China Outbound Investments – The Changing Nature of Chinese acquirers
By Christian Cornett, Rudolf Haas & Xiong Jin, King & Wood Mallesons
Posted: 2nd November 2016 08:18
2016 has started with a number of true “headline” transactions which excited the Chinese outbound M&A market: In early January, Wanda Group agreed to buy the American film studio Legendary Entertainment for US$3.5 billion; on 14 January, Chinese white goods heavyweight Haier announced its cash acquisition of the home appliance assets from GE for US$ 5.4 billion; on 3 February, ChemChina announced its US$45 billion bid for Swiss agri-chemicals manufacturer Syngenta, just one month after it signed a deal to purchase Krauss Maffei Group from Onex for €0.925 billion (the biggest Chinese investment in Germany so far) and just a few months after its acquisition of the Italian tyre giant Pirelli for over US$7.9 billion. These transactions highlight some very significant changes in Chinese outbound investment (by SOEs or otherwise).
What has driven those changes?
Chinese economy is in profound transition, from a government investment driven development model to a consumer and service oriented economy. This has major ramifications for Chinese outbound investors.
As a result, Chinese demand for energy and resources assets over the past few years has dropped significantly. In contrast, Chinese acquirers have shifted their investments focus into advanced technology, recognised brands, global manufacturing and marketing capability. To catch the demand from the emerging middle class, Chinese acquirers have been chasing assets such as hotels, healthcare and medical products and services, food and other consumer products (brands) globally. Europe has certainly become an even more important destination (and Germany has taken a lion share of Chinese investment).
Without doubt, Chinese acquirers are fast learning and increasingly sophisticated. Different parts of KWM global network have consistently observed a steady increase in the success rate for Chinese bidders in typical auction sale processes, which were once very challenging for them on many fronts. Increasingly other features such as consortium bids, acquisition finance and sophisticated onshore and offshore fund structures have become common place. As a result, the actual and perceived gap from a seller's perspective in the certainty of completion when dealing with Chinese buyers (as compared to western bidders) is narrowing rapidly.
Chinese listed companies are looking at outbound M&A activities for new growth opportunities and have become quite active in bidding for European targets. On the back of the high growth rates, price/earnings multiples of 30-60 are frequently seen in China, whereas outside China multiples in the range 10-15 are more common. Due to this comparably low valuation of overseas assets, many listed companies are also aiming for market capitalisation upsides. Attracted by this combination of a low valuation of overseas assets and growth opportunities overseas, Chinese listed companies are aggressively pursuing overseas assets.
This shift is also fuelled by the continuous deregulation firmly implemented by Chinese government over the past few years. Changes in the relevant regulations (MOFCOM, NDRC, SAFE), where to some extent filings have replaced the former approval processes together with recent changes in the relevant Chinese listing rules have made the acquisition process easier for listed Chinese companies. Correspondingly, selling to Chinese listed entities has also become more attractive from a seller’s perspective.
Sovereign funds and PE funds
Many sovereign funds were established by the central government over the past few years – mostly with strategic investment mandates, ranging from implementing the one-belt-one-road initiative to assisting Chinese investment into Latin America. Provincial governments are also rushing into setting up funds in different forms to achieve different policy objectives (including acquiring overseas assets). With a clear shift from the previous focus on energy and resources, these government backed funds are actively pursuing global investment opportunities, in particular on “heavy” assets (such as infrastructure, high speed train and nuclear projects). Notwithstanding their strategic mandates, they are increasingly market driven.
PE funds are increasingly looking beyond Chinese boundaries seeking better returns, too. These funds generally act as both financial advisers (helping less sophisticated Chinese acquirers to do cross-border deals) and co-investors (in particular on bridging funding gaps). Co-investments are particularly frequent alongside listed companies. Again, the different valuations are one driver, e.g. where the PE funds expect a better valuation and high return on investment,e.g. by way of a potential future exit reflecting the high multiple witnessed on the Chinese capital markets.
By now, a variety of Chinese investors, including listed companies, PE and Sovereign funds and consortiums of such investors have emerged. At the same time, Chinese investors have become more sophisticated and – following a number of succesful deals – the markets have accepted Chinese acquirers as a very credible option. Chinese investors are here to stay, and more are to come.
A recent report jointly commissioned by Rhodium Group and Mercator Institute for China Studies projects that by 2020, China will become the biggest cross-border investor, with global offshore assets tripling from US$6.4 trillion to nearly US$20 trillion.
Market participants and regulators in all major global economies need to seriously consider how to better engage with the enormous and ever changing pool of Chinese investors. Responding to those ramifications in a sensible way is a key element of being competitive in the global M&A market.
Rudolf Haas is a partner in King & Wood Mallesons’ Corporate Department focusing on capital markets transactions. He advises on securities issues and other financings, both debt (including high-yield) and equity, as well as public M&A transactions. His clients are issuers, bidders, underwriters and financial advisers.
Rudolf can be contacted on +49 69 505032 310 or by email at email@example.com
Dr. Christian Cornett is a partner in King & Wood Mallesons’ Corporate Department and advises listed companies, financial institutions and funds with respect to private equity and equity capital markets transactions (including block trades, PIPEs, tender offers, share-for-share transactions, public-to-privates etc.).
Dr. Christian can be contacted on +49 69 505032 197 or by email at firstname.lastname@example.org
Xiong Jin is a partner in the Beijing office of King & Wood Mallesons. He specialises in cross-border M&As and project investment, with substantial experience in China outbound investment. Qualified in China and Australia, Jin has extensive commercial experiences from working in Australia, China and Hong Kong.
Xiong can be contacted on +86 10 5878 5588 or by email at email@example.com
King & Wood Mallesons is a new breed of law firm combining local depth with a global platform. Since combining with SJ Berwin in 2013, King & Wood Mallesons has created one of the world’s top 15 law firms, bringing together more than 2,700 lawyers, including 550 partners, in over 30 locations across the world.
As the only firm in the world able to practise PRC, Hong Kong, Australian, English, US and a significant range of European and Middle Eastern laws, we open doors and unlock opportunities for clients as they look to unleash the fullest potential of the Asian Century. Our ability to connect emerging opportunities, with market leading capability, is pushing the frontiers of what can be achieved - connecting Asia to the world, and the world to Asia.
King & Wood Mallesons’ global M&A and commercial practice acts on some of the most high-profile transactions in the world, including handling a large number of transactions for Chinese acquirers outside of China. Working in close partnership with clients, our relationships are built on delivering a market leading experience and providing access to deep legal insights and local connections, with the benefit of a global platform.