined for a third straight year off the back of the wave of consolidation in the sector; other sectors were also mainly down, though offset to a small extent by some uptick in industrials and consumer M&A

11

Strategic buyer deal value by industry sector


52.3 54.8 56.1 53.0 61.4

37.9 50.9

105.1

51.6 42.2

47.5 40.2

35.1

38.5 44.9

64.2 42.4

43.0

46.3 39.1

39.7 41.8

33.6

48.328.9

69.8

43.8

45.6

47.4

27.2

29.0

18.3

12.0

21.3

19.0

46.7

17.5

21.9

16.9

20.7

27.4

13.8

23.2

15.3

10.2

0

50

100

150

200

250

300

350

400

450

2015 2016 2017 2018 2019

Industrials Real Estate Consumer Financials Materials High Technology Healthcare Energy and Power Others

US$ billion

PwC

In deal volume terms the stand-out was again industrials which hit a record high, perhaps boosted by various supportive policy measures in the sector; most other sectors were flat or declining

12

Strategic buyer deal volume by industry sector


706 771 798 7431108

786 811868 732

750

979 871 841 865725

354 331 360 387366

510 500 554 485461

701 686678

643 389

365 443579

457 369

391 431362

430374

345 297326

214204

0

1000

2000

3000

4000

5000

6000

2015 2016 2017 2018 2019

Industrials Consumer High Technology Healthcare Materials Financials Real Estate Energy and Power Others

No.

PE/VC and financial buyer deals

PwC

The PE/VC sector is generally well-capitalized after several strong years so there was some decline in new fund-raising* in 2019; Rmb fundraising continues to face difficulties, declining to its lowest level for several years

* These figures do not take into account available capital from alternative financial investors, e.g. corporate and SOE investment arms/captive-PEs, financial institutions, HNWI-platforms, government-backed funds and sovereign investors

14

PE/VC fund raising for China investment

Source: AVCJ and PwC analysis

28.1

88.9

49.0

25.3

9.0

14.5

9.0

28.6 78.9

26.1

163

103

283 281

210

0

50

100

150

200

250

300

0

20

40

60

80

100

120

2015 2016 2017 2018 2019

Renminbi Fund Size Non-renminbi Fund Size Fund Volume

No.US$ billion

*

* Not including reported Rmb200bn (US$28.5bn) injected into the state-owned National Integrated Circuit Industry Fund (Big Fund II) that was set up to support the development of the semi-conductor industry in China.

PwC

Despite the market uncertainties, PE remained under pressure to deploy capital and deal values – also buoyed by state-backed investments - stayed at high levels as a result; but the PE industry as a whole continues to consolidate and mature with a general trend towards fewer (but better quality) market participants and therefore fewer (but bigger) deals overall

15

PE deals overview

No.


1,062

1767

1324

1920

1585

171.0

212.0

174.1

212.9 206.3

0

50

100

150

200

250

0

500

1,000

1,500

2,000

2,500

2015 2016 2017 2018 2019

Announced Deal Volume Announced Deal Value

US$ billion

PwC

PE were also active in industrial and consumer sectors, but there was a sharp decline in high-tech deals with much fewer mega-deals (2 valued at US$2bn in total compared to 9 at US$17bn in 2018) exacerbated by valuation concerns

16

PE deal value by industry sector


17.8 30.2 24.0 32.9

42.117.0

39.527.4

22.1

34.963.7

40.5

43.658.0

32.7

21.0 19.1

11.9

35.025.314.5

29.2

32.5

12.816.015.1

24.5

17.7

14.6 29.47.9

10.7

11.7

30.4 17.6

…

18.5

5.4

7.38.3

0

50

100

150

200

250

2015 2016 2017 2018 2019

Consumer Industrials High Technology Financials Real Estate Others Healthcare Media and Entertainment

US$ billion

14.1

PwC

VC activity was subdued due to valuation concerns and a number of Rmbplayers exiting the market

17

Venture Capital Deals


2,735

3,492

2,338

3,410

2,549

4.0

5.6

3.0

7.0

2.6

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2015 2016 2017 2018 2019

Announced Deal Volume Announced Deal Value

No. US$ billion

PwC

PEs faced pressure to sell in 2019 resulting in a significant number of exits and PE-backed IPOs; the number of PE trade-sales was a record with an increasing number of secondary (PE to PE) transactions** Secondary transactions are included as “trade sales” in the charts below

18

PE/VC-backed deal exit volume by type

Source: ChinaVenture and PwC analysis

64

129

198228

305119

164

296

123

227

36

155

90

44

18

0

100

200

300

400

500

600

700

2015 2016 2017 2018 2019

Trade sale IPO other

No.

PwC

PE-backed IPO activity almost doubled compared to 2018 with a strong contribution from the new STAR market in the second half of the year; overseas markets such as HK (which opened up to more tech- and biotech-companies) and US were also active

19

PE/VC-backed IPO exit volume by bourse

Source: ChinaVenture and PwC analysis

No.

60 79

138

40 63

-

-

-

-

60 37

60

131

32

36

19

19

14

30

38

1

5

9

19

19

2

1

4

2

11

0

30

60

90

120

150

180

210

240

270

300

2015 2016 2017 2018 2019

Shenzhen Shanghai STAR Shanghai A Hong Kong NYSE/ NASDAQ Others

Mainland China outbound M&A

PwC

China outbound fell back to 2015 levels in value terms, with various factors combining to severely curtail large-sized cross-border transactions, as had been expected; however, there is still a solid body of smaller-sized outbound transaction with overall deal volumes holding up and even increasing slightly

21

China mainland outbound deals


No.

380

920

806

627 667

55.2

202.1

117.6

90.3

57.3

0

50

100

150

200

250

0

100

200

300

400

500

600

700

800

900

1,000

2015 2016 2017 2018 2019

Announced Deal Volume Announce Deal Value

US$ billion

PwC

POEs remained the most active overseas buyers in volume terms although the overall value of those deals fell markedly with considerably fewer mega-deals

22

China mainland outbound deals by investor type


No.

79 116 101 64 60

207

609

467

310 384

94

195

238

253

223

0

20

40

60

80

100

120

-

100

200

300

400

500

600

700

800

900

1,000

2015 2016 2017 2018 2019

SOE Announced Deal Volume POE Announced Deal Volume Financial buyer Announced Deal VolumeSOE Announced Deal Value POE Announced Deal Value Financial buyer Announced Deal Value

US$ billion

PwC

Mirroring the domestic scene, deal values were strongest in the industrial and consumer sectors, but larger-sized high-tech deals took a significant hit due to the various sensitivities in this vertical

23

China mainland outbound deals by industry sector - value


US$ million

312 687 2,500

11,630

1,246

3,374

186 366

9,536

11,535 9,055

616

1,691

7,060

6,716

2,791

2,635

2,452

6,564

245

1,313

7 6,533

1,251 5,735

0 39

7,165

308

2,850

- 14

6,202

8,294

5,750

1,350

2,183

796

1,030 659

2,183

3,111

4,612 73

1,932 563

1,019 1,415

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Industrials Consumer High Technology Energy and power Financials Materials Healthcare Others

2018 SOE 2018 POE 2018 Financial buyers 2019 SOE 2019 POE 2019 Financial buyers

PwC

However, in terms of deal volumes, outbound activity continues to be reasonably robust with smaller transactions less affected; China’s strategy to acquire technology, know how, IP and brands to put to use in the China market is continuing despite the headline declines in big deals

24

China mainland outbound deals by industry sector - volume


No.

311 8 5 7

152

13

59 4959

3421

34

11

43

102

19

38

50

26

2

11

5

317

5 2 511

116

74

93

89

26 2429

13

36

77

31

33

27 26 7

15

7

0

20

40

60

80

100

120

140

160

180

High Technology Industrials Consumer Healthcare Financials Materials Media and Entertainment Others

2018 SOE 2018 POE 2018 Financial buyers 2019 SOE 2019 POE 2019 Financial buyers

PwC

In terms of geographies, the squeeze in outbound deal values is now evident in Europe with significant declines in the bigger markets of Germany (US$6.5bn from US$11bn in 2018) and UK (US$1.4bn from US$4.5bn in 2018)

25

China mainland outbound deals by region - value


13.8 16.6 35.1

14.6 15.5

12.3

67.2 19.6

15.5 11.0

22.7

88.5

39.5

48.9

16.7

3.6

8.5

7.1

5.0

9.4 2.1

8.7

3.7

5.1

3.9 0.7

4.9

1.9

1.3

0.8

7.5

10.8

0.1

0

20

40

60

80

100

120

140

160

180

200

2015 2016 2017 2018 2019

Asia North America Europe South America Oceania Africa Russia

US$ billion

PwC

Outbound activity to Belt & Road countries held up reasonably well in the context of the otherwise significant declines in deal values seen elsewhere

26

China outbound to B&R - value and volume


No.

53

22

135

1601769

1.9

21.6

14.0

11.8

-

20

40

60

80

100

120

140

160

180

200

2015 2016 2017 2018 2019

-

5

10

15

20

25

Announced deal volume Announced deal size

US$ billion

Belt & Road: including 66 countries across three continents

Key messages

PwC

Key messages – China M&A in 2019 (1 of 3)

Overall

• China M&A fell 14% to US$559 billion, the lowest since

2014

• The principal drivers of the 14% decline in deal values

were the domestic and outbound sectors; PE held up

reasonably well, and there was strong foreign inbound

M&A (although this sector is smaller)

• There was a significant decline in deal volumes for

domestic and PE M&A (although PE did larger deal sizes

on average), whilst outbound tracked at close to 2018’s

lower levels; overall deal activity returned to volumes last

seen in 2015

• The PE sector saw a significant number of mega-deals,

but there were much fewer big outbound transactions and

the number of mega-deals overall fell to their lowest

levels since 2014

Domestic and Foreign-Inbound Strategic

• The considerable market uncertainties, together with a

China-wide deleveraging process which restricted access

to financing, resulted in a sharp decline in domestic M&A

(both value and v0lumes) which fell to levels last seen in

2014; but foreign inbound M&A – although much smaller

overall – increased to its highest ever with some big

inbound transactions in the healthcare sector

• Real-estate M&A values declined for a third straight year

off the back of the wave of consolidation in the sector;

other sectors were also mainly down, though offset to a

small extent by some uptick in industrials and consumer

M&A

• In deal volume terms the stand-out was again industrials

which hit a record high, perhaps boosted by various

supportive policy measures in the sector; most other

sectors were flat or declining28

PwC



• The PE/VC sector is generally well-capitalized after several strong years so there was some decline in new fund-raising in

2019; Rmb fundraising continues to face difficulties, declining to its lowest level for several years

• Despite the market uncertainties, PE remained under pressure to deploy capital and deal values – also buoyed by state-

backed investments - stayed at high levels as a result; but the PE industry as a whole continues to consolidate and mature

with a general trend towards fewer (but better quality) market participants and therefore fewer (but bigger) deals overall

• PE were also active in industrial and consumer sectors, but there was a sharp decline in high-tech deals with much fewer

mega-deals (2 valued at US$2bn in total compared to 9 at US$17bn in 2018) exacerbated by valuation concerns

• VC activity was subdued due to valuation concerns and a number of Rmb players exiting the market

• PEs faced pressure to sell in 2019 resulting in a significant number of exits and PE-backed IPOs; the number of PE trade-

sales was a record with an increasing number of secondary (PE to PE) transactions

• PE-backed IPO activity almost doubled compared to 2018 with a strong contribution from the new STAR market in the

second half of the year; overseas markets such as HK (which opened up to more tech- and biotech-companies) and US

were also active

29

PwC


Mainland China Outbound

• China outbound fell back to 2015 levels in value terms, with various factors combining to severely curtail large-sized cross-

border transactions, as had been expected; however, there is still a solid body of smaller-sized outbound transaction with

overall deal volumes holding up and even increasing slightly

• POEs remained the most active overseas buyers in volume terms although the overall value of those deals fell markedly

with considerably fewer mega-deals

• Mirroring the domestic scene, deal values were strongest in the industrial and consumer sectors, but larger-sized high-

tech deals took a significant hit due to the various sensitivities in this vertical

• However, in terms of deal volumes, outbound activity continues to be reasonably robust with smaller transactions less

affected; China’s strategy to acquire technology, know how, IP and brands to put to use in the China market is continuing

despite the headline declines in big deals

• In terms of geographies, the squeeze in outbound deal values is now evident in Europe with significant declines in the

bigger markets of Germany (US$6.5bn from US$11bn in 2018) and UK (US$1.4bn from US$4.5bn in 2018)

• Outbound activity to Belt & Road countries held up reasonably well in the context of the otherwise significant declines in

deal values seen elsewhere

30

Outlook

PwC

Outlook for 2020 (1 of 2)

Overall

• The impact of the coronavirus creates significant short-term uncertainty around M&A activity which makes predictions over the whole of 2020 difficult

• However, we do expect subdued activity and further declines in the first-half, largely as a consequence

• Assuming that the medical situation is resolved, we then expect to see some rebound in the second-half, due to:

• More acceptance of the “normalization” of the trading relationship with the US

• Government stimulus measures

• Significant dry-powder, and also exit activity for PE

• The release of pent-up demand from transactions previously being put on hold

• On balance, we expect 2020 M&A activity to be broadly comparable to 2019 overall

Domestic and Foreign-Inbound Strategic

• Same comments as for overall

• Foreign inbound should remain strong with some policy opening, and potential for some larger sized deals especially in FS

32

PwC

Outlook for 2020 (2 of 2)


• Continued pressure to defray existing new dry powder will drive ongoing activity

• Exits will also be active, including more larger size trade deals and PE-to-PE transactions

• We think 2nd half will be strong for PE, but first half will be negatively affected by short term factors mentioned above

33

Mainland China Outbound

• The phase 1 trade deal is a positive, though not a game changer and political sensitivity to large sized cross border transactions remains high, and not just in US

• Trade uncertainties will continue to have an impact in the US and also Europe with ongoing Brexit negotiations

• With this kind of macro-picture as well as the short term factors described above, it is difficult to predict a strong rebound in outbound M&A in 2020

PwC

Data compilation methodology and disclaimer

Included Deals

• Acquisitions of private/public companies resulting in change of control

• Investments in private/public companies (involving at least 5% ownership)

• Mergers

• Buyouts/buy-ins (LBOs, MBOs, MBIs)

• Privatizations

• Tender offers

• Spinoffs

• Split-off of a wholly-owned subsidiary when 100% sold via IPO

• Divestment of company, division or trading assets resulting in change of control at parent level

• Reverse takeovers

• Re-capitalisation

• Joint Venture buyouts

• Joint Ventures

• Receivership or bankruptcy sales/auctions

• Tracking stock

Excluded Deals

• Property/real estate for individual properties

• Rumoured transactions

• Options granted to acquire an additional stake when not 100% of the shares has been acquired

• Any purchase of brand rights

• Land acquisitions

• Equity placements in funds

• Stake purchases by mutual funds

• Open market share buyback/retirement of stock unless part of a privatization

• Balance sheet restructuring or internal restructuring

• Investments in greenfield operations

• Going private transactions

34

Statistics contained in this presentation and the press release may vary from those contained in previous press releases. There are three reasons for this: ThomsonReuters and ChinaVenture historical data is constantly updated as deals are confirmed or disclosed; PricewaterhouseCoopers has excluded certain transactions which are more in the nature of internal reorganisations than transfers of control; and exchange rate data has been adjusted.

pwc.com

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