Chinese company demand for offshore assets wavered slightly in the first half of the year due to the country's protracted political transition and its tight banking conditions but it is now beginning to pick up again.
“There was a lot of wait-and-see earlier this year,” said David Brown, China and Hong Kong transaction services leader at PwC. “People were waiting for the leadership transitions to be known and take effect and didn't want to commence transactions. And, after the new government had taken over, there was uncertainty over the policy direction and a tightening of liquidity,” he said.
Chinese mergers and acquisitions generates the lion’s share of M&A fees in Asia. So it matters hugely to the region's banking industry.
To be sure, the total amount of deal flow so far this year has not actually fallen. But it has been decidedly lumpy. Completed China outbound M&A chalked up to $50.7 billion from the start of the year till October 10, while announced outbound M&A amounted to $53 billion. That is 24% and 16% higher, respectively, than the same period a year ago, according to Dealogic.
However, the aggregate data is skewed by a couple of jumbo deals: Cnooc’s $15.1 billion acquisition of Nexen and Shuanghui’s $7.1 billion acquisition of Smithfield Foods, which both closed this year.
Fees from China M&A also appear to have declined, reaching $283 million over the same period compared with $437 million a year earlier, data from Dealogic showed. Fee data lags slightly as the bulk of the revenue for M&A is recognised only after completion of a deal.
The changes to China's top echelons were announced in November last year but they only took effect in March, when Xi Jinping was confirmed as the country's new president.
However, with the new administration now in place, bankers have noticed an uptick in deal flow. “There was a lower level of M&A activity out of China earlier this year due to the change in administration but in recent months there has been a pick-up in dialogue with Chinese state-owned corporate clients,” said Colin Banfield, head of M&A Asia Pacific at Citi. “The go-global message is being reaffirmed,” he said.
This was borne out by China Construction Bank’s purchase of Brazil’s Banco Industrial e Comercial (BicBanco) for about $730 million in cash in October and CNPC's purchase of Brazilian state-controlled Petrobras' oil and gas assets in Peru in November. Mainland parties have also been active in bidding for Hong Kong banks. For example, Chinese trading firm Yue Xiu, which is controlled by the Guangzhou municipal government, made an offer to buy up to 75% of Chong Hing Bank’s shares for up to HK$11.6 billion ($1.5 billion) in October.
Private companies rise
The complexion of China deals has also been changing. Traditionally, China M&A activity has been driven by large state-owned enterprises such as Cnooc and Sinopec. Those oil and gas giants are still active but in the past two years the companies in the Chinese private sector have stepped up their interest as well.
“Nowadays, there are more strong private Chinese companies that are looking for international opportunities,” says Kenji Kimura, global head of M&A at Nomura. “Year by year, private sector companies are playing a bigger role in China M&A,” he said.
Chinese company Shuanghui International’s $7.1 billion takeover of US pork producer Smithfield Foods, which closed in September, epitomised this emerging trend. The Hong Kong-based Shuanghui International is a privately held company and the deal was the largest takeover of a US company by a Chinese buyer.
Chinese conglomerate Dalian Wanda, controlled by billionaire real-estate developer Wang Jianlin, also acquired US movie theatre chain AMC Entertainment last year.
Increasingly, a wider range of Chinese companies from the consumer to technology sectors are looking to grow overseas. Many companies are hungry to climb up the food chain and are moving offshore to acquire branding and know-how. Amid growing affluence at home the Chinese consumer is also driving offshore acquisitions, as was the case with Shuanghui.
“Shuanghui’s acquisition of Smithfield is an example of rising consumption in China,” said Richard Wong, managing director at Morgan Stanley. “Increasingly, Chinese companies are going overseas to find inputs to meet that demand,” he added.
But private companies face challenges. They often have a tougher time getting financing as they are not state-backed and lack the experience and nimbleness to close a deal in a foreign market. “It’s hard. Many private companies want to do deals but only a small handful can get [them] done,” said one Asia M&A banker.
The recent recovery in the US and Europe, where most mainland companies hunt for assets, has also led to valuations becoming more expensive. “In the last few months, with some recovery in the US and Europe, asset prices are going up,” said PwC’s Brown. “That made it a bit more difficult for private enterprises to do deals overseas. It has also become more difficult for private enterprises to get bank financing,” he said.
Anti-trust slows deals
Although bankers expect China M&A activity to rebound, the country’s anti-trust laws could delay deal closures, both globally and for Chinese companies looking to make offshore or domestic acquisitions.
Companies – whether foreign or mainland – that generate substantial revenues from China require Ministry of Commerce (Mofcom) approval for acquisitions, even if the acquisitions are outside of China. This tends to slow deal closure.
The China’s Ministry of Commerce’s attitude towards variable interest entity (VIE) structures could also act as a brake on M&A activity from companies that use such structures. This was first seen back in 2009 when Chinese online media company Sina scrapped its purchase of the advertising assets of Focus Media due to delays in Mofcom approval.
VIE structures are contractual obligations that enable foreign ownership in sectors such as internet, media and advertising – where foreign direct ownership is restricted. US-listed Chinese internet firms Baidu and Tencent use the VIE structure, for example.
“My understanding is that Mofcom is not considering any applications for companies with a VIE structure, be that a buyer or seller,” said Brown. “That is acting as a brake on some of the M&A activity for companies with a VIE such as the internet companies,” he said.
