MergerMarket
Tech remains most attractive area
Activity in traditional sectors continues to mature
Domestic tech M&A increasing
Israel is poised for a record-breaking end to the first quarter with the remainder of the year also looking strong as interest in cybersecurity and from Asia continues to grow, dealmakers told Mergermarket.
Following a record 103 deals valued at USD 7.789bn in 2015, 1Q16 to date has had 18 deals valued at USD 3.437bn, making it the largest Q1 by value on record and putting it on track to surpass 4Q10 which had USD 3.7bn on 21 deals to become the fourth largest quarter by value on record, according to Mergermarket data.
Activity continues as companies look to sell, sources said. Regulatory demands, such as the Business Concentration Law (BCL), among other requirements, remain a key driver, they said. BCL requires companies over a certain size to choose between their financial and non-financial holdings within the next few years.
A slow IPO market may also cause companies to look at alternatives, such as a stake sales, the dealmakers said.
Tech and healthcare remain the strongest sectors, while activity in traditional sectors continues to mature, Roy David, Managing Director of Ridgeback Capital Partners, said. He pointed to consumer, retail, and financial services, specifically insurance and banking, as examples of active M&A sectors.
A government panel set up to increase competition in the banking industry will likely force Israel's largest banks - Bank Leumi [TLV:LUMI] and Bank HaPoalim [TLV:POLI] - to sell their credit card divisions, Leumicard and Isracard, respectively, in the next few years, as reported. The two companies - the largest credit card companies in Israel - are expected to attract foreign private equity and financial institutions, David said. The companies could be sold for NIS 2bn to NIS 3.5bn (USD 514m-USD 900m), as reported.
Large companies in other sectors that have unique products or technology are also attracting the interest of foreign buyers, Itay Makov, Head of Investment Banking at Citi Israel, said.
The largest cross-border deal in 2016 could end up being the sale of Keter Plastics, a local investment banker said. It has attracted PE bidders including TPG, Apollo, Carlyle, Apax, Onex, Bain, and KKR, and could be sold for between USD 1.5bn-USD 2bn, as reported.
Two of the largest cross-border deals so far this year have been the sale of a 36.3% stake in Israeli food company Osem [TLV:OSEM] to Nestle [VTX:NESN] for USD 836.7m and China-based NanJing Xinjiekou Department Store Co's acquisition of home healthcare provider Natali Seculife for USD 294.49m, according to Mergermarket data.
Overall, the majority of deals lie between USD 75m to USD 150m, Rick Mann, Partner at Israeli law firm GKH, said.
Technology
Fintech, internet, and especially cybersecurity are among the most attractive areas in tech, the dealmakers said.
Cybersecurity M&A is being driven by increasing consolidation of public and large private companies trying to offer a full solution and to grow margins, an investor said. Most deals in Israel are early stage companies without sales, Mann said.
Potential buyers in the space include major security vendors such as Microsoft [NASDAQ: MSFT], CA [NASDAQ: CA], IBM [NYSE: IBM], and Google [NASDAQ: GOOG], the investor said. Israeli security vendors such as Check Point [NASDAQ: CHKP], Imperva [NYSE: IMPV], and CyberArk [NASDAQ: CYBR], and PE firms, such as Insight Ventures, have also been active, Dan Yachin, a research director at IDC, said.
Other trends driving cybersecurity M&A include cloud security and mobile/BYOD security, Yachin said. Included in cloud security are cloud security gateways, cloud identify and access management, cloud encryption and other solutions that enable to protect and maintain control over users, data and workloads in cloud environments, he added.
There is also a growing need for IoT security, which will drive security M&A activity, he said.
Other established Israeli security vendors include Varonis [NASDAQ:VRNS] and Forescout, he said. Notable start-ups include Cybereason, LightCyber, Skybox, Cato Networks, Skycure, Indegy, Tufin, and CyberObserver.
Local and global buyers
Foreign buyers continue to come from the US, followed by Europe, and then Asia, Makov said. Local PE funds are also very active in making acquisitions, a second investment banker said. For example, Tene Capital acquired a 51% stake in Peanuts & Cotton Marketing Limited for an estimated USD 32m in January.
Chinese companies are looking for targets, including in healthcare, that have an existing sales force and strong brand and can act as a gateway to target markets such as the US and Europe, Manor Zemer, Head of Asia Practice at Clal Finance Underwriting in Israel, said. They are also looking for large scale M&A opportunities.
Examples of Chinese companies looking in Israel include Huawei, Baidu [NASDAQ:BIDU], Alibaba [NYSE:BABA], Fosun, Ping An Insurance [SHA:601318], and SunPower Group, the second investment banker said.
Investors from Singapore are also interested in Israel, Zemer said, explaining that they are looking for military tech that used for civilian applications, including robotics, drones, and aviation.
Emerging and potential trends
"M&A last year was fueled by low interest rates and strong economics. The first two months of 2016 has seen a bit of a slow down in the markets on the back of 2015 which could drive boards and CEOs to be more cautious given market volatilities," Makov said.
An increase in domestic deals is expected to continue in tech and between local PE funds as the market matures, such as ironSource’s acquisition of SuperSonic Ads and the acquisition in 2015 of a 50% share for NIS 100m in Marina Mushrooms by Sky Fund from Kedma Capital, David said.
Activity between Japan and Israel is accelerating, Kenichi Hartman, an IP lawyer and blogger on Japanese-Israeli business activity, noted. Japanese companies see how aggressive Korea and China are in growing their economies and want to take more action. While activity with Israel is still mainly partnerships and small seed investments, one notable exception was the acquisition of Altair Semiconductor for USD 212m by Sony Corporation [NYSE:SNE] in January.
Digital Garage (DG) Incubation, SBI Group [TYO:8473], and Mitsui [TYO:8031] are among Japanese investors interested in Israel, as reported.