The Emergence of China: New Frontiers in Outbound M&A
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The emergence of China: New frontiers in outbound M&A November 2009 New frontiers in outbound M&A Introduction 4 Executive summary 6 Methodology 7 China outbound M&A overview 8 China outbound M&A activity into Australia 17 China outbound M&A activity into the US 23 Sector focus Automotive 29 Oil and Gas 34 Financial Services 40 Mining 45 Deloitte Global Chinese Services Group Overview 50 Deloitte contacts 52 The emergence of China: New frontiers in outbound M&A 3 Foreword: New frontiers in outbound M&A China has truly stepped onto the world the China Development Bank recently loaning stage following the turmoil that afflicted the the state-owned China National Petroleum global financial system in the second half Corporation US$30bn in order to swell its of last year. Nowhere is this more prevalent outbound M&A war-chest. than in the Chinese outbound M&A market, where activity remained solid over the first Looking forward, Chinese outbound M&A three quarters of 2009, despite dire market activity looks likely to continue to move conditions. Indeed, outbound deal volumes from strength to strength over 2010, over Q1-Q3 2009 accounted for 10% of driven by a largely-unchanged appetite for overall Chinese M&A activity, as well as close deal-making in China, as well as relatively to one-quarter of M&A investment – in attractive valuations for overseas assets. comparison, foreign acquisitions in 2007 At the same time, Chinese acquirers are comprised just 8.5% over all M&A volumes increasingly examining assets in Europe and 21% of values. and South America, evidenced by the May 2009 announcement that the China With outbound deal activity playing an Development Bank will lend US$10bn increasingly important role in determining to Petrobras, the state-owned Brazilian the direction of China's overall M&A market, oil company, in exchange for a guaran- acquisitions of foreign assets have become teed supply of oil over the next decade. increasingly sophisticated, as well as contro- Furthermore, Chinese authorities are also versial. It therefore comes as no surprise that working to strengthen ties with the EU, in one-quarter of China's 20 largest outbound order to drive tighter economic integration transactions have been announced over with the trading bloc as well as gain market the previous three quarters, with a number economy status, recognition of which will of them, such as Yanzhou Coal Mining’s most likely boost Chinese acquisitions of US$2.6bn bid for Australia’s Felix Resources, European businesses in the future. encountering regulatory delays. In order to shed some light on other deal At the same time, China’s sovereign wealth drivers, as well as discuss any potential fund is also beginning to leave its mark, hurdles that Chinese firms are likely directly accounting for two multi-billion to encounter in the future, Deloitte’s dollar acquisitions since the beginning of Global Chinese Services Group, together 2007 – the US$3bn acquisition of a minority with mergermarket, has produced The stake in US buyout house Blackstone, as well emergence of China: New frontiers in as the US$1.5bn 17.2% stake purchase in outbound M&A, a thought-leadership Canada’s Teck Resources, announced in July report which looks to fully illuminate 2009. Public capital is also increasingly being potential Chinese acquirers on the ins-and- utilized to fund outbound acquisitions, with outs of purchasing foreign assets. 4 The emergence of China: New frontiers in outbound M&A 5 Executive summary and methodology Outbound M&A overview Sector focus Chinese outbound M&A flows (incorporating all Energy, Mining & Utilities transactions continue to outbound acquisitions stemming from buyers located dominate Chinese M&A purchases abroad. Since the in Mainland China, Hong Kong, Taiwan and Macau beginning of 2003, acquisitions in the sector have and targeting businesses situated outside China) accounted for 29% of total outbound deal flow by rebounded over the first three quarters of 2009, with volume and a massive 65% of total deal valuations. quarterly volumes expanding from just 10 announced Over Q1-Q3 2009, these proportions increased to 40% transactions in Q1 to 26 in Q3. Likewise, quarterly deal and 93%, respectively. values rose over the same timeframe from US$1.3bn to US$8.9bn. Deal rationale and obstacles One factor influencing outbound deal flow stems Chinese acquisitions abroad are steadily rising in value: from the fact that Chinese monetary authorities 20.8% of all disclosed Chinese M&A transactions over are encouraging state-owned enterprises (SOEs) to 2003 to Q3 2009 were valued at US$250m or greater acquire Energy, Mining & Utilities assets abroad in – a proportion which rose by 1.6 percentage points order to utilize some of the economy’s massive foreign over the first three-quarters of 2009. exchange reserves and diversify away from low- yielding US dollar-denominated government securi- Private equity buyouts from China seem to focus on ties, as well as secure mining and energy resources to portfolio companies located in the Industrials sector: satisfy the country’s growing appetite for manufac- 28% of all China-based private equity acquisitions over turing inputs. the 2003-Q3 2009 timeframe by both deal volume and value were conducted in this space. Meanwhile, over Chinese SOEs are also looking to expand inorgani- one-third (37%) of this activity by deal volume targeted cally so that they can achieve significant economies businesses in South Asia, while one-fifth of private of scale, which will ultimately allow them to achieve equity activity by value was invested in Australasian market share abroad and strengthen their bottom line. businesses. China’s post-merger integration (PMI) track record is Outbound M&A activity into Australia developing, however, with obvious corollaries for the Chinese acquisitions into Australia totaled some 58 long-term success of outbound transactions. transactions worth a total of US$9.3bn over the 2003-Q3 2009 period. The majority of this deal flow The impact of M&A regulations was centered on the acquisition of Australian Energy, Comprehensive revisions to China’s regulatory regime, Mining & Utilities assets, which accounted for some implemented in the summer of 2008 and 2009, 67% of overall deal volumes over the timeframe, as signal that such Chinese business policies are now well as 86% of total valuations. Furthermore, the comparable to the EU or North America. At the same predominance of Energy, Mining & Utilities purchases time, issues of regulatory reciprocity are unlikely to has risen over the first three quarters of 2009, with arise in the near future as the major antitrust regimes 75% of all deal volumes and 99% of all valuations are aware of the huge adverse impact such a charge being attributable to acquisitions in the space. would have on future M&A flows. Outbound M&A activity into the US The future Chinese acquisitions overseas tend to be focused on Outbound Energy, Mining & Utilities transactions, assets located in North America. Since 2003, roughly primarily focusing on Australian assets, are likely to one-quarter and one-third of all outbound M&A trans- continue into 2010. However, such transactions are actions and valuations have been for North American not going to get easier with time, with large Chinese targets. These proportions rose substantially when bids for foreign assets in this space are likely to be met looking at outbound purchases for the Q1-Q3 2009 with increasing resistance. period, to 32% and 70%, respectively. 6 Chinese bidders will start returning to bid for assets in standings, Head of agreement and Non-binding the Financial Services sector. While it is largely accepted agreements. that some Chinese bidders made have undertaken • All US$ symbols refer to US dollars unless otherwise poorly planned investments into Western financial stated. institutions in the past, pending financial sector reforms • The report includes deals from the below locations: in the EU and North America will no doubt create Mainland China (China); lucrative investment opportunities. Hong Kong; Taiwan; From a country perspective, China's vigorous invest- Macau. ment into US businesses is expected to continue over • According to mergermarket and for the purposes of the next 12 months with buyers eyeing assets in a bid this report, an outbound transaction is defined as a to boost their technological prowess. The most notable deal in which the bidder is predominantly located example of such a trend was undoubtedly Lenvovo’s in Mainland China, Hong Kong, Macau or Taiwan US$1.75bn acquisition of IBM’s personal computer and the target business is predominantly located in division, announced at the end of 2004. Anecdotal any other country aside from mainland China, Hong evidence suggests that the jury is still out on the deal, Kong, Macau or Taiwan. with Lenovo recently reporting better-than-expected • For the purposes of this report, regional splits are first quarter 2009 results after a difficult period defined as follows: following the acquisition. Germanic – Germany, Switzerland and Austria; Iberia – Spain and Portugal; Overall, the prognosis for Chinese outbound M&A Australasia – Australia and New Zealand; activity is fundamentally strong, despite significant Benelux – The Netherlands, Belgium and operational and political barriers to deal flow contin- Luxembourg. uing to hamper transactions. Looking forward, it is • Any mention to the term ‘2003-Q3 2009’ throughout increasingly likely that outbound values and volumes the report indicates that the period in question will eventually overcome such obstacles, ultimately runs from 01/01/2003 to 30/09/2009. Similarly, any resulting in the expansion of this particular market. mention to the term ‘Q1-Q3 2009’ indicates that the period in question runs from 01/01/2009 to Methodology 30/09/2009.