The Next Chapter of Chinese Outbound M&A
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Emerging from the twilight: the next chapter of Chinese outbound M&A October 2010 Chinese Services Group Emerging from the twilight: the next chapter of Chinese outbound M&A Foreword 4 Executive summary 5 Methodology 7 China outbound M&A overview 9 Northern China outbound M&A brief 11 Eastern China outbound M&A brief 15 Southern China outbound M&A brief 19 Sector spotlights Automotive 21 Financial Services 27 Mining 35 Oil & Gas 44 China's M&A investments into Brazil, India, and Russia 51 Introducing Deloitte's Chinese Services Group 64 China outbound historical data 67 Deloitte contacts 78 Emerging from the twilight: the next chapter of Chinese outbound M&A 3 Foreword: Emerging from the twilight Last year’s report on Chinese outbound M&A Looking forward, industry practitioners are activity begun by noting that China has truly broadly bullish on growth prospects, suggesting stepped onto the world stage. If that was that as China continues to play an increasingly true, then Emerging from the twilight: the next important role within the global economy, chapter of Chinese outbound M&A should outbound acquisitions will be conducted more really begin with a glowing reflection of China’s frequently as corporate players look to expand performance in what is almost certainly the market share overseas. Brand acquisitions, as well opening act of a long chronicle. as the purchase of advanced technologies are also crucial drivers of outbound M&A, while on What a glowing rendition it is. From the the Energy and Oil & Gas front, Chinese miners beginning of the third quarter of 2009 to the and power generators are almost universally end of the second quarter of 2010, Chinese scouring the globe for controlling stakes in businesses undertook 143 transactions abroad, mineral extractors. spending a total of US$34.2bn. This equates to 14% of all Chinese M&A activity by volume over In order to illuminate recent trends impacting the same period, and 16% of the total amount this particular segment of Chinese M&A, as well spent on acquiring such assets. In comparison, as glimpse into what market experts believe outbound acquisitions made up just 10% of the will drive deal flow over the next 18 months, overall market by volume and 12% by value over Deloitte’s Global Chinese Services Group, along the preceding four quarters. with Remark, mergermarket’s research and publications division, has produced Emerging This rise in outbound deal flow can be partially from the twilight: the next chapter of Chinese attributed to the emergence of local private outbound M&A. We hope you enjoy reading it equity players and sovereign wealth funds (SWFs) and welcome any feedback you might have. increasingly spreading their wings abroad, with the Chinese SWF, China Investment Corporation (CIC), certainly being in an acquisitive mood of late. Over the first six months of 2010, the fund undertook three overseas acquisitions worth a cumulative US$2.2bn, the largest (and arguably most innovative) of these being the US$956m acquisition of a 2.3% stake in Apax Partners, the UK private equity firm, in February this year. And as Chinese bidders becoming evermore ambitious, so they are widening their target scopes. Over the past seven-and-a-half years, 80% of all chinese outbound acquisitions were focused on targets located in just five countries. In contrast, over the first half of 2010, this proportion had fallen to just over three-quarters, highlighting to good effect, the growing significance of Chinese bidders on the global M&A arena. 4 Executive summary Outbound M&A overview Deal rationales Chinese quarterly outbound M&A activity surged Acquisitive Chinese businesses are currently over the second half of 2009 and the first half hunting abroad for three main reasons: of 2010, averaging 36 acquisitions per quarter The need to acquire raw inputs and over the period. In contrast, mean quarterly diversify foreign exchange reserves. Many deal volumes over the 2003-H1 2009 period Chinese state-owned enterprises (SOEs) have been amounted to just 16 transactions, demonstrating instructed by the Chinese government to buy to good effect that this particular deal class is miners and Oil & Gas production and exploration here to stay. firms across the globe as the authorities seek At the same time, Chinese acquisitions abroad to keep the Chinese economy fuelled with raw are rising in value. Over 2003 to 2008, just 21% commodity inputs. Such bidders are incentivized of all deals with disclosed valuations were worth to hunt abroad through the issuance of US$250m or more. This proportion rose by one non-interest loans granted by state lenders, whose percentage point over the 2009-H1 2010 period motive to do so is purely to diversify out of the while over the first half of 2010 alone, close to country’s massive holdings of US treasury bills. one-quarter (24%) of all outbound acquisitions The desire to expand abroad. Other Chinese were valued at US$250m or more. corporates (predominantly privately-owned), are increasingly looking to expand market share abroad, either to profit from discriminatory Sector focus pricing in comparatively wealthier overseas Energy, Mining & Utilities, Industrials & Chemicals markets, or simply to avoid intense competition and Telecommunications, Media & Technology at home. (TMT) acquisitions continue to be the three largest The drive to acquire brands and rights sectors in which Chinese outbound investors are to technological best practices. Chinese buying into, accounting for a total of 372 deals manufacturers are also driven to purchase since the beginning of 2003 (equating to a 67% overseas firms as they look to move up the value share of the overall market). Interestingly, Energy, chain by acquiring reputable brand names and Mining & Utilities acquisitions have increased the rights to world-class technological processes. proportionally over H1 2010, when they made Nowhere is this more prevalent at the moment up 40% of the larger market – from 2003 to H1 than in the Automotive industry, where a number 2010, such transactions typically accounted for of recent high-profile transactions have revolved just 30% of all deal flow. around the acquisition of a world-class brand (as in the case of Geely’s acquisition of Volvo in H1 2010), as well as the attempted acquisition of Private equity and sovereign wealth fund General Motor’s Indian research & development activity (R&D) (which ultimately did not materialize). Chinese outbound private equity volumes show a recent surge in the number of overseas buyouts undertaken by private equity firms, and exits of foreign private equity firms from portfolio companies ultimately bought by Chinese Chinese manufacturers are corporates. In H2 2009, just 8 outbound private equity transactions were completed, compared driven to purchase overseas with 13 over the first half of 2010. firms as they look to move However market sentiment suggests that this recent surge is unlikely to continue, with many up the value chain. believing that local investors will focus their attention on domestic, not foreign acquisitions. Emerging from the twilight: the next chapter of Chinese outbound M&A 5 Obstacles China's M&A investments into Brazil, India and Russia While Chinese outbound acquisitions are undoubtedly rising, obstacles still exist. Three of Chinese M&A acquisitions of Brazilian, Indian them are highlighted here: and Russian assets peaked in 2006 and 2007, when 10 transactions in these countries were Regulatory hurdles. There have been numerous undertaken as the economic boom plateaued. instances of foreign regulators restricting Chinese However, Chinese outbound deal flow to its SOEs from acquiring assets of late. The primary BRIC counterparts eased over 2008 and 2009, motivation of this, many market commentators falling to eight, then seven deals respectively believe, is down to political machinations or over those two years. Nonetheless, a resurgence simply the desire to protect local jobs and in dealmaking could be on the cards, especially businesses. given the recent uptick in activity, with seven The window-shopper mentality. Many deals already having come to market over the Chinese acquirers are relatively youthful when first half of 2010. it comes to cross-border purchases, with M&A Geographically, India has traditionally been where practitioners urging prospective bidders to resist the bulk of Chinese outbound bidders have the desire to ‘window shop’ and ask themselves hunted for targets, accounting for 79% of all whether or not a prospective deal is actually transactions between 2003 and 2008. However, value-enhancing. this dominance has started to fade of late, with The cultural perspective. Chinese deal flows into India over 2009 and H1 2010 management teams need to absorb the fact falling to less than 50% of the total. that cultural perspectives are very important Chinese bidders are seemingly focused on when it comes to buying overseas – especially acquisitions in the Energy, Mining and Utilities with regard to national labor laws and legal sectors of Brazil, India and Russia, with such frameworks. purchases accounting for around one-quarter of all deal volumes by sector. Of these, Energy, Mining and Utilities acquisitions in Russia were the most frequent, although Brazilian buys were also fairly numerous. M&A practitioners active in China are urging prospective outbound bidders to resist the desire to 'window shop' for overseas assets. 6 Methodology Historical data includes all mergermarket-recorded transactions for the period 01/01/2003 to 30/06/2010. Transactions with a deal value greater than US$5m are included. If the consideration is undisclosed, mergermarket will include deals on the basis of a reported or estimated value of over US$5m. If the value is not disclosed, mergermarket will record a transaction if the target’s turnover is greater than US$10m. Only true merger and acquisition deals will be collated.