Energy Finance

Cross-border M&A activity by Asia-Pacific corporations will increase during the next few years, notably in the energy and commodities sectors, according to a new report by Fitch Ratings’ managing director and head of the Asia-Pacific corporates team,Tony Stringer. The report, Asia-Pacific Corporates in 2012, finds that China in particular seeks to secure the natural resources necessary to support its continuing strong growth.

“Securing sufficient supplies of energy and raw materials is one of the biggest challenges facing high-growth economies and their leading industrial companies,” he writes.

A recent flow of transactions, mostly involving Chinese companies in the mining and metals sectors acquiring Australian resource-based assets, highlights this growing trend.

According to Stringer, China’s status as the world’s largest importer of iron ore to feed its voracious steel sector is a good example of the type of dynamic that will drive M&A in the region. To sustain double-digit growth rates being targeted by the Chinese government, security of supply of raw materials is paramount and becomes a political, as well as a corporate priority.

Yet, the expectation of increasing cross-border M&A may be tempered by the natural risk aversion of senior corporate executives, who may have little financial or career motivation to pursue deals, according to Stringer.

“As was seen in the aborted Chinalco tie-up with Rio Tinto Ltd. earlier this year, the viability of a transaction can be impacted by political concerns. Fitch anticipates that future proposed M&A transactions in Asia will continue to be affected by such considerations, particularly given the ongoing heavy involvement of sovereign governments in the ownership of large Asian corporate entities.”

Stringer believes that while the nature of the financing of such transactions will influence the effect on the acquiring company’s credit quality, the business-risk benefits derived from supply-chain integration could, in some cases, effectively mitigate the negative impact of more aggressive capital structures in the event that acquisitions are debt-funded. Fitch plans to assess this dynamic on a case-by-case basis.

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