November 27, 2018 / 11:14 PM / 17 days ago

Hong Kong's finance sector M&A deals fall prey to China crackdown

HONG KONG (Reuters) - Mergers and acquisitions targeting Hong Kong financial firms have slumped this year, with insurance sector deals particularly hard hit, as China’s moves to tighten capital controls and crack down on corporate debt have driven mainland buyers away.

FILE PHOTO - A ferry sails at Victoria Harbour in front of the financial Central district in Hong Kong, China February 17, 2016. REUTERS/Bobby Yip/File Photo

Hong Kong’s financial institutions have long been considered juicy targets, helped by the city’s wealth as well as its tight currency peg to the U.S. dollar. For Chinese financial firms, the city has also typically been the first step in realizing their overseas ambitions due to its proximity to home.

But the tune seems to be changing this year as Chinese buyers have all but disappeared. Two insurance companies have called off Hong Kong deals worth a combined $1.4 billion, with sources saying Chinese suitors struggled to move funds offshore.

Mergers and acquisitions where Hong Kong financial firms were targets have totaled $1.15 billion so far this year, with 2018 potentially its lowest in 13 years, according to data from Dealogic. The volume is down from $5.1 billion in 2017.

And Chinese buyers have accounted for less than a quarter of the 2018 volume, the data showed. Over the past six years cumulatively, they made up nearly 60 percent, or $21 billion, of deals worth $35.3 billion.

Beijing’s capital controls, put in place since late 2015 to stem weakness in the yuan, have not just pulled overall deal momentum lower but have also left sellers with fewer or no options, people with knowledge of the matter said.

“If you are looking for a buyside mandate, it would probably make a lot of sense to back a non-Chinese name for Hong Kong financial assets,” said a senior financial investment banker at a global investment bank.

The sources declined to be named as they were not authorized to speak to the media.

PULLED DEALS

Hong Kong Life Insurance, owned by five Hong Kong firms, called off its $907 million sale to a Chinese consortium last month after waiting for more than a year to get the transaction closed.

While Hong Kong Life shareholders, including OCBC Wing Hang Bank and Asia Insurance Company, did not respond to a Reuters request for comment on the deal, two sources familiar with the matter said there were concerns about the deal’s funding.

Chong Hing Bank, another shareholder of Hong Kong Life, declined to comment.

U.S. insurer MetLife Inc (MET.N) has decided to shelve the sale of its Hong Kong business worth over $500 million after the short-listed Chinese suitor failed to meet the funding commitment, said people with knowledge of the matter.

MetLife Hong Kong declined to comment.

In recent years, Hong Kong financial deals saw competition among Chinese bidders, driving up valuations.

China’s Thaihot Group bought Hong Kong’s Dah Sing Financial life insurance unit in 2016 for $1.4 billion in the most expensive insurance M&A, paying nearly three times the embedded value compared to 1.3-2.0 times for similar deals in the region.

While bankers said Chinese bidders with strong overseas business presence and balance sheets would still be able to compete for Hong Kong financial assets, the curbs are expected to open up the field for non-Chinese firms.

Beijing-based JD Group is selling its Hong Kong insurance unit, FTLife Insurance, and potential bidders are likely to include Hong Kong’s Chow Tai Fook Enterprises (CTFE), Asian private equity firm PAG and a Japanese insurer.

JD Group, FTLife and CTFE did not respond to requests for comment, while PAG declined to comment.

Taiwan’s Fubon Financial (2881.TW) is also looking to sell its Hong Kong banking unit, likely to be valued at over $1 billion, and investment bankers are rushing to tap potential bidders from Singapore, Malaysia and elsewhere, two of the people said.

Fubon Financial declined to comment, while Fubon Bank did not respond.

“Regulations are making people more cautious in thinking about insurance deals,” said Samson Lo, UBS’s head of Asia M&A. “Those who are able to pay above and beyond are non-traditional buyers such as private equity companies. The buyer’s universe has become more diverse.”

Reporting by Sumeet Chatterjee and Kane Wu; Editing by Jennifer Hughes and Muralikumar Anantharaman

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