A conversation with...

Natixis' Head of Investment Banking for Asia Pacific, Raghu Narain, speaks to Natixis' APAC M&A network partners

Marcus Shadbolt - Managing Partner, Vermilion Partners, and Simon Price - Joint Managing Partner, Azure Capital 

Raghu Narain: It’s been just over two years since Natixis began to build out its M&A network in Asia, as part of its global strategy to further strengthen its M&A advisory offering.

The global initiative began in Europe in 2015, with Leonardo & Co France and 360 Corporate (now known as Natixis Partners and Natixis Partners España, respectively). In the summer of 2016, PJ Solomon in New York joined the network, and then in 2018, we added our first M&A affiliate in Asia – with Vermilion Partners in  China – who joined alongside Fenchurch in the UK, and Clipperton in France. Then last year, Azure Capital joined the Natixis family.

Our multi-affiliate M&A advisory model is a unique approach to M&A advisory and it allows us to expand our capabilities by combining with firms that have specific areas of expertise, complementary to our own franchise and which strongly enhance our strategic dialogue with clients.

Today, I’m delighted to be joined by Marcus Shadbolt from Vermilion Partners and Simon Price from Azure Capital, to discuss the Natixis network approach to M&A, and what the future looks like.

Now, the first quarter of 2020 has clearly been an incredibly turbulent time for markets, but let’s start off with a bigger picture before we get down to those details.

Notwithstanding the environment in recent weeks – what has changed for you – in terms of business or in terms of the way you conduct business – since you became part of the Natixis M&A network?


Marcus Shadbolt: I think for us, there are two principal changes. The first is the network effect. We’ve got many more colleagues with sectoral expertise and relationships around the world. The second is that the offering has become broader. So, for instance, as part of the M&A process, we can now offer deal contingent hedging arrangements, FX swaps; there are just many more strings to our bow in terms of assisting clients in achieving optimum outcomes.


Simon Price: I’d echo what Marcus has said – those things have made a difference for us as well. Probably the other very material benefit that we’ve seen is the opportunity in amount of cross-border work. Right now, we’re working very closely with a couple of the sector groups in Natixis – Energy and Natural Resources, and Infrastructure in particular – and then in addition to that, we’ve been able to secure a few mandates that realistically wouldn’t have been opportunities for us were we not part of the network, and it’s really opened Azure up to capital flows from China for example – and that includes a deal that we’re working with Marcus’ team on, as well as [teams in] Europe.


Raghu Narain: I’d add from a Natixis standpoint, that what we see in terms of the benefits of having Azure and Vermilion join the family, is number one: we see the ability to be sharper in our cross border M&A offering for our clients, whether it related to China, Australia, or anywhere else in the world. Number two: we have seen increased opportunity for us to deploy our balance sheet behind the transactions that Azure and Vermilion are running, so we can support the buyer or seller, as the case maybe. Thirdly, there’s been an overall enhancement of our Natixis M&A offering in Asia Pacific, which allows us to upstream our dialogue with Natixis, Vermilion and Azure clients, and to be more relevant to them in achieving their strategic objectives.


"In terms of having Azure and Vermilion join our M&A family, we see the ability to be sharper in our cross-border M&A offering, whether that's related to China, Australia, or anywhere else in the world."

Raghu Narain: Let’s talk a little bit about some transaction that we’ve collaborated on. Marcus, why don’t we start with you - are there any transactions that you’d like to highlight where coming into the Natixis network has been accretive for you?


Marcus Shadbolt: There are actually quite a number. In fact, it’s the case that we’ve worked with not just Natixis, but all of the other boutiques that are part of the family, on live mandates since joining the network. So, we’ve got a good level of engagement across the Natixis 'mothership' and our sister firms across the network. There are probably two that I would like to highlight. The first is a transaction that completed in the summer of last year (2019), which was Hamleys, the well-known toy store, headquartered in the UK with operations through franchise partners in many countries across the world. That was a super piece of cooperation between us and Natixis – particularly Natixis APAC – where the owner was based, but also, with other parts of the network, as we reached the buyer universe through other boutiques and other parts of Natixis itself. That was a successful outcome – we achieved a good result for our client. The second is one that’s a restructuring in China, currently going through the approval process. It’s a pretty good result too – it’s a joint venture that our client was looking at closing which would have incurred a loss for them and in fact we managed to sell the business for a material sum of money. We’re expecting that to close in the next few weeks. So definitely value added through the network. For both of those opportunities, we wouldn’t have got the client if it wasn’t for cooperation across the network, and equally, the rest of the network wouldn’t have been able to execute those transactions without us.


Simon Price: For Azure, I’ll just start by saying that we haven’t been part of the network for as long as Vermilion, so there’s a shorter list of closed or publicly announced transactions. But in terms of mandates, we’ve got a number that we’re working on with either one of the boutiques or Natixis. There are two in particular that I can highlight. The first is that we are on the sell-side of some renewable assets for Engie. So as a large French corporate, Engie has a very good relationship with Natixis, but not with Azure – but we have the infrastructure expertise and familiarity with the platform that they want to set up, which we brought to Natixis’ ability to undertake that mandate. So, a real win-win for both of us. Another mandate that we worked on, was one that Azure already had, but working with Natixis’ ASF (Acquisition and Strategic Finance) team in Sydney really added value to us. Unfortunately, in this instance, our clients weren’t the successful bidder, but it was a very publicly contested M&A process where we acted for some infrastructure funds, to put a competing public takeover offer in for a power company called Pacific Energy. The ASF team gave that deal strong support in the form of acquisition finance, and really, we wouldn’t have been as competitive as we were without them.

"We’ve got a good level of engagement across the Natixis 'mothership' and our sister firms across the network."

Raghu Narain: Switching gears, I’d like to talk a little bit about the fact that we are seeing unprecedented levels of market volatility and an almost country by country shutdown in response to the Covid-19 situation. Certain industries, such as travel and leisure, transportation and energy/oil and gas, and those with Asian supply chains – particularly emanating out of China – have been significantly impacted. Perhaps you can share with us some observations form your respective markets as to how business have changed their approach to M&A – if indeed that is the case?


Marcus Shadbolt: As you said, it's been turbulent times for everybody, and the principal thing we’ve been focusing on is just being there for our clients, and being a sounding board for them, as well as sharing best practice across our network, in terms of capacity but most importantly maintaining the health and safety of staff. There is one point that’s become apparent over the last few weeks. At the start of the Covid-19 crisis, this was very much portrayed as an issue in China. A lot of global companies were thinking about retrenching and re-engineering their global supply chains so that they would be producing more at home, but since the Covid-19 virus has spread throughout the world, the companies that are diversified geographically are faring better because they’re able to switch on more capacity I less affected corers of the world. There a change in thinking going on, I think, amongst the global MNC’s, that they need to build a robust and diversified supply chain and business, and not be dependent geographically – whether on China or their home market. So, overall, I think this will be quite a positive for enmeshing the world economies, which ultimately makes everybody safer in the long run.


Simon Price: Its hard to understate the impact right now. The Australian market and the markets in which we participate are probably more in sync with the US and Europe, and so the meltdown on the capital markets, the fall in liquidity, impacts just about everybody. Then you have the sector-by-sector impacts – not all of which are negative by the way. We do a lot of work in natural resources, and the Australian gold sector is absolutely booming because gold prices have gone up and the Australian dollar has gone down, so they’ve never had it as good as they do right now. That’s obviously a massive contrast to anyone who’s in airlines or hospitality for example. So its been a real shock to capital markets and to the M&A process, but out of these things there are opportunities, and what we’re busy doing right now, is trying to pick where they are. Things like the gold market, supermarkets, food retailers, home delivery, telcos, infrastructure, these are businesses that are stronger in this environment. For the more distressed areas there are also great buying opportunities. The other thing to highlight is that a number of capital providers have reached out to Azure and people like us, saying “Hey, we’ve got money, we’re open for business, and we want to take advantage of special situations that might arise here.” There’s also been a massive amount of liquidity, in Australia, pumped into the market by the fiscal response and so that has also meant that funding is available for people who are able to stay viable through all this. We all know that it will end, like a lot of these crises do. Our main focus really is trying to look for the opportunities that come out of it.

"It's been a real shock to capital markets and to the M&A process, but out of these things there are opportunities."

Raghu Narain: It’s good to hear that there are opportunities coming  out of these difficult times. Maybe a good follow up question to that, would be what lessons in the M&A business, have you and your teams learned from past crises – say the Global Financial Crisis (GFC) in 2008 – and what can you share with our audience to help them navigate through these times.


Marcus Shadbolt: You’ve got to repair your roof when times are good. I think when the sun is out, you’ve got to build the reserves of your company and stay mindful to the fact that it may not always be a sunny day. That’s the principal action. Not to have too much tightness in the company when things are good, but to have some redundancy or capacity that you can reply on when things are less good. There’s an optimistic gene in many people that leads them to think that when times are good, it’s just going to get better. But it’s also worth looking at the other side of the coin sometimes and making sure that you’ve got a balance in your business and you’ve got the resilience to withstand shock.


Simon Price: There’s no question that cash is king in these kinds of situations. The GFC was a financial crisis, but many of the things we’re experiencing day to day are similar, even though the cause is different. As we learned then, it's absolutely the case that cash is king and companies who lack it are staring down a difficult situation and worried about their cash and cashflows. Marcus hit it on the head when he said there’s an optimistic gene in everybody, and you obviously need to balance that against making sure you have the liquidity and the cash that you need, and if you’ve got the cash there are great opportunities to deploy it. The other thing is that the markets, once we get into one of these modes, are incredibly jittery. "Sell first and ask questions later" is probably the policy of a lot of investors and so things move around sharply and change quickly. So you’ve got to be careful not to get too caught up in that. You’ve got to analyze situations company-by-company, deal-by-deal, market-by-market and you’ve got to be conservative and cautious about how bad things could get and how long for, but also remember that a quality business and a quality company is valued on the basis of its future cashflow, its future maintainable earnings. We won’t be in this crisis forever and the GFC showed that – it was a big hole to climb out of, but we did come out of it, and this will be the same.


"There’s an optimistic gene in many people that leads them to think that when times are good, it’s just going to get better."

Raghu Narain: Marcus, if you were to look at the future, when do you think we should see a resumption in activity related to China cross-border M&A?


Marcus Shadbolt: There are obviously various steps that we need to go through. There will no doubt be some activity that’s forced by circumstances. But in terms of expansion and “business as usual”, I think it will be some time yet. We’ve got to get through this crisis and then there will be taking stock process, and my personal view is that  as part of that there will be an analysis of how diversified companies’ risks are. I think for a lot of companies, they will reach a point where China is an important part of that equation. Indeed, we’re already seeing this today in terms of medical supplies. When China entered the crisis, in January, it went into mass production of many necessary equipment, whether that was PPE (personal protective equipment), or ventilators, and now that production capacity is being soaked up by the rest of the world, and so you can see the benefits of diversification. I think that companies will start looking seriously at expanding again, probably within two quarters of the crisis blowing through.


Raghu Narain: That’s good to hear. Simon, when you do see a resumption or growth in activity in and out of Australia?


Simon Price: Well, for us the Covid-19 crisis is actually quite new. It has really hit us in the last two weeks and so it’s a bit hard to say how long it will go for. I suppose the other point to make is that China contained the coronavirus, by the looks of it, quicker than it appears likely to be the case, in Europe.  There are differences in the way that society and the government works, and differences also in their experience from prior pandemics. China had SARS and we didn’t have that. So, I guess it’s hard to say how long this is going to go on for. Our government is preparing people for a longer period than it affected China. As a result we’re seeing a fall in M&A despite what I said earlier about there being opportunities – there are, but overall there’s a fall – and I think it’s going to take a good twelve months to build back up to where it was, that’s my prediction at the moment.

"No question we’re seeing a fall in M&A. There are opportunities – but overall there’s a fall."

Raghu Narain: Marcus, do you see a bifurcation in activity between the financial sponsor or the fund community as opposed to the corporate?


Marcus Shadbolt:  In terms of new initiatives, they’re in completely different circumstances. The corporates are principally concerned with their core business, and for many of them, they won’t be putting new initiatives out there that are expansive, they’ll be looking first at protecting their core business, and if they’ve got that stable, doing anything they can to enhance it, post the crisis, or as part of the crisis. For financial sponsors, I think there’s a category for which this represents a great opportunity. I think many of them are mindful of the opportunity but also tempered by the fact that they don’t want to be seen as predatory or taking advantage of what is a global crisis. But a lot of these firms have got liquidity, they’ve got money on the shelf and they can provide solutions to companies that are struggling with those issues.


Raghu Narain: Simon from your perspective – what differences are you seeing between corporates, and financial sponsors, such as infrastructure funds?


Simon Price: There are clear differences. Corporates, depending what industry they’re in and how impacted they are can become quite inward looking, possibly in survival mode. There are major job retrenchments and PR issues to manage. Some corporates are active still in looking at opportunities, but others just can’t. That contrasts with financial sponsors – we’re seeing a little bit of a mix. There are some who are very busy, managing issues in their portfolio companies, and that hinders their ability to get involved in new deals, or they might simply be cautious and waiting for signs that we’re at a bottom. But there are many financial sponsors that were very liquid going into this, and were possibly even having trouble finding value, and now there is value to be had. They also know that companies and vendors are more motivated to engage on more favourable terms to investors, because they need an outcome. So, there’s definitely a lot of appetite among the financial sponsor community. You mentioned infrastructure funds, they have faced an environment of increasing competition and increasing capital allocated to their sector making it hard to compete for assets.  The message we’re getting from some of them on a current sales process is that ‘we’re very much open for business’, maybe hoping that in tougher times it will be less competitive. In short we see plenty of appetite in the financial community, more so than the corporate community.


Raghu NarainThank you both, very insightful comments.