Asian LBO bankers hope for revival in 2009

It takes a lot of courage and conviction to be optimistic about financial markets these days, especially when seemingly cataclysmic news emerges on a daily basis. Yet speakers at IFR’s Asian Leveraged Finance Conference, which was attended by 240 delegates in Hong Kong last week, were hopeful of a revival in leveraged buyout (LBO) activity across the region, should market conditions show any signs of normalising.

This is despite the problems recently affecting two potential high-profile transactions. Last week, Run Run Shaw, chairman of Hong Kong-listed Shaw Brothers, called off the sale of a 75% stake in the company to Yeung Kwok Keung, chairman of Guangzhou-based property developer Country Garden. That followed a similar development on the sale of a 51%–78% stake in Huawei Communication Technologies, a unit of Chinese telecommunications equipment giant Huawei Technologies.

Last week, Hong Kong-listed PCCW called off the sale of a 45% stake in its telecoms subsidiary, HKT Group Holdings, after receiving extremely low bids from private equity firms.

But leveraged financiers are looking forward to the new year in the hope that deal flow revives. LBOs will still be possible if market participants sense opportunities amid the financial meltdown.

The plunge in equity valuations in the past month alone might be a big driver for M&A. Financial sponsors and trade buyers with deep pockets and strong balance sheets will be salivating at some of the opportunities to buy assets on the cheap.

The potential for publicly listed companies to be taken private is immense. Richard Li, chairman of PCCW, seems to have fired the first salvo. He is rumoured to be considering taking the company private.

Singapore, which has enjoyed a strong run of deals this year, still has potential, considering the low PE ratios at which its companies are trading relative to their counterparts in the region, according to bankers speaking at the conference.

Many were sanguine about prospects of deal flow from Australia, China, India, South Korea and Taiwan, although regulatory challenges need to be overcome in some jurisdictions such as China and India.

Leveraged financiers are optimistic that LBOs featuring mid-market companies as targets can be done even in the current climate. Asian banks are not beset with the balance sheet problems faced by their peers in the US and Europe. Bankers expect deal sizes to be smaller at about US$500m or less. Larger deals would probably face challenges on the financing front.

Bankers have called for structures to be conservative with low leverage for the deals to be able to get done.

“Leverage multiples of seven to eight times are a thing of the past, as are PIK-toggles,” said one banker.

The emergence of alternative sources of capital such as specialist debt funds that invest in leveraged financings will provide the much-needed support for LBOs from Asia, which have traditionally relied heavily on bank liquidity, bankers said.