Asia deals slide in Q1, hit by deteriorating business outlook

© Reuters. FILE PHOTO: High-rise buildings are seen at the Shinjuku business district during sunset in Tokyo, Japan, March 7, 2017. Picture taken March 7, 2017. REUTERS/Toru Hanai

By Scott Murdoch and Anshuman Daga

SYDNEY/SINGAPORE (Reuters) - Asia deal volume tumbled in the first quarter and dealmakers do not expect a near-term rebound as the Russia-Ukraine war, higher interest rates and economic uncertainty hurt business sentiment.

Mergers and acquisitions (M&A) and equity capital market activity declined sharply in the region over January-March, according to Refinitiv data, with Chinese stocks among the biggest losers in Asia.

M&A involving companies in Asia Pacific and Japan fell to $233 billion in the quarter, down 25% from a year earlier and nearly halving from the final quarter of 2021, the data shows.

This follows record high global M&A deals in 2021 amid easy availability of cheap financing and sky-high valuations as U.S. stocks saw their best three-year run in more than two decades.

"Deal flow in M&A is fundamentally driven by the confidence boards have around the outlook for businesses and the macro developments in the world," said Rohit Chatterji, JPMorgan (NYSE:JPM)'s co-head of M&A, Asia-Pacific.

The Russia-Ukraine crisis, soaring commodity prices, inflation as the world emerges from the COVID-19 pandemic, and uncertainty over the rate hike path adopted by the U.S. Federal Reserve are stalling deals, analysts and bankers said.

"The buyers are saying 'let's revisit whether the pricing we had in mind is still valid in markets like these' and the sellers are like 'do we really want to sell unless we get the prices we want,'" said Chatterji.

Australia's Macquarie Asset Management and British Columbia Investment Management Corp's deal to buy a 60% stake in National Grid (LON:NG)'s British gas transmission and metering business for an enterprise value of about $12.7 billion was the biggest transaction involving Asia Pacific firms this year.

And Sweden-based buyout fund EQT (NYSE:EQT)'s move to snap up Baring Private Equity Asia in a deal worth $7.5 billion was the second-biggest deal, the data showed.

"The longer deals stay dislocated, the more financial sponsors may get the opportunity to come into deals," Chatterji said.

Dealmakers said stability in equity markets would be a prerequisite for a revival in deals but they expect little improvement in the short term.

HONG KONG IPOS NOSEDIVE

Equity capital market activity in Asia, including Japan, fell 54% to $56.5 billion in the first quarter from a year earlier, and slumped 64% from the final quarter of 2021, Refinitiv data showed.

Initial public offering activity fell 35% on the year, with Hong Kong suffering the biggest drop - from a value of $11.05 billion in the first quarter of 2021 to just $837 million.

The city slid from being the world's No.2 IPO market behind the Nasdaq to eighth this quarter from a year earlier.

South Korea's $11 billion listing of battery maker LG Energy Solution in January made Seoul the world's top listing venue in the first quarter.

Some bankers said China could see an improvement.

"A lot of the world economies still depend on China. If it is in a relatively non-tightening mode versus the U.S., which is in a 5 to 7 times rate hike cycle, this is where we think it could be beneficial for China," said Selina Cheung, UBS's co-head of equity capital markets for Asia.

"I would think that if relative monetary easing impacts how corporate earnings do in the first half, we should see good data start to come out in August. If and when that happens, I think there's a shot at the market reopening and investors having renewed confidence," she said.

Investors are also watching the effect of rising COVID cases in China as Shanghai, its most populous city and home to some 26 million people, entered the third day of a lockdown on Wednesday.