Israel posts drop in M&A deal value in 2017 as Chinese investment wanes – report

Merger and acquisition deals in Israel dropped 27 percent by value in 2017, as Chinese buyers cut back on their buying activity, a report by consultants PwC Israel shows.

Overall, the PwC Israel 2017 Mergers & Acquisitions report shows that the volume of financial transactions that closed during 2017 totaled some $12.2 billion this year. The figure does not include Intel Corp.’s acquisition of auto-technology developer Mobileye, which totaled $15.3 billion and is Israel’s second largest deal, to date, the report said. The largest deal in Israel’s history is Teva’s $40 billion acquisition of Actavis Generics, a unit of Allergan Plc.

In addition, there was a 38% decline in the average value of the deals in 2017 compared to 2016, the report said, though the number of deals valued at $100 million and above rose, with 9% of the transactions valued between $400 million and $1 billion, the report said.

“We see larger deals because entrepreneurs have learned to wait longer with an exit (initial public offering of shares or a sale), until the company reaches maturity,” said Liat Enzel-Aviel, partner, transactions services leader at PwC Israel.

The high-tech and pharma sectors had the most transactions this year, she said, and will continue to “lead the market.”

According to the study, 2017 saw a significant increase in deals with North America — totaling some $3.9 billion compared to $1.8 billion in 2016. This increase was mainly due to the sale of business units — mainly the Women’s Health Division — by Teva Pharmaceutical Industries Ltd., which has been selling off assets to cut costs and repay debt.

This year, however, saw a drop in the volume of transactions by East Asian investors — $2.7 billion this year, compared to $6.4 billion last year, mainly due to $4.4 billion acquisition of Playtika by a Chinese consortium in 2016, and to a significant decrease in the activity of Chinese buyers. This year Japan was the leading player from East Asia with two investments totaling $7.1 billion.

The restrictions imposed by the Chinese government on capital spending last year affected the activity of Chinese investors in Israel, said Enzel-Aviel, similar to the drop-off  in their activities globally.

For the first time this year deals in the pharmaceutical sector were higher than those in the high-tech sector. Pharma deals totaled $4.7 billion this year compared with $3.9 billion in 2016, the report said.  The boost in M&A activity stemmed mainly from Teva’s sale of assets. The drug-maker sold activities and products totaling some $2.5 billion in 2017, in three deals, the report said. In addition Mitsubishi Tanabe acquired Israel’s NeuroDerm for $1.1 billion this year.

Deals in the tech sector, not taking into account Mobileye, declined to $2.9 billion from $7.5 billion in 2016, mainly due to the massive Playtika deal in 2016.

“In our opinion, the decline in 2017 in the technology / high-tech sector is not a sign of a slowdown in the market, but an expression of a trend in which entrepreneurs do not rush to make a quick exit, but prefer to invest in building and improving companies to raise their value and perhaps even surpass the billion-dollar threshold,and become unicorns,” said Enzel-Aviel. “There is a lot of money in the market, but also patience.”

Enzel-Aviel forecast that there would be more deals to come in 2018.

“We believe companies will continue their aggressive tactics in multiple markets in search of strategic moves that will enable them to influence their sector and expand their market share,” she said.

The recently passed US tax reform injects some uncertainty regarding their impact on US acquisitions of Israeli firms, she said. In addition, a continued boom in the US capital markets could lead to a greater number of initial public offerings of shares as opposed to mergers and acquisitions, she said.

The data analyzed by PwC does not include deals over $10 billion, to avoid anomalies, the authors said.