China’s hunger for acquisitions abroad continues unabated. Yesterday, Shandong Heavy Industry-Weichai announced it was buying a controlling interest in the world’s biggest luxury yacht maker, Italy’s Ferretti.
That a Chinese company would step up to the plate and help the struggling luxury yacht maker makes sense — wealthy Chinese are the target market these days. “China is one of the most rapidly developing countries for the yachting sector and has great potential for the coming five to 10 years,” noted Norberto Ferretti, chairman of Ferretti.
The heavy equipment maker agreed to pay €374 million ($477 million) for control of debt-laden Ferretti. The deal includes an equity investment of €178 million and the provision of €196 million of debt financing. SHIG-Weichai will acquire a 75% interest in the yacht maker after the completion of the debt restructuring procedures.
Furthermore, RBS and funds under the management of Strategic Value Partners will invest alongside SHIG-Weichai. Both will become 12.5% shareholders. While these investments are for an undisclosed amount, they push the deal value to more than €400 million.
This makes it the biggest cross-border Italy/China deal ever and perhaps the largest distressed Western business acquisition by a Chinese buyer, according to a banker.
Through the acquisition, Ferretti’s capital structure will be fully restructured with equity capital increased by €100 million and total debts reduce to around €100 million.
Citi, Houlihan Lokey and ICBC International acted as joint financial advisers to SHIG-Weichai. King & Wood, Bonelli Erede Pappalardo and Akerman Senterfitt worked as legal advisers to SHIG-Weichai.
Rothschild and Ernst & Young were financial advisers to RBS and Strategic Value Partners. Ashurst and Clifford Chance served as legal advisers to RBS and Strategic Value Partners.
Game plan
“Developing the yacht business is one of the group’s strategic goals for the next five years,” said Tan Xuguang, chairman of SHIG-Weichai. “Through the acquisition, the group will cooperate closely with this world-renowned yacht maker, providing Ferretti with new channels to market and capital support as well as other resources with which it can expand more effectively into emerging markets, a key area of potential growth for Ferretti.”
Indeed, Ferretti has to crack the China market, as while the global yacht market has been in decline since the financial crisis in 2008, the mainland market has been growing. For example, China’s yacht imports increased threefold from 2009 to 2010. The number of luxury powerboats and yachts in China is expected to exceed 10,000 by 2015, according to the China Cruise and Yacht Industry Association. Of course, China’s wealthy aren’t just buying up boats. On Monday, Rolls Royce announced that China was now its biggest market for new cars. The burgeoning high-net-worth class in China likes their toys.
Ferretti makes those toys — but at a cost. It has eight shipyards in Italy, as well as in Miami, and employs nearly 2,000 people. As a result of the combination of a relatively highly leveraged balance sheet and the continued lower demand levels for certain classes of luxury yachts after the financial crisis, Ferretti needed help.
It will be interesting to see if some of the company’s manufacturing moves to China. Xuguang said that the group could help Ferretti’s overall competitive advantages in production cost, sales channels and after-sales services. SHIG-Weichai after all is one of the most competitive equipment manufacturing groups in China, offering a broad range of commercial vehicles, construction machinery and other heavy-duty industrial products.
But the group isn’t just making bulldozers. In 2009, SHIG-Weichai bought Moteurs Baudouin in France, through its subsidiary Weichai Power, which was its first step in expanding into the international high-end marine engine business. Since the acquisition, Weichai Power reports that it has invested more than €30 million and implemented multiple measures to improve Baudouin’s businesses and operations. The group says several objectives have been achieved including the expansion of production scale, the enhancement of its research and development capabilities, as well as the recruitment of local employees. The group says sales volume of Baudouin’s engines has increased to 352 units in 2011 from 74 units in 2009. The staff numbers has nearly doubled to 202 in 2011 from 120 in 2009 — though the company did not provide a breakdown of where the majority of those employees are based.
To ease concerns about job losses in Europe and the US, the company said in a statement that it will continue after the acquisition to uphold its general principle of “unified strategy, sharing resources and independent operations”, and will retain Ferretti’s key management team, headquarters and production bases in Italy.
But it is worth watching, in the long run, say a decade’s time, where production for these companies ultimately moves to — will it stay in Europe, the US and China? And will a Chinese company have the appetite for luxury businesses if China’s astronomical growth slows down and its high-flying, high-net-worth individuals are forced to choose between the yacht and the fancy car?
In the meanwhile, this is a deal that further underscores that China outbound M&A is likely to be a theme of 2012, which has corporate executives asking the bankers involved to “show me the blueprint for doing this type of transaction”.
