China outbound “M&A” FAQ format
Q. What is the situation of the Chinese outward foreign direct investment in the form of M&A?
From 2008 to 2011, Chinese companies' outward foreign direct investment in (OFDI) the form of M&As of totalled $106.3 billion, representing an annualized growth of 44 percent. In 2011 alone, OFDI in the form of M&As amounted to $27.2 billion, accounting for 37 percent of the total OFDI that year Mining, manufacturing and power generation are among the most favored sectors for Chinese investors. Chinese outbound mergers and acquisitions activity is expected to increase partly supported by the continued implementation of the country's 12th Five-Year Plan (2011-15). Despite the fact that the Chinese economy is undergoing a recalibration, as it looks to move away from an export-led growth model toward a model based on domestic consumption, industry practitioners from across the world expect Chinese overseas investments to continue to grow.
Q. Why outbound mergers and acquisition deals by Chinese companies are expected to increase in the near future?
Outbound mergers and acquisition deals by Chinese companies are expected to increase because with the economic crisis in the West there is plenty of High-quality assets available at a lower price. In fact Outbound merger and acquisition transaction by Chinese companies are expected to increase due to the favorable momentum of the Chinese currency also.
Q. What makes so attractive for Chinese companies the European market?
Due to the eurozone debt crisis, many high-quality assets have became available in Europe at very competitive valuations, so Chinese companies have been active in large-scale M&A transactions since 2011.
Q. What are the main sectors interested by this new trend?
The main sectors for M&A activity are expected to be energy, engineering machinery and infrastructure, which require significant funds and policy support. Chinese companies in these sectors are expected to increase their M&A activity. China is home to a number of industries that turn to inorganic growth abroad. Yet, none do so as obviously and as frequently as the energy and resource sectors. In order to satisfy China’s extensive energy needs, energy and resources corporate are active buyers. This is due to a shortfall in domestic production and China’s turn away from coal to stymie pollution. Energy & resources deals accounted for around a third of deal volume and two-thirds of value in 2012. In absolute terms, the sector totalled 48 outbound transactions in 2012, down 8% from 2011. The sector’s value was also somewhat depressed, amounting to $39.6bn, an 11% drop from 2011. This is likely due to many of China’s state-owned oil and gas operations – some of the sector’s most active acquirers posting falling profits in 2012.
The financial services sector too forms an increasingly significant proportion of Chinese outbound M&A, growing its share of value from 11% in 2007 through 2011 to 12% in 2012 and 2013 YTD, although it dropped from 7% to 5% of volume over the same period. A generator of high-value activity is beleaguered financial institutions from developed markets disposing of assets to pay down debt, with opportunistic Chinese buyers eyeing bargains.
Meanwhile, North America is considered the most attractive target for potential deals in the technology, media and telecommunications sectors, as well as for real estate acquisitions by Chinese buyers. From 2005 to the third quarter of 2012, around 41 percent of all outbound technology, media and telecom deals were to buy North American targets.
Chinese companies are also interested in buying life sciences and healthcare assets in North America and Europe to complement existing products or to allow them to move into new product areas.
Q. Who are the main actors in these transactions involving Chinese investors?
The main actors are usually State-owned enterprises, this makes the trade value of these deals extremely considerable. M&A deals by Chinese companies linked to their own industry sector are also becoming increasingly popular in China.
Q. Which are the most favored countries where Chinese investors are active?
In March 2013, the China National Petroleum Corporation (CNPC) announced plans to purchase a stake in Mozambique’s Eni East Africa for US$4.2bn, as East Africa is considered to be the next hot region for exploration due to its abundance of shale gas.
In the consumer sector, Haier Electronics Group purchased a majority stake in New Zealand-based household appliances maker Fisher & Paykel for US$1bn in September. In addition to benefiting from Fisher & Paykel’s popular makes of items such as two-drawer dishwashers, the deal will enable Haier to sell its branded appliances in developed markets at a higher profit.
In other instances, consumer deals were driven by Chinese corporates’ desire to establish marketleading positions by swallowing up competitors. In February, China-based Pacific Andes Resources Development, a supplier of frozen fish and vegetables, announced plans to take over Peruvian fishmeal and fish oil producer Copeinca in a US$735m deal. Peru is one of the world’s largest exporters of anchovies, making a foothold there crucial to rise to global prominence. Indeed, the transaction will help make Pacific Andes one of the world’s largest producers of fishmeal and fish oil.
As the energy and resources sector continues to dominate China's outbound M&A transactions, it is expected that most of the upcoming Chinese acquisitions in the sector will take place in North American, South America, Africa and European Regions .
Q. What are the main obstacles for a Chinese company to buy an American company?
The main obstacle that Chinese companies looking to acquire targets in North America face is the legislation that stifles foreign ownership of companies.
Plus, the management of cultural clashes when it comes to the price expectations of buyers and sellers could also affect potential outbound opportunities in North America.
Q. What are the Regional prospectives for a Chinese company to expand their presence abroad?
Although M&A with regional neighbours is important to many Chinese buyers’ expansion plans, far-flung target markets, including Canada, the USA and the UK are among the most active. This may be down to a scarcity of quality targets in the Asia-Pacific, or an effect of the ample opportunities borne by the crisis in Europe and North America, and the cache (both in terms of profits and brand equity) that often comes with acquiring businesses from these countries.
Among target markets, Canada stands out for its concentration of high value deals. This is largely due to a handful of large-cap energy and mining transactions, boosting Canada’s overall value to US$20.9bn, despite a meagre 11 deals. Canada’s strong value figures were undoubtedly boosted by the largest-ever acquisition with a Chinese outbound acquirer, when China National Offshore Oil Corporation (CNOOC) – majority owned by the Chinese government – purchased Canada-based Nexen in 2012. This deal follows CNOOC’s takeover of American Unocal Oil Company blocked by the Securities and Exchange Commission in 2005.
Despite trailing Canada in value, the US was the most active target country by volume, with 29 deals in 2012 through 2013 YTD. Activity in terms of size and number has been increasing over the past few years. While there were 14 deals valued at US$3.8bn in 2007, there were 22 deals amounting to US$11.8bn in 2012. Unlike deals with Canadian targets, transactions involving American targets involve a broader range of industries than energy & resources.
Q. Do Chinese investors favor any particular country regarding their investment?
Not in particular. Europe also saw healthy levels of deal making in 2012 and 2013 YTD. European deals tend to be from a broader variety of sectors, with drivers including access to new technologies and products or geographical expansion. For instance, China Merchant Holdings’ announced its US$535m acquisition of a 49% stake in France-based Terminal Link, giving the firm a foothold in Europe.
While farther-flung countries dominate the Chinese outbound narrative, there is significant movement into regional neighbours. The busiest of these countries is Australia, which is the
second most active country by deal count, and the fourth most active by deal size. Like Canada, Australia saw a spate of energy and mining transactions, with deals from other sectors much smaller in value and fewer in number. The two biggest deals of 2012 and 2013 YTD involved government-backed businesses, China Africa Development Fund and Sinopec, purchasing Australian energy assets for US$1.3bn and US$1.1bn, respectively.
Q. Is this trend of expanding their presence abroad going to diminish for Chinese big companies?
It looks unlikely that strong Chinese outbound growth will abate any time soon. There are several encouraging signs that point to continued M&A in the near future. For starters, attitudes toward takeovers by Chinese companies are changing.
Some developed-market countries were initially put off by Chinese acquirers, particularly those under full or partial state ownership. This trend is particularly evident in the energy sector, with oil giants such as Sinopec, China National Offshore Oil Corporation (CNOOC), the CNPC and PetroChina actively pursuing outbound acquisitions.