China offshore acquisitions set for liftoff

China’s protracted leadership change held back offshore acquisitions in the first half of the year but interest is now picking up.
China Construction Bank bought Brazil’s Banco Industrial e Comercial (BicBanco)for about $730 million in cash.
China Construction Bank bought Brazil’s Banco Industrial e Comercial (BicBanco)for about $730 million in cash.

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.

¬ Haymarket Media Limited. All rights reserved.

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