Asian Infrastructure Deals Take Off

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Posted on November 6, 2013


It is the basic foundations–power, water, roads–that are providing the building blocks of merger-and-acquisition activity in Asia this year. Infrastructure deal activity has hit its highest level in a decade thanks to consolidation in China and privatizations in Australia and bankers don’t see that activity abating anytime soon.


So far this year, $79 billion worth of infrastructure deals have been announced in the Asia Pacific region, a 46% increase from volumes seen this time last year, according to Dealogic. Attracted by long-term and steady returns, investors bought ports, pipelines and energy assets around the region.


A consortium including Industry Funds Management and Abu Dhabi Investment Authority won leases for two major Australian ports in April in a deal worth $5.3 billion according to Dealogic. China’s Taikang Asset Management Co. and Beijing Guolian Energy Industry Investment Fund announced plans to invest $3.3 billion in PetroChina Co. Ltd’s pipeline assets in June. The list goes on.


“You’ve got two different issues at play. In China you’re seeing reform and a bit of rebalancing,” said Matthew Rennie, Ernst & Young’s global power and utilities leader in the advisory division. “There’s a move toward renewables and solar energy, plans to cut coal-fired power generation down, and then there’s interplay between Chinese companies starting to actively move outbound into emerging economies like Africa.”


For example, Power China Corp. signed a $20 billion memorandum of understanding with the Ministry of Power in Nigeria to invest in the country’s electricity industry earlier this year. But Chinese and Hong Kong-based companies are looking at investments in developed markets as well. Hong Kong billionaire Li Ka-shing’s Cheung Kong Infrastructure Holdings Ltd. is mulling a deal to acquire Nordic company Fortum Oyj’s electricity distribution business in Finland, a sale that could be worth more than $2 billion, people familiar with the matter told The Wall Street Journal.


In June, a consortium led by Cheung Kong Infrastructure bought Dutch waste management firm AVR Afvalverwerking BV.


Infrastructure deal activity within China’s borders should remain robust, bankers say, given the government is supportive of consolidation in industries that are in oversupply.


“In the past 10 years, a lot of gross domestic product growth in China was tied to entities focused on heavy industry and related infrastructure development, and the main objective of managers in these entities was to grow as fast as possible,” said Viral Gathani, CIMB’s head of energy, natural resources and infrastructure. “This delivered the imbalanced economy that we’re all beginning to understand and now China’s going through the second phase of this growth, which will seek to correct this imbalance. The stronger, more able parties are being encouraged to take over smaller parties.”


Meanwhile, Australia continues to throw up targets for global infrastructure investors. Half of the top 10 completed infrastructure deals done in the Asia Pacific region this year had an Australian component, Dealogic data shows.


“Privatizations continue to be a strong driver of M&A activity in Australia with several large infrastructure assets sold in the past two years, many more in the pipeline and the new Federal government quickly announcing the sale of Medibank Private,” said Richard Wagner, Morgan Stanley’s head of investment banking in Australia. Medibank Private is Australia’s largest private health insurer and analysts say it could sell for as much as $3.8 billion.


As far as global infrastructure deals go, Mr. Wagner expects Australia to be a leader in merger-and-acquisition activity, given the country’s state governments are mulling selling assets to raise funds in order to invest in new projects in their states. Should New South Wales, the state where Sydney is located, decide to sell its electricity poles and wires, such a deal could be worth more than $10 billion.


The infrastructure and privatization pipeline in Australia is currently much larger than what is seen in Europe or the U.S. In Europe, many of the governments privatized their state-owned assets some 10 years ago and in the U.S., there isn’t as much of a culture of privatization of infrastructure,” Mr. Wagner said.


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