Back in business: Hong Kong reopening spells M&A confidence hike, practical freedoms

Data InsightDealspeak 14 November

Back in business: Hong Kong reopening spells M&A confidence hike, practical freedoms

Hong Kong’s long-awaited easing of pandemic-induced travel restrictions –– some of the toughest in the world –– has elicited a ripple of applause from M&A dealmakers. With the rest of the world already ‘living with COVID’, market participants in Hong Kong, once an international finance hub, are itching to get back on deal track after a dearth of activity.

M&A volume and value involving Hong Kong-based targets have fallen by around half in the year to date (YTD) from 2021, per Dealogic data. The city has seen only two buyout deals so far this year, involving shipping company Honour Lane Shipping and lingerie maker Hop Lun, compared with a total of six buyouts last year.

In late September, Hong Kong’s government scrapped mandatory hotel quarantine for inbound travelers, one of the most significant barriers to entry for international arrivals. The new arrangement, requiring three days of medical surveillance (known as the ‘0+3’ policy), was introduced ahead of a major banking summit in early November aimed at attracting global financial executives to the city.

Although virtually conducted M&A processes survived the first two years of the pandemic, it has become clear that face-to-face business meetings are increasingly crucial to sealing deals, especially as worsening macroeconomic conditions add to uncertainty going forward.

The Asian city’s reopening offers hope to the M&A community, and the ability to physically meet eases the practicalities around dealmaking and boosts sentiment among buyers and sellers.

“Buyers need to have confidence in the business outlook for a potential target… it is harder to sign on the dotted line without having met the relevant parties in person,” says a sector participant.

Deals are returning thanks to the convenience of conducting due diligence and hosting analyst meetings in-person, an M&A banker agreed. It is easier to discuss existing deals and refer clients to new deals during physical meetings, while boosting investor communication with potential sellers, he notes.

Stepping stone to China

As mainland China relaxes its quarantine rules, international investors are also increasingly willing to travel to the country, with Hong Kong acting as a stepping stone, for on-site visits and deal due diligence processes, says the M&A banker.

Today (11 November), mainland China reduced its centralised quarantine period for inbound travellers to five days from seven days, sending a cheer to the stock markets. Shanghai’s CSI 300 Index jumped nearly 3% on the back of the news.

The latest move came after the country in June shortened its quarantine measures to seven days of centralized hotel quarantine and three days of self-isolation (‘7+3’ policy), from14 days’ hotel quarantine plus seven days of home surveillance (‘14+7’ policy).

Observers remain hopeful for a potential shift in China’s zero-COVID policy, even if only gradual. Hong Kong’s border relaxation signals to the market that China is taking active steps in considering a reopening, says the sector participant, adding that a policy change is “just a matter of time”.

Mainland China – when it reopens – will be a major driver of a pick-up in M&A activity across North Asia, which has so far been a drag on Asia-Pacific’s total dealmaking levels this year, adds the sector participant.

However, not everyone is optimistic. Investors will not immediately flock to Hong Kong, which is maintaining its ‘0+3’ policy, nor are they desperate to visit China amid dwindling deal opportunities, says an industry consultant. On the flipside, it will be easier for Hong Kong-based market participants to travel outside of the city and conduct cross-border M&A deals throughout the Asia-Pacific region, he notes.

Coming up

Looking ahead, several deals are in the offing. Mergermarket reports Affinity Equity Partners’ stake sale in Hong Kong-based apparel-labeling producer Trimco Group is expected to conclude by year-end, which would mark this year’s first exit by a Hong Kong-based financial sponsor.

Although a previously reported potential sale in Hong Kong-based telecoms network services provider HKBN [HKG:1310] has purportedly stalled, it could result in a management buyout or privatization of the HKD 6.624bn (USD 843.8m)-market cap company, if a deal rematerializes.

In terms of outbound deal flow, a sale process for London-based data center operator Global Switch Holdings could end with a winning bid from Hong Kong’s PAG, as reported by sister publication Debtwire.

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