Group Corporate Profile

A Globally-Diversified Company

China’s megadeals fail to offset slowdown

July 1st, 2016  23:00 P.M.   Souece: FTchinese

China’s record-breaking demand for overseas assets underpinned cross-border mergers and acquisitions in the first half of the year — but confidence that the country’s corporations can drive further dealmaking has waned, after several groups recently dropped out of bid talks at key moments.

Chinese companies agreed to $121.1bn in cross-border deals between January and June, according to data from Thomson Reuters, smashing the country’s all-time record for full-year outbound M&A, which was set at $111.5bn in 2015.

This aggressive buying by some of China’s largest state-owned and private enterprises contrasted sharply with the slowest first-half for global M&A since 2013. Activity in North America and Europe fell away as markets responded to political instability ahead of the US presidential election and the UK vote to leave the EU.

Global cross-border deals totalled $580.6bn during the six months, a decrease of about 4 per cent on the same period a year ago. Groups based in China accounted for 21 per cent of all cross-border activity as deal value sank in every major region across the globe.

Total US and European M&A was down 27 per cent and 18 per cent respectively on the same period in 2015. Even voracious demand from Chinese buyers was not enough to increase cross-border dealmaking in Asia, where the total value of transactions plummeted 27 per cent.

“Chinese firms’ appetite for overseas assets continues to be robust, and is one of the few bright spots for global M&A in 2016,” says Mayooran Elalingam, head of mergers & acquisitions for Asia-Pacific at Deutsche Bank.

Demand for high technology, along with the weakening of the renminbi and slowing economic growth at home, were all factors that kept Chinese corporations on the hunt for assets abroad during the first half of the year, Mr Elalingam noted.


Over the period, Chinese groups homed in on technology bid targets worth $26.0bn, far surpassing the $9.5bn spent during all of 2015 thanks to megadeals such as HNA Group’s $6bn acquisition US electronics distributor Ingram Micro in February.

However, it was a record breaking chemicals deal — state-owned ChemChina’s $44bn buyout of Swiss agrochemical company Syngenta, also in February — that became China’s largest-ever outbound acquisition.

More recently, though, some industry watchers have expressed growing doubts over the longevity of the country’s mega-dealmaking as more M&A negotiations involving Chinese groups come to nought.


Most recently, Zoomlion, one of China’s largest heavy equipment makers, gave up on its $3.4bn bid for US-based crane maker Terex after attempting to snuff out existing negotiations with Finland-based Konecranes.

Zoomlion had wooed Terex since December but, when faced with a fast-approaching deadline at the end of May, it backed out citing an inability to agree on price.

“The jury is out on how sustainable this wave of Chinese deals will be because there are responsible acquirers and some less responsible ones,” says Hernan Cristerna, co-head of global M&A at JPMorgan Chase. “I’ve [seen] some clients’ attitude toward Chinese bidders go from boom to bust in six months, from ‘Great, let’s find a Chinese buyer’ to deep worries about some of them.”

No deal better highlights the “bust” aspect of Chinese deal talks than Anbang Insurance’s $14bn bid for Starwood Hotels & Resorts in March.

Beijing-based Anbang grabbed international headlines for two weeks as it ratcheted up its offer for the owner of the Sheraton and St Regis hotels — in an attempt to upend an existing deal between Starwood and Marriott International.


Amid rumours of a regulatory crackdown in China, the proposed deal eventually came crashing down at the end of March — with little explanation from Anbang. Then, in May, the company withdrew a regulatory application for its $1.57bn acquisition of Fidelity & Guaranty Life after a US regulator asked for more information from the buyer.

“Sellers engaging with Chinese acquirers have to look carefully at the ability of such acquirers to ultimately obtain financing and other approvals and to deliver deal certainty,” warns Dietrich Becker, partner at Perella Weinberg. “Too many approaches have failed to result in successful transactions,”

Regulatory influence has proved a factor in the fate of Chinese deals since the start of 2016. Most notably, the Committee on Foreign Investment in the United States, or CFIUS, shot down the $3bn acquisition of Philips lumileds lighting business by Chinese venture capitalist GO Scale in January.

Regulatory concerns have also been mounting over ChemChina and its Syngenta acquisition, after the company was forced to refile its application to CFIUS in June — underlining the risks that Chinese groups face when targeting sensitive assets.

Still, experts point out that the biggest factor now holding back further outbound investment from China is not the regulators but sellers’ fears that buyers will not complete.

“Chinese buyers are being cautious about selecting their investment targets, but the bigger problem may actually be that sellers are becoming reluctant to deal with Chinese buyers out of fear that they can’t close the deal,” says James Lidbury, a Hong Kong-based partner at US law firm Ropes & Gray.

Mr Lidbury points out that US-based Fairchild Semiconductor rejected a $2.5bn bid from China Resources Microelectronics and Hua Capital in February, in favour of a lower offer from a US group.

It is not the only company to spurn a Chinese suitor in favour of a bidder it deems more reliable, he says. “It’s happening all the time in less visible situations,” says Mr Lidbury.

Cross-border loans for cross-border deals

All spending sprees have to be paid for somehow, writes Jennifer Hughes. And, in the case of China’s outbound merger and acquisition binge, that has meant loans in some unusual structures — as well as record borrowing overseas by the country’s biggest banks.

ChemChina’s $44bn acquisition of Switzerland’s Syngenta was only the second example of a Chinese deal involving loans taken against the target, not just the acquirer (the first was its takeover of Pirelli last year). This time, a group of 12 European banks agreed a $15bn bridge loan which relies on cash flow from Syngenta, while China Citic Bank is still in the process of raising the other $30bn in equity and debt backed by ChemChina itself.


“It’s unusual, but it does allow you to tap two investor bases,” says one senior finance arranger. “Financing the target suited European names who maybe don’t want such China exposure. And a lot of Chinese banks would rather lend to ChemChina. It may not be the stronger credit of the two, but they have the cover of state backing.”

Syndicated loans related to Chinese deals reached $34.5bn in the first half of the year, according to Dealogic, up by three-quarters on 2015’s full-year volume.

A similar jump in activity was also evident in Chinese banks’ record borrowing overseas, rather than at home. This year, the country’s biggest policy banks, led by ICBC and Bank of China, have borrowed $12.2bn — mostly in dollars and through their offshore branches from Hong Kong and Singapore to Dubai and New York.

Raising deal funds offshore helps to avoid putting immediate pressure on the weakening renminbi to pay for acquisition and, if funds are spare, they can be remitted home, thereby helping bolster the currency.

Bankers say that finding $44bn for ChemChina will not mark the end of creative deal funding. “The amount of blue-sky thinking required depends on the size of the deal — the bigger ones will need more innovative financing,” says Stephen Williams, head of global banking for Southeast Asia at HSBC.