Offshore Is Only Mature Market to Experience Year-On-Year Growth despite Decline in Q3 activity

Cayman Islands, 08 November 2012 – The offshore M&A market was one of the few world markets to have experienced growth in the cumulative value of transactions in Q3 2012 compared to the same period last year, according to a report released today by Appleby, the world’s largest provider 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 Q3 2012.

Robustness returning to deal values

As had been the case with the first two quarters of 2012, the offshore markets are faring better than many other world regions, and are among the only areas to grow in the cumulative value of transactions when compared to the second quarter of 2012. Looking at year-on-year comparisons in the offshore market, the report shows that while Q3 2012 volumes are down 16% on 2011, the values are actually 11% higher, suggesting that general robustness is returning to deal values.

“While we remain quietly confident of the early signs of activity returning to our markets, it is still impossible to overlook the macroeconomic situation and the continuing gloom on our doorstep,” said Peter Bubenzer, Appleby’s Group Chairman. “The uncertainty in the Eurozone, which we hoped might reach some kind of resolution back in Q1, remains far from entering an end game, while the close race for the White House will, we suspect, have a profound effect on US transactions through to year end.”

Looking forward, Appleby’s report predicts that the year will close lower than 2011 in part because of the general condition of the economy and the reductions in expected global GDP forecast by the International Monetary Fund. Additionally, the report points to the so-called Fiscal Cliff – the potential expiration of certain U.S. tax provisions and implementation of stringent tax cuts. Appleby expects this to further depress current investment activity.

Global offshore market

Key themes emerging from the report show that in the third quarter of 2012:

• There was a 10% drop in the volume, and a 17% drop in the value, of transactions that took place offshore compared to Q2. This fall is typical of third quarter activity, but it is not as significant as the drop between Q2 and Q3 last year.
• Values are 11% higher than they were in the same period last year, suggesting that conditions are improving year-on-year.
• In the last 10 quarters, only three periods have seen a larger average deal size than what the offshore markets experienced in Q3 – at US$78m – suggesting some robustness returning to deal sizes.
• The financial services sector continues to dominate activity in the offshore region, accounting for over a third of all deals. The second highest value sector was telecommunications, followed by manufacturing of computer, electronic and optical products.
• Cayman remains the most attractive offshore target destination for investors, for the third quarter running, followed by Hong Kong, which witnessed a significant increase in the value of deals involving its companies as targets.
• The offshore region ranks ninth amongst world markets by deal volume and fifth for value, significantly ahead of some “hot” markets including the Middle East and Oceania.

According to the report, the average deal size in Q3 stood at US$78m, which although smaller than the previous quarter’s US$85m, remains strong compared to levels witnessed a year ago. In the last 10 quarters, only three three-month periods have seen a higher average deal size.

The largest deal this quarter was the US$3.6bn stake taken in Bermuda-incorporated Vimpelcom, the Dutch telecoms provider, by Russia’s Altimo. This was followed by Taiwan’s biggest chipmaker, MediaTek’s US$2.1bn stake in Cayman-incorporated monitor maker MStar Semiconductor.

That said, in the third quarter of 2012, the offshore market saw a drop in M&A activity levels as against Q2, falling from 475 to 428, with the cumulative value of transactions also declining from US$40.4bn to US$33.5bn. The report notes, however, that the lower levels of deal activity are unsurprising since Q3 is often quiet as transactions dry up in the summer months.

Hong Kong sees a return to solid activity levels

Hong Kong is the story of the third quarter, with a 15% increase in volume from 68 deals in Q2 to 78 deals in Q3, and a 72% increase in value from US$4.6bn to US$7.9bn. The Cayman Islands meanwhile continues to hold the top spot for both volume and value of deals in Q3, generating 86 deals for Cayman targets worth a combined value of US$9.1bn.

It is the Isle of Man that saw the biggest increase in money being spent on its shores between Q2 and Q3 of this year, generating 23 deals against 21 last quarter, with a 95% increase in combined value from US$221m to US$430m.

Financial services continues to dominate offshore market

The financial services sector accounted for 139 of the 428 deals this quarter, worth a combined value of US$4.2bn. Also of note was the US$2bn sale of the minority stake in insurer AIA Group to institutional investors from Hong Kong as well as the US$1.4bn sale of the holding entities of Conversus Capital, the Guernsey-incorporated asset management company, to HarbourVestPartners of the US.

Despite the obvious slowdown in consumer spending, the high-tech revolution continues to gather pace and drive M&A activity, in place of the energy and natural resources markets that accounted for four of the top 10 deals in Q2 and dominated offshore M&A in the first half of the year. This quarter, the telecommunications and related industries accounted for three of the top five deals and generated a cumulative value of US$8.3bn.

Minority stake transactions lead deal type

Of the 428 deals completed this quarter, minority stakes accounted for 56% of the volume and 52% of the value spent over the period.

“We remain convinced that this high volume of minority stake transactions is a function of the economic uncertainty with which investors are currently forced to grapple, which is deterring dealmakers from riskier whole-business transactions,” said Mr. Bubenzer. “Minority stake deals allow acquirers some exposure to new markets or businesses, while making it possible to limit that exposure to a comfortable level. At the same time, while gaining bank lending is challenging, such deals give sellers access to much-needed capital, and as a result we expect the trend towards this deal type to continue well into the next year.”

Acquisitions of offshore targets meanwhile accounted for 150 deals against 167 in Q2 2012, and US$11.8bn of value compared to US$15bn last quarter.

Turning to IPOs, the report notes that there was a big drop-off between Q3 and Q2, with 35 IPOs and planned IPOs last quarter but only 17 this quarter.

“The return of greater activity in the IPO market is likely going to be linked with more continuing positive trends in stock markets, reflecting better valuations for companies,” Mr. Bubenzer said, adding that “The volatility over the last several months mean that it is likely that companies will now want to wait for a more continuing improving trend before going to market.”

BVI and Hong Kong markets top deals by acquirer

When it comes to deals involving offshore acquirers, both the volume and value of transactions has risen considerably against the last quarter, with 432 deals compared to 385 deals in Q2, and a composite worth of US$52.8bn compared to US$31.7bn last quarter.

The Hong Kong and BVI markets continue to produce the largest number of deals, generating US$24.3bn and US$17.4bn respectively. Hong Kong in particular showed impressive growth, generating nearly five times what it did last quarter. Of particular significance was the US$15bn acquisition of oil and gas exploration company Nexen by Hong Kong based CNOOC.

Global market comparison

The offshore M&A market continues to fare positively against other global markets, with offshore this quarter ranking ninth on the list for deal volume activity and fifth for value, worth an aggregate of $33.5bn. In value terms, offshore activity comfortably outstripped that of the Middle East, Oceania, the Nordic States, Scandinavia and Eastern Europe.

“Offshore is one of the few markets to have seen growth year-on-year, and the only mature market to do so,” said Mr. Bubenzer. “We expect that offshore financial centres will continue to be strongly represented, noting that those centres in which we are located have worked hard to ensure their continuing compliance with developing international standards, so as to retain their global acceptance in this significant role as a means of efficient investment, capital deployment and risk management.”

Looking ahead to Q4 2012, Peter Bubenzer noted “As we enter the fourth quarter, the inability of dealmakers to predict even how 2012 will round out, let alone beyond, has an obvious impact on their willingness to make investments that might ordinarily involve at least a five-year time horizon. But against this backdrop, some of the fundamentals remain strong; not least the insatiable appetite for natural resources around the globe, the continuing advances and efficiencies being realized in high tech electronics, and the rapidly developing consumer demand in many emerging markets.”

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

Laura Swartz, Myddleton Communications

[email protected]

Richie Singleton, Marketing Manager, Cayman Islands

[email protected]

Research Methodology:

Appleby’s Offshore-i report details mergers and acquisitions activity in Offshore jurisdictions in Q3 2012 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 01/07/2012 – 30/09/2012 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 Q2 2012 figures in the offshore-i Q3 report have been calculated as at 30/09/2012 and may differ from those in the offshore-i Q2 report which were calculated as at 30/06/2012.

Appleby is 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 the world’s largest provider of offshore legal services by partner numbers in The Lawyer’s 2012 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 more than 800 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.