Offshore market performs robustly on international stage despite lacklustre quarter as global economy continues to present challenges

Cayman Islands, 16 May 2013 – While the first quarter of 2013 saw the lowest number of deals in the offshore region since Q1 2008, the offshore M&A market has performed better than the global average, according to a report released today by Appleby, one of the world’s largest providers of offshore legal, fiduciary and administration services. The latest edition of Offshore-i, the firm’s quarterly report which provides data and insight on merger and acquisition activity in major offshore financial centres, focuses on the first quarter of 2013.

The report shows that both the volume and value of deals involving offshore targets dropped considerably in Q1 2013 as against the preceding quarter, with volume down 28% and value down a disappointing 73%. While it is not unusual to see a drop in volume when comparing Q4 to Q1, this year’s first quarter was particularly quiet, with the report revealing that the offshore markets recorded the lowest number of deals in five years. Nevertheless, there is room for optimism when considering the average deal size, which though lower than the figures witnessed during 2012, is consistent with the average deal size across 2010 and 2011. Furthermore, when comparing the offshore region with the global market, offshore deal volumes were down only 10% year-on-year, compared to a global average drop of 20%.

The largest offshore deal of the quarter was the USD2bn joint venture by BasicEnergy and Malaysia’s Petrosolve Sdn Bhd to create Hong Kong-based Grandway Group followed by the USD1.5bn sale of 25 million shares in BVI-based fashion label Michael Kors Holdings Limited.

“The fortunes of the offshore world are, of course, entirely entwined with those of the other major economic regions in which many of our clients operate, and despite positive economic signs emerging from the United States and a period of stability expected in China now that its political uncertainties have been addressed, global dealmakers remain nervous,” said Cameron Adderley, Global Head of Appleby’s Corporate & Commercial department. “We are cautiously optimistic that history will pick out 2013 as the year in which the international economy entered a gradual upward trajectory, but it did not begin in the first quarter.”

Frances Woo, Appleby’s Chairman said, “In all of our jurisdictions, despite conservatism still being the prevailing feature, we are seeing an increasing acceptance of a new reality when it comes to growth prospects, liquidity challenges and pricing levels. Experience tells us that Q2 is usually more robust than Q1 and we expect that to be the case again this year. Certainly the evidence from our business is that pipelines are strengthening and activity levels are on the increase.”

Global Offshore Market: Q1 2013

The key themes emerging from the report show that in the first quarter of 2013:

There were 448 deals involving offshore targets completed with an aggregate value of USD28bn, representing a 28% drop in volumes and a 73% drop in values against the previous quarter.

The average offshore deal size was USD62m for Q1 2013, which is lower than we have come to expect based on 2012 figures, but is consistent with the average deal size across 2010 and 2011, which stood at USD66m across those eight quarters.

The start of 2013 saw just two deals announced offshore in excess of USD1bn; this compares to 10 such deals in Q4 2012.

While financial services dominated in terms of deal volumes, accounting for 135 of the 448 deals done in Q1, the sector is not the frontrunner in terms of value. That is manufacturing which, with 70 deals, accounted for 16% of the deals done in the first quarter of 2013, and 26% of the USD27.9bn spent.

The vast majority of deals that took place offshore in the first quarter were minority stake transactions, comprising 274 of the 448 deals completed, or 61% of the total. The market for initial public offerings offshore remains steady. Eight IPOs were announced in the quarter under review, as against 14 in the preceding three months.

Cayman-incorporated targets were the most popular in the offshore region this quarter, accounting for 102 of the 448 transactions.

Acquisition activity led by companies incorporated in offshore markets has slumped this quarter, with 352 deals worth an aggregate value of USD25.2bn.

Cayman Islands continues to dominate offshore activity

In the first quarter of 2013, there were considerably more deals involving Cayman Islands-incorporated targets than those based in other offshore markets, with the jurisdiction accounting for 23% of the volume and 43% of the total USD27.9bn worth of deals generated this quarter.  As against the first quarter of 2012, the value of transactions involving Cayman targets has nearly doubled, up from USD6bn to USD11.9bn. These figures are in stark contrast to those emanating from BVI and Hong Kong, which, along with Cayman, led deal activity in Q4 2012. Both jurisdictions witnessed a sharp decline in deal activity as against the preceding three months, with volumes down 31% and 47% and values down 95% and 74% respectively.

Manufacturing leads offshore deal expenditure

While the financial services and insurance sector continues to dominate deal volume, accounting for 30% of the deals done in the three-month period, the manufacturing sector was the frontrunner in terms of value, having completed 70 deals worth an aggregate value of USD7.2bn. This represents 26% of the USD27.9bn spent offshore this quarter, with the largest manufacturing deal being the USD1.5bn minority stake of BVI-incorporated Michael Kors Holdings Limited.

The transportation sector boasted the largest average deal size this quarter, at USD226m, assisted by the USD742m joint sale by port operator DP World of a 75% stake in CSX World Terminals Hong Kong Co., ATL Logistics Centre, a Hong Kong-based warehousing service company, and Asia Container Terminals Holdings Ltd, a Cayman Islands-incorporated port operation holding company.

The report also revealed that the construction of buildings, a high growth sector, doubled in value from a year ago, despite deal volume decreasing from 13 transactions in Q1 2012 to 10 in Q1 2013.

Minority stake transactions popular; IPOs hold steady

Minority stakes dominated offshore activity again this quarter, accounting for 61% of all deals done, or 274 out of the 448 transactions recorded in the period. Furthermore, minority stakes accounted for one of every two dollars spent offshore, with an aggregate deal value of USD13.9bn out of the USD27.9bn total for the three-month period. Acquisitions, meanwhile, accounted for a third of deals announced by both volume and value, with 143 transactions completed.

“The fact that 32% of dollars went into acquisitions this quarter as against just 26% for the same period last year, suggests some room for optimism,” said Adderley. “Whole-business transactions are undoubtedly riskier than the more popular minority stake deals, which afford investors a piece of their chosen target business, industry or geography, while limiting exposure. Given the macroeconomic conditions we find ourselves facing, it is no surprise that minority stake deals are dominant, and indeed we expect this to continue, but we believe that the gradual return of investors willing to put money to work in acquisitions is a good sign.”

IPOs, meanwhile, have remained steady, with eight announced this quarter compared to 14 in the preceding three months. Looking ahead to the second quarter of 2013, two of the five largest rumoured transactions pending offshore are IPOs.

BVI market continues to top deals by acquirer

BVI acquirers spent more than twice as much money this quarter as they did in Q4, completing 125 deals out of a total 352 transactions recorded, worth an aggregate value of USD13.1bn. The USD7.8bn takeover of Singapore’s Fraser & Neave by BVI-incorporated TCC Assets was the largest offshore acquirer deal completed this quarter.

In contrast to the BVI, just about all other offshore markets saw deal values decline in Q1 2013 as against Q4 2012, particularly Hong Kong and Jersey where values dropped 50% and 99.5% respectively. It should be noted, however, that one of the largest global deals of 2012, the USD33bn purchase of Xstrata by Jersey-based Glencore, took place in Q4.

Global market comparison

The offshore M&A market continues to perform relatively robustly on the international stage, with the offshore market ranking ninth on the list for deal volume activity and sixth by value this quarter, accounting for 3% of the global total of USD909bn. At USD62m, the offshore market has generated the fourth highest average deal size, considerably ahead of Western Europe at USD40m and Asia at USD39m.

“We continue to find these regional statistics encouraging from an offshore point of view, and going forward we expect the offshore financial centres to continue to perform strongly on the international stage,” said Woo. “That said, as and when a deeper global recovery takes hold of the M&A market, we will not be surprised to see the performance of our markets eclipsed by larger relative growth of onshore economies, and perhaps the 35% aggregate deal value growth seen in North America in Q1 2013 against a year ago should give us all a reason to be cheerful.

ENDS

For a full copy of the report or for any further information, please contact:

Laura Swartz, Myddleton Communications

[email protected]

Research Methodology:

Appleby’s Offshore-i report details mergers and acquisitions activity in Offshore jurisdictions in Q1 2013 using data from the ’Zephyr’ database, published by BvD. The Offshore region covers target companies in Bermuda, British Virgin Islands, Cayman Islands, Hong Kong, Guernsey, Jersey, Isle of Man, Mauritius and the Seychelles. The date range is 01/01/2013 – 31/03/2013 inclusive. Deal status is as announced within the time period covered. Where necessary, deal values have been converted to USD at a rate set by Zephyr. Not all deals are reported immediately, so the figures are subject to change as new information becomes available.The Q4 2012 figures in the offshore-i Q1 2013 report have been calculated as at 31/03/2013 and may differ from those in the offshore-i Q4 2012 report which were calculated as at 31/12/2012.

Appleby is one of the world’s largest provider of offshore legal, fiduciary and administration services. With an unparalleled presence in the key offshore jurisdictions of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Isle of Man, Jersey, Mauritius, and Seychelles, the group offers advice on offshore law and also has offices in four international financial centres: London, Hong Kong, Shanghai and Zurich.

The Appleby Group has been ranked as one of the world’s largest providers of offshore legal services by partner numbers in The Lawyer’s 2013 Offshore Survey. In 2010 Appleby was named “Offshore Law Firm of the Year” in both the Legal Week and The Lawyer Awards; no other firm has ever received both accolades in the same year. With over 770 lawyers and professional specialists across the Group, Appleby delivers sophisticated, specialised services, primarily in the areas of Corporate and Commercial, Litigation and Insolvency, Private Client and Trusts and Property, and a broad range of fiduciary services.  The Group advises public and private companies, financial institutions, and high net worth individuals, working with them and their advisers to achieve practical solutions, whether in a single location or across multiple jurisdictions.