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 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 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 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 funds (SWFs) and welcome any feedback you might have. increasingly spreading their wings abroad, with the Chinese SWF, China 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 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 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, & 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 ’s acquisition of Volvo in H1 2010), as well as the attempted acquisition of Private equity and 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. Transactions to be included will usually involve a controlling stake in a company being transferred between two different parties. Where the stake acquired is less than 30% (10% in Asia- Pacific), the deal will only be included if its value is greater than US$100m. Transactions such as restructurings where shareholders’ interests in total remain the same will not be collated. mergermarket does not track property deals, Letters of intent, Memorandums of understandings, Head of agreement and Non-binding agreements. All US$ symbols refer to US dollars unless otherwise stated. The report includes deals from the below locations: (China); Kong; ; . According to mergermarket and for the purposes of this report, an outbound transaction is defined as a deal in which the bidder is predominantly located in Mainland China, , Macau or Taiwan and the target is predominantly located in any other country aside from Mainland China, Hong Kong, Macau or Taiwan. Any mention to the term ‘2003-H1 2010’ throughout the report indicates that the period in question runs from 01/01/2003 to 30/06/2010. Similarly, any mention to the term ‘H1 2010’ indicates that the period in question runs from 01/01/2010 to 30/06/2010. All data quoted is proprietary mergermarket data unless otherwise stated.

Emerging from the twilight: the next chapter of Chinese outbound M&A 7

China outbound M&A overview

mergermarket’s Douglas Robinson talks companies have been hamstrung by rising costs to Lawrence Chia, Head of Deloitte China at home, and as a result, are increasingly looking M&A Services & Global Chinese Services to acquire abroad in order to take advantage of Group Co-Chairman, about recent Chinese cheaper factors of production,” he remarks. outbound M&A trends as well as his thoughts on where this particular market is This desire to acquire abroad has also been aided headed over the foreseeable future. by the June 2010 announcement that the / US dollar exchange rate could be reduced in the near-future, meaning that acquisitive Chinese businesses will see their M&A war chests swell in value. Chia highlights the fact that over the period two months immediately following the announcement, the currency appreciated by 1.03% against the US dollar – a sizable movement in the international currency markets and one that could precipitate further acquisitions abroad by Chinese firms. Looking forward, Chia is quick to suggest that the Chinese outbound M&A arena is now on the verge of a major sea change. “I wouldn’t want to say that we are nearing a paradigm shift, but I certainly think that a second wave of outbound Chia kicks off the conversation by contending M&A is about to occur” he quips. When asked that while the Chinese outbound M&A market why this is so, Chia explains that “Chinese has remained relatively robust over the past six businesses are now looking to diversify their months, it has certainly not outdone itself. “What operations away from the mainland. As a result, we’ve seen over the first half of 2010 is a steady the first wave of outbound M&A, which focused rise in the number of Chinese bidders looking on Mining and Oil & Gas deals, is increasingly abroad. However, this has not yet manifested itself giving way to a new wave of foreign purchases, into a rapid scramble for foreign assets” he says. focused on the Agricultural, , and Automotives sectors – Chia asserts that the main driver behind this Geely’s recent US$1.8bn acquisition of Volvo rise in outbound deal flow is the strengthening being a good example of this incipient trend.” Chinese economy. According to the , over the first two quarters of 2010, While much of this forecasted wave of outbound Chinese GDP grew by 11.9% and 10.3% M&A activity is expected to continue to target respectively, in excess of the 8.7% annual US assets, Chia submits that the most attractive expansion rate the country witnessed the year area for Chinese businesses hunting overseas prior. Chia explains that such a rapid rate of will be South America. “Brazil is the most likely development has resulted in further outbound destination for Chinese firms looking to expand M&A acquisitions as Chinese businesses into new markets. It’s a relatively large country increasingly become the victims of their own with a population of close to 200 million people, success. The recent rash of labor disputes is has a robust infrastructure network already in symptomatic of an economy that is quickly place, and benefits from lower labor costs. All moving up the value chain, ultimately driving of these factors encourage expansionist Chinese many manufacturers to seek more cost-effective businesses to target Brazilian firms for takeover.” centers of production elsewhere. “Many local Nigeria is also an attractive option for Chinese

Emerging from the twilight: the next chapter of Chinese outbound M&A 9 bidders as it is the third-largest economy in Africa On the other hand, Chia expects that sovereign according to World 2009 figures, and also wealth fund (SWF) activity abroad will be ramped benefits from a relatively (by African standards) up over the foreseeable future. “The country’s stable political framework which has seen recent SWF, CIC has been particularly acquisitive transfers of power take place with comparatively overseas of late, and this is likely to continue little violence. going forward. At the same time, other state investment funds, such as the fund of the State Nonetheless, Chia admits that buying abroad can Administration of Foreign Exchange (SAFE), still be challenging, with deal financing conditions are understood to be looking to make foreign having become a lot more stringent recently. investments” he remarks. Local are now being urged to reduce the amount they lend, causing borrowing costs to While Chinese SWFs are eager to acquire abroad, rise and ultimately depressing M&A volumes Chia concedes that they – along with other and valuations. At the same time, the effects Chinese businesses targeting foreign assets – of the government’s massive 2008 economic are unlikely to be able to do so without facing stimulus package are now beginning to dissipate, lengthy regulatory processes in their target’s meaning that would-be buyers are unable to take jurisdiction. “It would seem that the predicted advantage of officially-sanctioned preferential thaw in regulatory attitudes to Chinese acquirers lending policies and other incentives aimed at buying overseas has – unfortunately – not yet supporting the economy. transpired” Chia warns, going on to say that “there have been numerous instances of foreign To some extent, prospective Chinese bidders are regulators restricting Chinese SOEs from acquiring avoiding these challenges altogether by adopting assets of late, the primary motivation of this, I a wait-and-see approach in order to accurately believe, being the desire to protect local jobs assess target valuations. “Chinese bidders have and businesses.” However, this attitude does recently become a lot more experienced in the art very much depend on the location in question. of dealmaking,” says Chia, “and as a result, are “Chinese purchases of African assets are usually now progressively more willing to play a waiting welcomed” says Chia, “this could be due to the game with foreign vendors.” At the same time, target country's fairly small and underdeveloped Chinese financial institutions have, over the past domestic corporate sectors and relatively high year, opened a large number of branches around levels of unemployment.” the globe which will greatly facilitate M&A financings by Chinese bidders wherever they may In summary, Chia believes that the future of be acquiring.” Chinese outbound M&A remains bright, despite the many obstacles that acquisitive Chinese firms Chia remains less bullish on outbound activity might face. “Be prepared for any eventuality” he being generated by local private equity firms, counsels, “and adopt a flexible and pragmatic saying that while the asset class has certainly approach to buying abroad. The key to success is come of age in China, buyouts of foreign assets always to communicate with your counterparts. by domestic financial investors is likely to be Remember to bring soft skills to the table and try the exception, not the norm. “Local investors to take into account the other side’s viewpoint understand the Chinese market much better than in order to formulate a win-win situation for all. their foreign counterparts and are therefore able Lastly, remember why you are doing the deal in to move quickly to snap up domestic targets. the first place – money isn’t everything, but being However, this advantage is lost abroad, so I don’t savvy is.” expect to see many Chinese private equity houses hunting overseas” he explains.

10 Northern China outbound M&A brief

mergermarket met with Kevin Ng, Deloitte from such low levels,” meaning that, all in all, Ng China’s Tax Partner in , and Po Hou, is not a big proponent of a V-shaped recovery. Deloitte China's Consulting Strategy & Paradoxically, Ng believes that the continuing Operations Partner, also based in Beijing, relative weakness in global markets compared for a quick chat on the current state of play of Chinese outbound M&A activity with the resilience of the Chinese economy emanating from the north of the country. will actually be the main driver of outbound M&A flows over the near-future. "Some foreign businesses are currently finding the current climate difficult and are willing to accept Chinese capital in order to keep them afloat” he says, adding that at the same time, the Chinese government, which has the largest foreign exchange reserves of any sovereign state, is doing everything it can to promote its ‘go abroad’ policy. As he explains, “Chinese SOEs – many of which are headquartered in or around Beijing – have essentially been instructed by the authorities to buy overseas firms for a number of reasons: firstly, in order to allow the government to diversify out of its enormous holdings of US treasury bills; and secondly, to secure upstream assets of foreign Mining and Oil & Gas firms as a hedge against the expected price inflation of raw inputs." Hou broadly agrees with Ng, stating that the macroeconomic climate is now incredibly conducive to outbound M&A shopping; yet he warns that this period will be short-lived. “Prospective Chinese acquirers of overseas assets have found that the stars are now all aligned, with foreign targets being significantly undervalued and the cost of capital being almost non-existent. However, I would argue that the opportunity to transact abroad will be fleeting, First off, it must be said that Ng is not overly especially given the large swings in global optimistic on the global economy. “While financial markets of late.” it would seem that the worst of the market downturn was witnessed in 2009, it is becoming Against this backdrop, individual Chinese increasingly clear that we are not out of the acquirers are also looking to buy abroad in doldrums yet. Massive fiscal injections may have order to expand their market share and, to kept the global economy alive during that period, varying degrees, promote their brands on the yet they also created a great deal of uncertainty global stage. Ng points out that the preferred in the months and years that followed.” At the destination for such a promotion very much same time, Ng explains, the broad rebound over depends on the product in question: “It’s H1 2010, which at first looks impressive, “does so complementary – Chinese manufacturers of primarily due to the fact that markets have risen low-end consumer products will probably look

Emerging from the twilight: the next chapter of Chinese outbound M&A 11 to expand abroad where there will be a ready purchases will most likely be valued in the market for their products, such as in Africa. On US$500m+ range as businesses look to buy the other hand, producers of luxury retail goods targets in their entirety.” will probably look to build up a presence in more At the same time, Ng believes that SOEs will developed economies, with market leaders, such continue to take advantage of preferential as Geely, eager to take on top Western brands, lending rates offered by state-owned banks to such as Volvo.” raise capital for M&A financings, an assertion In addition to Chinese corporates looking with which Hou agrees. “SOEs have the dry to acquire Western brands and world-class powder to make these large-cap acquisitions,” he technological processes, Hou considers that the says, “while private companies hunting abroad crowded domestic marketplace is also driving are coming up against capital constraints when acquisitive businesses abroad: “Ambitious Chinese looking to outbound bids. However, corporates looking to grow don’t really have this will start to change over time, and I expect any other option than to expand overseas” he to see the emergence of a number of serious says, adding that “most privately-owned Chinese privately-owned businesses undertaking some corporate worth buying will be overvalued while transformational (>US$1bn) acquisitions abroad SOEs will fight tooth-and-nail to avoid having over the next couple of years.” Ng adds that to assimilate with another agency and lose their Chinese acquirers – whether they are private independence.” or not – who invest abroad have recently been offered tax rebates on the repatriation of foreign Hou goes on to suggest that some deregulated dividends, ultimately reducing their tax burden sectors at home are crowded, which explains and further enticing businesses to go abroad and the desire to move into new markets. “Certain buy up foreign assets. domestic markets, such as the retail, food and beverage, and aviation spaces, are heavily When asked about outbound M&A opportunities saturated, with players unable to gain a for Chinese private equity firms and SWFs, Ng competitive advantage over their counterparts. remains cautious, suggesting that local private Furthermore, industry consolidation is virtually equity firms will probably not yet make their impossible, given that bidder and vendor presence felt on the international stage given expectations are almost completely out of sync. that they still require government blessings in And with the introduction of the ChiNext Board order to transact abroad. Hou is more bullish on in late 2009, many fast-growing mid-sized the matter, suggesting that local private equity business owners can now exit their business firms are quickly coming of age, with companies via the public market, which is fast becoming such as CDH and CITIC Capital expected to a popular alternative to a private sale.” be the Blackstones, Carlyles and KKRs of the Furthermore, Hou hints that domestic tie-ups next decade. However, he is not unabashedly between SOEs can be difficult to conduct as well. optimistic: “Local investors are beginning to look "In general, domestic M&A between SOEs are not abroad. However they are under no illusions easy." that they are experienced enough to successfully complete such acquisitions. Therefore, many of Ng is confident that looking forward, outbound them are entering the market via club bids in M&A bids undertaken by Chinese corporates order to leverage off each other’s international will be relatively big-ticket acquisitions from a dealmaking expertise.” value perspective, explaining that many SOEs are “seeking to acquire in order to achieve Both Hou and Ng are more confident on prospects operational economies of scale abroad. As a for SWF activity overseas. “CIC will increasingly result, I foresee that in the near-future, overseas look to support acquisitions made abroad by

12 Chinese SOEs, as well as look to make their own When asked for some words of advice for purchases over the next 18 months, all of which expansionist bidders hunting overseas, Hou is will be driven by a desire to support Chinese fairly succinct: “I have two first words for any economic development. At the same time, other potential buyer: deal rationale. Make sure that state-owned funds have initially indicated that your reasons for buying are watertight before they will also begin hunting for foreign assets to you proceed and do not become victims of buy, compounding SWF outbound M&A activity synergy illusion. Secondly, move fast. Current over the near-term,” Ng says. Hou also points out opportunities are unlikely to be around for very that many of the leveraged buyouts of 2006 and much longer. Thirdly, do your homework. Select 2007 vintage which are coming up for refinancings potential targets carefully, conduct vigorous over the next couple of years are likely to find valuation exercises and, ensure that transactions themselves facing unbearable debt terms – events are structured properly. Fourthly, ensure that you which CIC and other Chinese SWFs are likely to take PMI issues into account before you sit down watch with interest. at the negotiating table – a solid plan to tackle PMI will really come into its own when faced with However, despite Ng’s general optimism on obstructive labor unions or hostile governments. the future of Chinese outbound M&A flows, he concedes that many Chinese acquirers are Finally, tax issues are always a major hurdle relatively immature when it comes to cross- facing prospective acquirers – make sure that you border purchases. “Chinese businesses are still employ specialists to handle local taxation policies inexperienced when buying foreign assets. While and regulations.” And finally, learn from the there have been success stories, they are relatively successes (and failures) of others – for example, few and far between. Prospective buyers need in some cases, the best integration strategy is no to be more tenacious, especially with regards integration at all – walking away from deals that to operational differences, understand the require heavy-handed integration can be the best importance of cultural and – to a lesser extent – option in certain instances.” language barriers when transacting; and finally, Ng has some further pointers for buyers. “Firstly, need to remember to communicate with their think seriously about whether you need to counterparts effectively.” undertake an M&A acquisition at all – can you Hou’s viewpoint broadly corresponds with grow your business organically? If not, is the deal Ng’s, although Hou does note that the State- rationale clear and do you have the experience owned Assets Supervision and Administration and resources needed to successfully complete Commission of China (SASAC) is already working the transaction? Secondly, is the opportunity to enforce proper deal best practices among realistic? Work out forecasted synergies carefully the SOEs it governs. Over the past couple of and try to be as forward-looking as possible. months, he remarks, SASAC has announced that Thirdly, engage professional advisors at the member SOEs undertaking overseas acquisitions earliest instance – they invariably are worth have to incorporate certain key performance their weight in gold when it comes down to the indicators into their post-merger integration (PMI) technical fundamentals of dealmaking. Finally processes, which ultimately will be evaluated by pay due attention to cultural and language the Commission. This move is a direct response differences when transacting abroad. Not to the relatively high number of recent deals addressing these points could lead to a deal undertaken by SOEs which, while initially hailed falling through, so try to anticipate when they as sound transactions, have subsequently been will need to be taken into account.” shown to be flawed.

Emerging from the twilight: the next chapter of Chinese outbound M&A 13

Eastern China outbound M&A brief

Both Vivian Jiang, Deloitte China’s Tax brighter, with Jiang pointing out that export and Partner for the country’s Eastern region domestic spending figures have now returned and Anita Ding, Deloitte China's M&A to some semblance of normality. She adds that Transaction Services Partner in , while Southern China seems to have borne the China, are comparatively bullish on the brunt of the downturn due to its high exposure global economy over the near-term, with to international markets, Eastern China has ridden global equity markets having remained the waves very well, due to its more diversified buoyant over the past year and economic regional economy which is more focused on indicators broadly pointing to a recovery – domestic rather than foreign-led growth. however weak it may be – sometime over the next 18 months. When asked about Chinese economic growth prospects for H2 2010 and beyond, both Ding and Jiang believe that the 10% forecasted growth rate is likely to be hit, although both believe that it is important for the Chinese government to juggle short-term growth with longer-term development aims. "What is important here is whether this growth is achieved through the correct allocation of resources. Fuelling real estate bubbles and constructing infrastructure developments that turn out to be white elephants is definitely not the way to create long-term value,” says Jiang. Ding echoes this sentiment, saying that “the quality of economic growth is of paramount importance; however, managing this is very much a double-edged sword. I believe it is important for the Chinese government to juggle short-term growth with the long-term desire to shift economic dependence away from overseas markets." These may be matters of indifference to Eastern China's outbound M&A market, which Ding describes as being divorced from wider economic considerations. “Corporates based along China’s Eastern seaboard are driven to acquire foreign assets because ultimately, they want to move up the value chain. As a result, prevailing macroeconomic conditions play a However, Jiang does suggest that the coming limited role in shaping regional outbound deal months will be crucial in determining the flow, with acquisitions depending much more ultimate outcome of the credit crisis, saying that on the individual bidder’s desire to grow their “as national stimulus packages are unwound, business abroad, acquire a recognizable brand investor confidence could follow, increasing the name, or seek to extract technological know-how likelihood of a double-dip recession.” The outlook from the target.” Jiang adds that Eastern Chinese for the Chinese economy, however, is somewhat businesses tend to be private concerns, and therefore aren’t as constrained by regulatory

Emerging from the twilight: the next chapter of Chinese outbound M&A 15 channels as their SOE cousins, the vast majority those looking to streamline their manufacturing of which are headquartered in Northern China. operations are heading to Germany. Focusing on why Eastern Chinese corporates One large divergence between coastal buyers are so attracted to moving up the value chain, and acquirers located elsewhere in China is the Jiang says “Chinese manufacturers are looking large difference in M&A valuations, with Eastern to expand their distribution channel overseas China-based bidders much less likely to be because they can command higher prices for undertaking large-cap (US$500m+) transactions their products in certain developed markets,” than their compatriots. Jiang explains that going on to highlight the case of a luxury "the vast bulk of outbound M&A transactions Chinese furniture business which acquired a stemming from Eastern China have taken place French company primarily to sell its wares to in the US$30m to US$100m deal size range, and (comparatively wealthier) French consumers. this is unlikely to change over the foreseeable Meanwhile, she explains, those producers down future. Companies are simply not going to make the value chain aren’t getting in on the game, large-cap acquisitions unless they are absolutely mainly because they have much less to gain from certain that they will benefit from the deal – moving abroad, but also because they lack the and this process can take years.” Ding offers a experience to do so. Instead, they are moving more positive viewpoint: “While I agree with their operations into the Chinese hinterland Jiang that large-cap outbound deals are unlikely in order to lower their costs. Jiang, however, to dominate the Eastern Chinese M&A scene does not discount the latter group, saying that anytime soon, I expect their frequency will rise “while such firms are not planning to focus over the foreseeable future as global markets their attention abroad anytime soon, they will recover, business confidence soars and – as a increasingly do so over the medium term as their consequence – deal premiums grow,” she says. existing facilities struggle to keep up with rising Yet while Jiang – and to a lesser extent, Ding – demand for their products.” both highlight the discrepancy between Eastern At the same time, Ding argues, many Chinese and Northern outbound Chinese M&A trends, businesses based on the country’s east coast are they agree wholeheartedly with each other taking the opportunity to expand abroad partly on the current outbound outlook for private because the government is encouraging Chinese equity firms. “It’s simply a question of returns on businesses to buy overseas. “Speedy approval investment, and I think that local private equity procedures and a generally favorable attitude to firms tend to focus on domestic markets which outbound acquisitions tend to smooth out the offer relatively attractive returns on their capital. overall process of acquiring abroad,” she says. Some may look to fund outbound acquisitions, but typically, these private equity stakes will When asked to name where and what exactly comprise only a small proportion of the total Eastern Chinese businesses are buying, Jiang amount in play,” Ding comments. Jiang holds suggests that companies are interested in a similar view on SWF investments abroad, expanding their distribution channels to sell mentioning that the bulk of Chinese SWF offices overseas, and are also interested in acquiring are situated in Beijing, and will therefore, make brands and technologies. For example, their investments from there. companies who sell niche products, such as high-end furniture companies, are moving into When asked about the drawbacks that many France, while others are looking to acquire in the Eastern Chinese businesses will face when US, primarily to access technological know-how hunting abroad, Jiang and Ding quickly highlight and world-class R&D facilities. Meanwhile, Chinese overseas bidders’ lack of M&A experience

16 and strategic vision as the main impediment to dealmaking. “Decision makers should be asking themselves whether a prospective deal is value- “Studies show that more than half of accretive, not pursuing a transaction merely because they find the valuation attractive,” says Chinese outbound transactions do not Jiang. Ding adds that “potential acquirers need succeed in adding value to the bottom to shed the ‘window-shopper mentality’ that so easily destroys value during an M&A transaction, line, demonstrating to good effect that and focus on deal specifics such as target transacting abroad is a complex and screening, due diligence and PMI processes in order to extract as much value as possible from difficult undertaking.” the deal.” For potential buyers to better prepare themselves, Anita Ding, both Partners suggest that they should think M&A Transaction Services Partner, Deloitte China before they leap. “Firstly, bidders should have a long-term strategic vision in place and, perhaps more importantly, should understand it. Secondly, they should ensure that they have the means and the resources in place to complete an acquisition in its entirety, from target origination through to PMI. Finally, acquirers need to be able to take into account cultural differences, especially with regard to the target’s management culture,” Jiang remarks. Ding adds that Chinese dealmakers hunting abroad may not succeed in their endeavors if due diligence is not performed thoroughly: “Studies show that more than half of Chinese outbound transactions don’t succeed in adding value to the bottom line, demonstrating to good effect that transacting abroad is a complex and difficult undertaking. Seeking out good quality advice, especially from consultants with international experience, can therefore make all the difference when it comes down to measuring outbound M&A success.”

Emerging from the twilight: the next chapter of Chinese outbound M&A 17

Southern China outbound M&A brief

Eric Leung, Deloitte’s M&A Partner in Hong abroad, with Cheung Kong recently acquiring a Kong, talked to Douglas Robinson about UK electricity network for a reported US$8.6bn, the ins-and-outs of outbound M&A activity as well as reportedly tracking down opportunities emanating from Hong Kong, to snap up High Speed One, the UK rail network. and the surrounding areas. However, such large-cap deals are relatively infrequent, and I don’t expect this trend to change anytime soon.” Similar to their Eastern Chinese counterparts, Leung explains that many Southern Chinese acquirers are looking to capture reputable brand names or acquire companies with first-mover advantages in terms of technological processes. And as a regional financial hub, it is unsurprising that Leung highlights the Financial Services sector in Hong Kong, as a principal driver of regional outbound deal flow. “Hong Kong- based banks have been slowly returning to the bargaining table and are increasingly looking to buy overseas." A case in point is HSBC's current

interest in a controlling stake in ’s Leung remains fairly cautious on global Nedbank, a holding which its chief competitor macroeconomic trends, observing that US business confidence is now down from its highs is also understood to be interested in. However, earlier in 2010, while US home sales have also it’s not only Hong Kong-based banks that are fallen of late. These concerns are somewhat enjoying all the action. Over the past year, Leung allayed when looking at Chinese growth, notes that two Hong Kong-based securities firms although Leung remains guarded on the topic, have been acquired by mainland counterparts, saying that it is unlikely that the economy will highlighting to good effect, the growing buyside grow at the same rate as the first half of 2010. "I clout of regional financial institutions. think 8% is a much more realistic target, primarily due to the continuing uncertainty surrounding Leung highlights another trend of outbound the recent development of asset bubbles in the M&A stemming from Southern Chinese-based country,” he says. businesses, one especially evident at the lower end of the market. “I’m also seeing a rising However, despite his less-than-optimistic forecast, number of companies with overseas energy and Leung is much more upbeat on outbound M&A resources assets doing reverse takeover of HK activity stemming from southern Chinese bidders, listed companies in order to achieve listing status noting that global M&A activity is now back at in Hong Kong,” he says. levels last seen in 2006 and 2007. Furthermore, he believes that outbound acquisitions will Moving on, the value of outbound deals is likely increasingly come to market as Hong Kong- and to rise over the near-run, Leung goes on to note, southern China-based corporates progressively adding that “deal values fell precipitously over look to make small bolt-on acquisitions or, as the financial crisis before bottoming out in 2009. witnessed of late, mega-cap infrastructure plays Therefore, they are likely to rise in line with the in Western Europe. “Large corporations based wider recovery. At the same time, the historically in the Southern China region, such as Cheung low cost of capital at present will almost certainly Kong Infrastructure, are hunting for targets contribute to climbing M&A valuations.”

Emerging from the twilight: the next chapter of Chinese outbound M&A 19 And with valuations forecasted to rise, Leung also expects outbound private equity investments “Hong Kong-based banks have been – almost all of them Hong Kong-based – to continue to grow. “The bulk of Hong Kong- slowly returning to the bargaining based private equity firms are actually regional table and are increasingly looking to subsidiaries of private equity giants. They are driving the vast majority of outbound private buy overseas.” equity buyouts across the region. Local firms, on

the other hand, are almost exclusively focused on Eric Leung, domestic markets,” he says. M&A Transaction Services Leader, Deloitte China Yet, as ever, transacting abroad is risky, with Leung singling out regulatory intransigence and differing management styles as the main obstacles facing prospective acquirers. “Chinese management teams need to absorb the fact that cultural perspectives are very important when it comes to buying overseas – especially with regard to national labor laws and legal frameworks,” he says. Because of this, Leung advises potential bidders to adopt a ‘global view’ when targeting foreign assets, particularly with regard to cultural differences. Regulatory codes, financial frameworks, labor laws and legal systems all need to be examined in detail, while contingency planning for those unforeseen circumstances is also strongly recommended.

20 Automotive

Emerging from the twilight: the next chapter of Chinese outbound M&A 21 China outbound Automotive M&A activity, 2003 - H1 2010 Over the past six-and-a-half years, Chinese Automotive businesses have undertaken some 8 2,000 19 deals worth US$4.9bn abroad, with 2009 proving to be a watershed for this particular 1,800 7 type of target. Over the year, seven acquisitions 1,600 abroad were completed, with investors spending 6 US$1.3bn in the process. And while H1 2010 has 1,400 not seen a proportional number of deals come 5 1,200 to market, it has witnessed the arrival of the large-cap outbound Automotive transaction in 4 1,000 the form of Geely’s US$1.8bn buy of Volvo in the

Deal volume last days of Q1 2010. This particular transaction 3 800

Deal value (US$m) has accounted for more than one-third of all 600 2 overseas Automotive investments from China 400 since 2004, and inflated average deal values over 1 the first six months of the year. 200 Just under three-quarters of all Automotive transactions originating in China since the 2003 2004 2005 2006 2007 2008 2009 H1 2010 beginning of 2004 have been worth less Deal volume Deal value (US$m) than US$500m. Nonetheless, with 16% of all Automotive sector acquisitions abroad being worth more than US$500m, large-cap deals in this particular sector have taken place slightly more frequently compared to overall trends, where just 10% of all outbound transactions China outbound Automotive M&A average deal size, 2003 - H1 2010 have been valued at over US$500m.

1000

900

800

700 Over the past six-and-a-

600 half years, Chinese 500 Automotive businesses 400 have undertaken some 19 age deal size (US$m)

ver 300 A deals worth US$4.9bn 200 abroad, with 2009 proving 100 to be a watershed for this 0 2003 2004 2005 2006 2007 2008 2009 H1 2010 particular type of deal. Average deal size (US$m)

22 Western Europe represents the largest target China outbound Automotive M&A deal size split by volume, market for acquisitive Chinese Automotive 2003 - H1 2010 players, with bidders undertaking just over 20 one-quarter of their purchases there over the period from 2004 through to the end of H1 18 3 2010. Another four acquisitions, equaling a 16 21% share of the market, were also completed 3 in North America, while two deals each were 14 conducted in Australasia, South Asia, and e 12 Southeast Asia over the same period. 10 Outbound acquisitions by value were similarly 7

represented, albeit with variations in orders volum Deal 8 of magnitude. Western European buys made 6 1 up 70% of the market, primarily due to the 1 1 aforementioned Geely/Volvo deal. Chinese 4 1 4 bidders spent US$531m on North American 2 2 3 acquisitions and US$440m to acquire 1 1 2 2 Australasian targets. 0 1 1 1 1 1 1 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total

Not disclosed US$500m

China outbound M&A deal size split by volume (%), 2003 - H1 2010

% 100 14 90 20 16

Just under three-quarters 80 14 50 50 16 of all China's outbound 70

) 14 Automotive transactions 60 since the beginning of 50 100 60 100 100 37 29 40

2004 have been worth (% volume Deal 30 less than US$500m. 50 50 20 21 29 10 20 10 0 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total

Not disclosed US$500m

Emerging from the twilight: the next chapter of Chinese outbound M&A 23 China outbound M&A deal size split by value (%), 2003 - H1 2010 Top China outbound Automotive deals % The largest and most notable overseas Automotive 100 acquisition undertaken by a Chinese firm was the aforementioned takeover of Volvo by 90 Geely. The deal saw Geely snap up the Swedish 80 marque as well as its intellectual property rights 51 for US$1.8bn, initially seeing off competition 70 62 from Saab, Volvo’s local competitor, as well 60 77 as overcoming obstacles from within. Volvo’s 95 powerful labor unions nearly upset the transaction 50 100 100 100 100 by withdrawing their support at the eleventh hour. 40 Thankfully for Geely, they acquiesced following Deal value (%) value Deal last-minute assurances from the bidder that they 30 38 would pay the full asking price. 29 20 The second-largest transaction saw the Shanghai 22 10 Automotive Industry Corporation (SAIC) and 8 8 General Motors (GM) form a JV called General 1 5 2 1 0 Motors SAIC Investment, with SAIC putting up the 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total majority of the (US$650m) needed to seed US$500m Indian manufacturing facilities, namely its Talegaon and Halol plants (in Maharashtra and Gujarat states respectively), as well as its Indian distribution network. The venture will hopefully allow GM SAIC to sell vehicles domestically by 2011, and open up a new export revenue stream for GM. In third place was the US$600m white-knight bid and subsequent acquisition of SAIA-Burgess Electronics, the Swiss manufacturer of electronic automotive components, by Johnson Electric Holdings, its Hong Kong-based counterpart. The bid was submitted at an 11% premium to an earlier offer tabled by the Sumida Corporation, a Japanese competitor of Johnson Electric who refused to budge from their initial offer price, ultimately forcing SAIA’s management to find solace in the arms of the eventual buyer. Only one outbound private equity buyout has taken place in this particular space over the past six-and-a-half years. The lone transaction witnessed CCMP Asia, the Hong Kong-based private equity firm, acquire the entire share capital of Repco Limited, the Australian distributor of automotive tools, for US$435m in Q4 2006. This represented a deal premium of some 21.5% over the share price of Repco one day prior to the deal announcement – enough to easily induce the majority of shareholders to back the bid.

24 Upcoming outbound activity China outbound Automotive M&A deal volume by region, 2003 - H1 2010 Looking forward, Chinese Automotive players continue to go abroad in order to seek 5% technological know-how and acquire recognizable 5% 5% brand names. One prospective bidder, Guangzhou 26% Western Europe Automobile, a state-owned Chinese automaker, 5% North America is looking to form a JV with Mitsubishi Motors, its Australasia Japanese counterpart. It may well use Changfeng South Asia Motors, its Hunan-based subsidiary, to form a JV South East Asia with its Japanese peer. Mitsubishi already holds a 11% 14.59% stake in Changfeng Motors, which has a Japan market capitalization of US$729.26m. Korea Northern Europe Guangzhou Automobile may also be interested 11% South America in forming a sports utility vehicle JV with Subaru, 21% the auto subsidiary of Fuji Heavy Industries, yet may face competition from Chongqing Lifan, the 11% Chongqing-based auto components maker, who is also in the running to create a JV with Subaru. In fact, Subaru has the luxury of picking two of seven Chinese Automotive manufacturers with whom to partner, the other five being named as SAIC, China China outbound Automotive M&A deal value (US$m) by region, First Auto Works, Beijing Automotive Industry 2003 - H1 2010 Corporation, Chery, and Jianghuai. <1% <1% In other news, Chongqing Zongshen Power 1% <1% Machinery, a listed motorcycle maker, is reportedly 3% <1% in talks with Piaggio, an Italian motorcycle manufacturer to form an engine JV, with a total 12% Western Europe start-up investment of €15m. Piaggio will provide North America state-of-the-art diesel engine technology to the Australasia JV, while Chongqing Zongshen will provide the South East Asia equipment and machinery needed to produce the 14% South Asia first batch of diesel engines. Northern Europe South America Japan 70% Korea

Emerging from the twilight: the next chapter of Chinese outbound M&A 25 Top 15 China outbound Automotive deals, 2003 – H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 28/03/2010 C Volvo Cars Corporation Automotive Sweden Zhejiang Geely Holding Group China Ford Motor Company USA 1,800 Company Limited 05/12/2009 C General Motors Automotive India SAIC Motor Corporation China General Motors Company USA 650 Company Limited (Manufacturing Facilities in India) 26/08/2005 C SAIA-Burgess Automotive Switzerland Johnson Electric Holdings Hong 600 Electronics Holding AG Limited. Kong 29/10/2004 P Ssangyong Motor Automotive South Shanghai Automotive Industry China Ssangyong Motor Company South 500 Company Limited Korea Corporation Limited (Creditor Group) Korea (49% Stake) 28/12/2009 C General Motors India Automotive India Shanghai Automotive Industry China Motors Liquidation USA 500 Pvt Ltd (50% Stake) Corporation Company 11/12/2006 C Repco Corporation Ltd Automotive Unitas Capital Ltd Hong Limited Australia 435 Kong 30/03/2009 C Delphi Corporation Automotive USA Beijing West Industries Co Ltd China DPH Holdings Corporation USA 100 (Global Suspension and Brakes business) 23/07/2005 C MG Rover Group Automotive United Nanjing Automobile China 87 Limited Kingdom Corporation 16/09/2005 C Benelli SpA Automotive Italy Qianjiang Group China Fineldo SpA Italy 73 29/09/2008 P Midsouth Holdings Ltd Automotive Zhong Nan Holdings Limited China 46 (24.88% Stake) 25/09/2007 C Copperweld Bimetallics Automotive USA Fushi Copperweld Inc China 23 LLC 26/12/2006 C Lawrence Automotive Automotive United Hua Xiang Group China Magna International Inc 21 Interiors Ltd Kingdom 28/06/2005 C NMPC (50% Stake) Automotive Canada Baosteel Group Corporation China Court Group Canada 15 16/12/2009 C Nikko Electric Industry Automotive Japan Ningbo Yunsheng Co Ltd China WL Ross & Co LLC; Daiwa Japan 11 Co Ltd (79.1% Stake) Securities SMBC Principal Investments Co Ltd 01/11/2009 C Michigan Rubber Automotive USA Anhui Sealing Parts China Myers Industries Inc USA 10 Products Inc; Buckhorn Co Ltd Rubber Products Inc

C = Completed; P = Pending

Beiqi Foton Motor, a Beijing-based commercial Last but not least, Bain Capital Partners may vehicle maker, and Daimler have already travelled make more acquisitions to build up its recently down this route, having recently announced the purchased stake in ASIMCO, its Chinese maker of creation of a 50/50 JV. The JV will be based in parts and systems for automobile engines. Two Huairou, Beijing and will commence operations deals are percolating – one in Europe, the other following a capital injection of US$936m, half of in the US. Bain is planning to spin off ASIMCO which will ultimately originate from Daimler. One via a listing within two to three years. However, a of the first steps the JV will undertake will be the company insider denied that M&A purchases were creation of an R&D center focusing on the design in the works, instead saying that Bain is mostly and manufacture of medium- and heavy-duty focused on growing ASIMCO organically. trucks.

26 Financial Services

Emerging from the twilight: the next chapter of Chinese outbound M&A 27 China outbound Financial Services M&A activity, 2003 - H1 2010

4 6,000

5,000 3 4,000

2 3,000 Deal volume

2,000 Deal value (US$m) 1 1,000

0 0

Q1 2003Q2 2003Q3 2003Q4 2003Q1 2004Q2 2004Q3 2004Q4 2004Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010 Deal volume Deal value (US$m)

China outbound Financial Services M&A average deal size, 2003 - H1 2010

2,000

1,800

1,600

1,400

1,200

1,000

800 age deal size (US$m)

ver 600 A

400

200

0

Q1 2003Q2 2003Q3 2003Q4 2003Q1 2004Q2 2004Q3 2004Q4 2004Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010 Average deal size (US$m)

28 Chinese banks have been in the media's spotlight China outbound Financial Services M&A deal size split by volume, of late, with the Chinese banking system 2003 - H1 2010 continuing to mature, and a number of the larger 12 institutions recently becoming significant players on the global stage. 10 This viewpoint is clearly reinforced by the 3 increasing level of outbound M&A undertaken by 1 Chinese firms across all industry sectors in recent 8 1 1 years. Certainly, the Financial Services sector is e no exception, with a total of 42 outbound M&A 6 2 2 transactions being brokered since the beginning 1

of 2004, carrying an aggregate disclosed value of volum Deal 1 1 US$19.6bn. Somewhat unsurprisingly, outbound 4 2 activity peaked at the height of the dealmaking 1 3 4 2 boom in 2007, when 11 outbound deals valued 3 1 2 at US$12.2bn came to market, including the three 3 1 1 largest transactions of the past six years. 2 2 1 1 1 1 0 2003 2004 2005 2006 2007 2008 2009 H1 2010

Not disclosed US$500m

China outbound Financial Services M&A deal size split by volume (%), 2003 - H1 2010

% 100 11 90 20 17 20 27 Outbound Financial 80 11

Services activity peaked 70 20 9 33 22 ) at the height of the 60 75 40 18 50 dealmaking boom in 100 20 2007, when 11 deals 40 34 Deal volume (% volume Deal 30 20 valued at US$12.2bn 37 50 20 40 came to market. 11 25 10 20 9 11 0 2003 2004 2005 2006 2007 2008 2009 H1 2010

Not disclosed US$500m

Emerging from the twilight: the next chapter of Chinese outbound M&A 29 China outbound Financial Services M&A deal size split by While the financial crisis and subsequent economic value (%), 2003 - H1 2010 downturn had a huge negative impact on global M&A levels, it is remarkable that outbound % Financial Services investment from China-based 100 firms has continued apace. Indeed, in the two years from the third quarter of 2008, 15 deals 90 worth US$3.7bn were announced, including 80 several large cap plays. Against this backdrop, it 55 is worth noting, however, that a number of the 70 65 64 larger transactions came to market because of, 60 rather than in spite of the financial crisis, as cash- 86 85 strapped financial institutions in North America 93 50 100 and Europe looked to the Middle East and Asia as 40 sources of much-needed liquidity. Deal value (%) value Deal The most notable transaction in this regard 30 14 was announced in the second quarter of 2009, 44 20 29 with CIC acquiring a 3.3% stake in US-based 11 10 9 2 giant for 14 3 10 1 1 US$1.2bn. The deal was part of a public offering 6 2 6 0 of in the company, with the 2003 2004 2005 2006 2007 2008 2009 H1 2010 proceeds used to partly repay the US$10bn in US$500m following the onset of the financial crisis in the autumn of 2008. In a significant deal in the European market, CIC also bought a 2.3% stake in UK-based private China outbound Financial Services private equity M&A activity, equity firm Apax Partners in Q1 2010. Once again, 2003 - H1 2010 the transaction was driven by the fundamental need to access cash, with the deal also giving 4 2,500 existing investors in Apax funds the opportunity to transfer up to US$1.2bn worth of commitments to CIC. 2,000 3

1,500

2

Deal volume 1,000 Deal value (US$m)

1 500

0 0 2003 2004 2005 2006 2007 2008 2009 H1 2010 Deal volume Deal value (US$m)

30 Despite a number of prominent outbound China outbound Financial Services M&A deal volume by investments in the established financial markets region, 2003 - H1 2010 of Europe and North America, the largest deal in recent times was announced in South Africa 2% 2% 3% over the fourth quarter of 2007. In an acquisition valued at US$5.4bn, Industrial & Commercial 7% (ICBC) moved to buy a 20% South East Asia stake in Group, enabling it to 36% North America access Standard Bank’s corporate, personal, and 10% South Asia investment banking services across Southern Western Europe Africa. Australasia Africa Central & Eastern Europe 17% Korea

21%

China outbound Financial Services M&A deal value (US$m) by The largest Chinese region, 2003 - H1 2010 1% outbound Financial 1% Services deal in recent 2% <1% 15% times was a South African 32% North America buy, which took place in Africa Western Europe the fourth quarter of 2007. South East Asia Central & Eastern Europe South Asia 21% Australasia Korea

28%

Emerging from the twilight: the next chapter of Chinese outbound M&A 31 China outbound Financial Services M&A deal volume by region, Casting an eye towards the volume breakdown H1 2010 of outbound investment in the sector, the bulk of activity has proceeded in markets closer to home, 20% 20% with the emerging markets of South East Asia receiving 36% of Chinese outbound acquisitions since 2003. Chinese investors have been Central & Eastern Europe particularly active in their pursuit of Vietnamese North America financial institutions, with five such deals South Asia announced over the timeframe in question. In South East Asia terms of regional M&A valuations, Singapore leads the way, largely due to Bank of China’s US$965m Western Europe 20% 20% buy of Singapore Aircraft Leasing Enterprise from Singapore International Airlines in 2006.

20%

China Outbound Financial Services M&A deal value (US$m) by region, H1 2010

1% 17% Chinese investors have been particularly active in Western Europe South East Asia their pursuit of Central & Eastern Europe Vietnamese financial South Asia 26% 56% institutions, with five such deals announced between 2003 and H1 2010.

32 Top 20 China outbound Financial Services deals, 2003 – H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 25/10/2007 C Standard Bank Group Financial Services South Industrial and Commercial China 5,413 Limited (20% Stake) Africa Bank of China Limited 20/05/2007 C Blackstone Group Financial Services USA China Investment Corporation China 3,000 Holdings LLC (Minority Stake) 23/07/2007 C Plc (3.1% Financial Services United China 2,980 Stake) Kingdom 14/01/2008 C Canadian Imperial Financial Services Canada Manulife Financial Corporation; Hong 1,530 Bank of Commerce Caisse de Depot et Placement Kong (6.27% Stake) du Quebec; Cheung Kong Limited; OMERS Administration Corporation 02/06/2009 C Morgan Stanley (3.3% Financial Services USA China Investment Corporation China 1,227 Stake) 15/12/2006 C Singapore Aircraft Financial Services Singapore Bank of China Limited China Singapore International Singapore 965 Leasing Enterprise Airlines; WestLB AG; Seletar (SALE) Investments Pte Limited; Apfarge Investment Pte Ltd 04/02/2010 C Apax Partners LLP Financial Services United China Investment Corporation China 956 (2.3% Stake) Kingdom 04/03/2010 C ACL Bank Public Financial Services Industrial and Commercial China 453 Company Limited Bank of China Limited (80.74% Stake) 04/02/2008 C EON Capital Berhad Financial Services Primus Pacific Partners 1 L. P Hong Hicom Holdings Berhad Malaysia 412 (20.2% Stake) Kong 12/04/2010 P Digital Sky Financial Services Russia Holdings Limited China 300 Technologies Limited (10.26% Stake) 05/09/2009 C PineBridge Investments Financial Services USA Bridge Partners LP Hong American International USA 277 Kong Group Inc 25/06/2008 C Barclays Plc (0.59% Financial Services United China Development Bank China 269 Stake) Kingdom 13/09/2007 C Bao Viet Holdings Financial Services HSBC (Asia-Pacific) Hong 252 (10% Stake) Holdings Limited Kong 07/10/2007 P UCBH Holdings Inc Financial Services USA China Minsheng Banking China 194 (9.9% Stake) Corporation Limited 24/04/2007 C AFFIN Holdings Berhad Financial Services Malaysia Bank of East Asia Ltd Hong 146 (15% Stake) Kong 29/09/2009 P ACL Bank Public Financial Services Thailand Industrial and Commercial China Bank Public Thailand 106 Company Limited Bank of China Limited Company Limited (19.26% Stake) 26/07/2006 C (Sub-Custody Financial Services Australia Hongkong & Shanghai Banking Hong Westpac Banking Australia 105 business in Australia Corp Kong Corporation and ) 22/10/2009 C Bao Viet Holdings (8% Financial Services Vietnam HSBC Insurance (Asia-Pacific) Hong The Ministry of Finance Vietnam 104 Stake) Holdings Limited Kong 13/01/2008 C ICICI Financial Services Financial Services India Nomura International (Hong Hong 100 (0.9% Stake) Kong) Limited Kong 03/01/2007 C BankThai Public Financial Services Thailand Blum Capital Partners LP; Hong 94 Company Limited Marathon , Kong (32.87% Stake) LP; TPG Newbridge

C = Completed; P = Pending

Emerging from the twilight: the next chapter of Chinese outbound M&A 33 The largest outbound Financial Services Upcoming outbound activity transaction to have taken place over the first half Looking forward, China Bank (CCB), of 2010 was the aforementioned Apax Partners/ the Shanghai- and Hong Kong-listed commercial CIC tie-up, while the second-largest saw Tencent bank, is reportedly seeking acquisition and JV acquire a stake in Digital Sky Technologies. The opportunities abroad. They are looking for large US$300m acquisition saw the China-based industry players in international financial centers, provider of internet services purchase a 10.26% such as New York, , and , holding in the Russian TMT-focused private with CCB purportedly looking to strengthen equity firm, ultimately valuing the entire target at their overseas presence to keep up with local US$2.9bn. competitors. CCB has already established Looking at announced activity in South East branches in these three cities. However, they are Asia over the last 18 months, Thailand, and keen to expand their commercial, investment, specifically, ACL Bank , has and other financial banking businesses been the subject of significant interest. Once inorganically. “Ideal targets or partners should again, the deals in question were driven by the be large rather than mid-sized or small players. acquisitive aspirations of ICBC, with the industry It would be hard for CCB to realize their heavyweight moving in 2009 to initially acquire international expansion strategy by teaming up a 19.26% stake in ACL for US$106m. In order with a small- or mid-sized peer who is having to expand its business network in the Mekong financial difficulties” a source at CCB said on the River region, ICBC returned to launch a US$453m matter. voluntary offer bid for the remaining 80.74% of Another Chinese banking giant, ICBC, is now the company in March 2010. hunting abroad with a war chest of US$3.68bn raised from a convertible bond issue. According to a recent report, the bank factored in the possibility of potential overseas acquisitions when it initially issued the convertible bonds. “It would be hard for CCB to realize In the meantime, , a Heilongjiang- based Chinese bank, has entered into an their international expansion strategy agreement with International Financial by teaming up with a small- or Corporation (IFC) to become strategic partners. Harbin Bank is mainly engaged in small-sized mid-sized peer who is having financial issuance, and had total assets of US$14.55bn as of June 2010. The two companies will reportedly difficulties.” form a village and town banking JV, and is expected to have in place 30 village and town announcement banks by the end of 2011. Company source anonymous mergermarket, 24 August, 2010

34 Mining

Emerging from the twilight: the next chapter of Chinese outbound M&A 35 China outbound Mining M&A activity, 2003 - H1 2010

12 16,000

14,000 10

12,000 8 10,000

6 8,000 Deal volume

6,000 Deal value (US$m) 4

4,000 2 2,000

0 0

Q1 2003Q2 2003Q3 2003Q4 2003Q1 2004Q2 2004Q3 2004Q4 2004Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010 Deal volume Deal value (US$m)

China outbound Mining M&A average deal size, 2003 - H1 2010

2,500

2,000

1,500

1,000 age deal size (US$m) ver A

500

0

Q1 2003Q2 2003Q3 2003Q4 2003Q1 2004Q2 2004Q3 2004Q4 2004Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010 Average deal size (US$m)

36 China outbound acquisitions of overseas mining China outbound Mining M&A deal size split by volume, assets have surged markedly in recent years, 2003 - H1 2010 driven by robust economic activity and the need 30 to import mineral resources to meet the region’s growing appetite for raw inputs. 4 25 Since 2003, there have been a total of 92 outbound Mining acquisitions emanating from 4 China, collectively valued at US$31.97bn. The 20 2

e 1 pace of outbound Mining M&A accelerated in 5 2006 with eight transactions together valued 15 6 1 at US$2.17bn coming to market after meager 2 5 activity in earlier years. This trend continued over volum Deal 2 2007, 2008 and 2009, with transaction volumes 10 2 9 rising by an annual average of more than 50% 8 over these three years. Indeed, in 2009, the 2 7 8 trend in outbound Mining transactions defied 5 3 2 5 the wider downturn in global dealmaking, rising 1 2 2 1 2 2 2 to its highest level ever, with 28 deals totaling 0 1 1 1 US$8.73bn being announced. 2003 2004 2005 2006 2007 2008 2009 H1 2010 Not disclosed US$500m

China outbound Mining M&A deal size split by volume (%), 2003 - H1 2010

% 100 6 13 10 14 11 Outbound Mining 90 25 5 8 transactions defied the 80 34 13 14 31 70 29 wider downturn in global 13 25 ) 18 60 dealmaking in 2009, with 38 28 deals, totaling 50 100 33 40 47 38 32 50 38 US$8.73bn, being (% volume Deal 30 announced over the year. 25 20 33 9 18 10 14 14 12 9 13 0 4 4 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total

Not disclosed US$500m

Emerging from the twilight: the next chapter of Chinese outbound M&A 37 China outbound Mining M&A deal size split by value (%), M&A valuations for China-based acquisitions of 2003 - H1 2010 foreign mining assets also rose over the period, buoyed by rising prices for hard commodities % amid a trend of robust global demand. Emerging 100 national champions within the region also had a 90 greater willingness, as well as the financial clout, 25 to ink big-ticket deals, which acted as a further 80 49 spur to takeover activity in the higher-value 70 segments of the deal market. 68 69 60 83 91 74 The largest such transaction saw Chinalco, a state-backed company and the largest aluminum 50 100 57 producer in the Chinese market, team up with 40 Alcoa, its US competitor, to acquire a 12% stake

Deal value (%) value Deal 25 in the Anglo-Australian Mining giant for 30 a hefty US$14bn in January 2008. Meanwhile, 17 20 11 9 the largest transaction in the first half of 2010 28 saw Hong Kong-based Hornbridge Holdings 10 2 16 13 17 14 11 3 acquire Brazil’s Sul Americana de Metais (SAM) 1 6 1 <1 2 0 4 4 for a total consideration of US$390m from the 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total Netherlands-based Lit Mining and Votorantim Novos Negócios, the private equity arm of the

China outbound Mining M&A deal volume by region, 2003 - H1 2010

1% 3% 2% 1% 4% Australasia 4% North America M&A valuations for 6% South America China-based acquisitions Western Europe of foreign mining assets Africa 6% 50% South East Asia have risen of late, buoyed North Asia Southern Europe by rising prices for hard Central Asia commodities amid a trend 23% South Asia of robust global demand.

38 In terms of the regions targeted by Chinese China outbound Mining M&A deal volume by region, H1 2010 firms, the Australasian market is dominant, accounting for exactly one-half of total outbound 6% transactions in the mining space between 2003 and H1 2010. Over the same period, the deal 13% value share for Australasia was 25%, below the 48% for Western Europe, which was bolstered by Australasia the aforementioned stake buy in Rio Tinto. The Mining giant is headquartered in the UK albeit North America with extensive operations in Australia. Western Europe 56% South Amercia It is precisely this heavy investment in the Australian market that clouds the outlook 25% for future outbound Mining deal flow. This uncertainty is chiefly due to Australia’s controversial ‘super tax’ of 30% to be levied on profits from resources companies that exceed the 10-year government bond yield. The China outbound Mining M&A deal value (US$m) by region, introduction of the tax, originally set at 40%, 2003 - H1 2010 has been something of a political liability for the <1% government with the August 2010 election poll <1% 2% 2% <1% returning Julia Gillard to power by the smallest 2% margin in Australian political history. She will 5% Western Europe now have to work hard to rebuild her support, Australasia meaning that the imposition of the proposed tax North America could be delayed. 15% South America The tax may deter some investors from sourcing 47% South Asia targets in the Australian market, but the Southern Europe long-term fundamentals in China point toward Africa strong outbound acquisition activity in the South East Asia medium and longer term. Indeed, the appetite North Asia for raw materials and the need to secure supply Central Asia lines for the rapidly expanding domestic market 25% is simply too great for outbound Mining deal flow into Australia to stagnate. China outbound Mining M&A deal value (US$m) by region, H1 2010

20% 30%

North America Australasia South America Western Europe

25%

25%

Emerging from the twilight: the next chapter of Chinese outbound M&A 39 Top 20 China outbound Mining deals, 2003 – H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 01/02/2008 C Rio Tinto Plc (12% Mining United Alcoa Inc; Aluminum China 14,000 Stake) Kingdom Corporation of China 13/08/2009 C Felix Resources Limited Mining Australia Yanzhou Mining China 2,568 Company Ltd 03/07/2009 C Teck Resources Limited Mining Canada Fullbloom Investment China 1,508 (17.2% Stake) Corporation 14/04/2009 C OZ Minerals (certain Mining Australia Non-Ferrous China OZ Minerals Limited Australia 1,386 assets excluding Metals Co Ltd Prominent Hill and Martabe) 14/03/2008 C Midwest Corporation Mining Australia Corporation China 879 Ltd (80.31% Stake) 10/11/2006 C Mining United China Vision Resources China E Oppenheimer & Son South 812 (1.01% Stake) Kingdom Africa 11/06/2007 C Peru Copper Inc. Mining Canada Aluminum Corporation of China 779 China 24/03/2006 C Ashapura Minechem Mining India Qingtongxia Aluminium Group China Sichuan Aostar Aluminum China 651 Ltd (Alumina plant in Company Ltd Co Ltd Kutch) (50% Stake) 29/08/2007 P Bellavista Holding Mining Chile China Elegance Resources Ltd Hong Ceasers Development Ltd Hong 600 Group Ltd (60% Stake) Kong Kong 28/12/2009 C Corriente Resources Inc Mining Canada CRCC-Tongguan Investment China 549 Co. 06/12/2007 C Northern Peru Copper Mining Canada Northern Peru Acquisition Co. China 411 Corp. 24/02/2009 C Fortescue Metals Mining Australia Hunan Valin Iron & Steel Group China Harbinger Capital Partners USA 408 Group Ltd (9.07% Co Ltd Special Situations Fund, L.P.; Stake) Harbinger Capital Partners Master Fund I Ltd 30/11/2009 C MMX Mineracao e Mining Brazil Wuhan Iron and Steel China 400 Metalicos SA (21.52% Company Limited Stake) 18/04/2010 P Sul Americana de Mining Brazil Honbridge Holdings Limited Hong Votorantim Novos Brazil 390 Metais S.A Kong Negocios Ltda ; Lit Mining Cooperatief U.A. 24/02/2009 C Fortescue Metals Mining Australia Hunan Valin Iron & Steel Group China 363 Group Ltd (7.42% Co Ltd Stake) 27/10/2009 C Krom Maden (50% Mining Taiyuan Iron & Steel Group China CVK Group Corporation Turkey 300 Stake); Kop Krom (50% Company Ltd Stake); Guney Krom (50% Stake) 26/09/2007 C Zimasco Consolidated Mining Zimbabwe Sinosteel Trading Company China 292 Enterprises Ltd (92% Stake) 14/11/2008 C Langfeld Enterprises Mining Cyprus Grandvest International Ltd Hong Cordia Global Limited Cyprus 253 Limited (90% Stake) Kong 06/01/2010 P African Minerals Mining Channel China Railway Materials China 244 Limited (12.5% Stake) Islands Commercial Corporation 28/08/2009 C Aquila Resources Mining Australia Baoshan Iron & Steel Co Ltd China 241 Limited (15% Stake)

C = Completed; P = Pending

40 Aside from the aforementioned Chinalco/ Alcoa acquisition, the largest outbound Mining deal to have been undertaken over the past seven-and-a-half years was the US$2.6bn acquisition of Felix Resources, the Australian coal producer, by Yanzhou Coal Mining, the Chinese coal mining group, back in August 2009. The deal represented a discount of 14% to the target’s share price one day prior to the deal announcement and also witnessed Felix Resources spin off its South Australian Coal Corporation, a 100% owned subsidiary, which ultimately listed on the Australian stock exchange. One month before the Yanzhou Coal/ Felix Resources transaction, CIC, through its acquisition vehicle Fullbloom Investment Corporation, acquired a 17.2% stake in Teck Resources, the debt-laden Canadian diversified mining and refining company, for a total of US$1.5bn. Fullbloom acquired the holding at a 6.9% discount to Teck’s share price one day prior, yet paid a price for this apparent bargain. Fullbloom was required to hold the stake for at least 12 months and cannot sell it without Teck’s consent. In addition, a standstill provision requires Fullbloom not to undertake certain actions, including acquiring additional shares in Teck, soliciting any extraordinary transactions involving Teck or seeking representation on Teck’s board of directors. The target will use the proceeds to lighten its debt load.

Emerging from the twilight: the next chapter of Chinese outbound M&A 41 Top 10 China outbound Mining deals, H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 18/04/2010 P Sul Americana de Mining Brazil Honbridge Holdings Limited Hong Votorantim Novos Brazil 390 Metais S.A Kong Negocios Ltda ; Lit Mining Cooperatief U.A. 06/01/2010 P African Minerals Mining Channel China Railway Materials China 244 Limited (12.5% Stake) Islands Commercial Corporation 01/03/2010 C Chariot Resources Mining Canada CST Mining Group Limited Hong 211 Limited Kong 24/03/2010 C Iron Metals Mining British China Life Insurance (Overseas) Hong Belmore Overseas Limited British 200 International Limited Virgin Company Limited Kong Virgin Islands Islands 12/03/2010 C Cape Lambert Lady Mining Australia CST Mining Group Limited Hong Cape Lambert Iron Ore Australia 124 Annie Exploration Kong Limited Pty Ltd 06/04/2010 P Gloucester Coal Ltd Mining Australia Noble Group Limited Hong 118 (12.3% Stake) Kong 07/01/2010 P Oxus Gold Plc (59.7% Mining United Group Co China 76 Stake) Kingdom Ltd; CITIC Construction; Chang Xin Yuan Su Equity Management LP 28/01/2010 C Bluestone Mines Mining Australia Tin Group (Holding) China Metals X Limited Australia 45 Tasmania Pty Ltd (50% Company Ltd Stake) 01/02/2010 P Khan Resources Inc Mining Canada CNNC Overseas Uranium China 34 Holding Limited 08/04/2010 P MetroCoal Mining Australia China National Coal Import & China MetroCoal Limited Australia 28 Limited (EPC 1165 Export Coal Co Ltd Columboola) (51% Stake)

C = Completed; P = Pending

Outbound Mining deal flow over the first half 5 to 13, located along a mineralized trend of of 2010 indicates that the pattern of trade approximately 270 square kilometres in the north has shifted somewhat compared to the larger of Minas Gerais (Blocks 6 to 13) and the south of picture. Indeed, the fact that the two largest Bahia (Block 5). outbound Mining transactions of the period were The second-largest deal saw China Railway buys of a South American and African company Materials Commercial Corporation acquire a respectively, adds credence to this. First up was 12.5% stake in African Minerals Limited (AML) the previously-mentioned US$390m acquisition for US$244m. The offer represents a premium of of SAM, the Brazilian iron exploration firm, by 19.6% based on AML's closing share price one Honbridge Holdings, a Hong Kong-based firm day prior to the deal announcement date, and engaged in the refining and trading of silicon. will allow AML to undertake its first phase of iron SAM holds the mineral rights to 94 exploration ore production in the foreseeable future. permits covering an area of approximately 136,000 hectares. The permits are grouped into nine exploration areas identified as Blocks

42 Upcoming outbound activity According to reports, , the Chinese gold miner, is eager to make acquisitions Outbound Mining deal flow over the first overseas, with reports suggesting that it is half of 2010 indicates that the pattern of looking to snap up an Australian gold mine. The company is believed to have an M&A war trade has shifted somewhat compared to chest of approximately US$141m and is said to be hunting aggressively in Australia seeking the larger picture. Indeed, the fact that to buy mines with pure gold reserves of over the two largest outbound Mining 30 tons. Zhaojin Mining previously acquired a minority stake in Australian Gold Miner Citigold transactions of the period were buys of a in July 2010, and is now looking to acquire a majority stake in a new target. Oz Minerals, South American and African company Resolute Mining and OceanaGold have all been respectively, adds credence to this. mentioned as potential targets but industry commentators note that there may not be a lot of opportunities to acquire companies with such plentiful gold reserves in Australia. Antares Minerals, the Canadian gold and copper company that explores Latin American prospects, could also attract takeover interest from Chinese bidders, with one analyst noting that the company’s Haquira project in Southern Peru is one of the largest undeveloped copper assets controlled by a junior exploration entity. Finally, Hebei Iron and Steel Group, the state- owned Chinese steel producer, is reportedly in talks with Atlas Iron over the purchase of a stake in the Ridley magnetite project. The project is based in Western Australia and is expected to mine 15m tons of iron ore annually over the next 35 years. Previous reports suggest that the project is worth around US$290m.

Emerging from the twilight: the next chapter of Chinese outbound M&A 43 Oil & Gas

44 China outbound Oil & Gas M&A activity, 2003 - H1 2010

5 10,000

9,000

4 8,000

7,000

3 6,000

5,000

Deal volume 2 4,000 Deal value (US$m) 3,000

1 2,000

1,000

0 0

Q1 2003Q2 2003Q3 2003Q4 2003Q1 2004Q2 2004Q3 2004Q4 2004Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010 Deal volume Deal value (US$m)

China outbound Oil & Gas M&A average deal size, 2003 - H1 2010

6,000

5,000

4,000

3,000

age deal size (US$m) 2,000 ver A

1,000

0

Q1 2003Q2 2003Q3 2003Q4 2003Q1 2004Q2 2004Q3 2004Q4 2004Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010 Average deal size (US$m)

Emerging from the twilight: the next chapter of Chinese outbound M&A 45 China outbound Oil & Gas M&A deal size split by volume, Chinese outbound Oil & Gas sector M&A activity 2003 - H1 2010 surged over the first half of 2010, with eight transactions, worth a total of US$11.6bn being 9 announced over the first six months of the 8 3 year. Such deal volume equaled the number 3 of transactions that were undertaken over the 7 4 whole of 2009, and accounted for a larger 1 1 3 cumulative investment – total 2009 outbound Oil 6 4 & Gas M&A by value comprised just US$10.9bn.

e 1 5 2 2 And with deal flows surging recently, it is 1 1 perhaps unsurprising that a rise in valuations has 4 2 2

Deal volum Deal 1 followed. In fact, the average deal size over the 3 2 2 2 first two quarters of 2010 stood at US$1.4bn – 1 3 1 3 1 close to double the US$795m average deal size 2 seen over the 2003-2009 period. 1 1 1 1 1 2 2 1 1 1 1 1 1 0 2003 2004 2005 2006 2007 2008 2009 H1 2010

Not disclosed US$500m

China outbound Oil & Gas M&A deal size split by volume (%), 2003 - H1 2010

% 100 13 90 23 The average deal size of an 34 32 80 40 37 45 outbound Oil & Gas 50 50 70 29 11

) transaction over the first 60 11 12 22 13 two quarters of 2010 stood 50 20 11 14 29 22 13 at US$1.4bn – close to 40 25 Deal volume (% volume Deal 22 double the US$795m 30 37 13 33 11 25 average deal size seen over 20 40 12 29 11 11 3 10 25 the 2003-2009 period. 11 11 11 13 12 14 0 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total

Not disclosed US$500m

46 This shift in outbound Oil & Gas sector deal sizes China outbound Oil & Gas M&A deal size split by value (%), is even more prevalent when looking at absolute 2003 - H1 2010 deal size splits by volume over the years. Over H1 2010, exactly half of outbound acquisitions have % been worth more than US$500m, the largest 100 proportion witnessed since 2003. Over the same 90 period, mid-market (

40 Deal value (%) value Deal 30 42 12 20

10 19 3 13 3 4 3 7 4 5 2 10 3 1 4 1 1 2 0 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total

US$500m

China outbound Oil & Gas M&A deal volume by region, 2003 - H1 2010

3% 2% 3% North America 3% South East Asia 5% 30% Over H1 2010, Africa Central & Eastern Europe mid-market (

Emerging from the twilight: the next chapter of Chinese outbound M&A 47 China outbound Oil & Gas M&A deal volume by region, H1 2010 Acquisitions of North American Oil & Gas sector 12% targets have dominated overseas buys over the 2003 to H1 2010 period, numbering 17 deals with a combined value of US$22.1bn. This 37% North America amounts to a 30% market share in terms of 12% deal volume and a 43% stake by value. South Africa East Asian assets have also proven popular, with Central Asia a further eight transactions being announced Middle East over the time frame. In addition, five overseas Northern Europe purchases each have taken place in Africa, South America Central and Eastern Europe, Central Asia and 13% South America. Chinese corporates’ desire to snap up North 13% 13% American firms seems to have taken greater hold of late, with 37% of all outbound deals over China outbound Oil & Gas M&A deal value (US$m) by H1 2010 comprising buys of North American region, 2003 - H1 2010 targets. The largest of these was undoubtedly the aforementioned 9.03% stake acquisition 2% 1% 2% 1% of Syncrude Canada by , but other 1% North America notable transactions include the dual purchases 3% Central & Eastern Europe undertaken by CIC, the Chinese SWF, of various 7% assets belonging to Penn West, the Canadian Oil Africa & Gas exploration and production company. Central Asia 7% Northern Europe Between 2003 and H1 2010, Chinese bidders 43% South America spent the bulk of their M&A war chests on Australasia North American targets, amounting to a total 8% investment of US$22.1bn in Oil & Gas sector Middle East assets. Furthermore, buyers have spent another South East Asia US$8.9bn buying up targets based in Central and Western Europe 10% Eastern Europe, US$5bn in Africa, and US$4bn in North Asia Central Asia over the same period. South Asia 17% North American purchases rose over H1 2010 to account for more than half the total (51%) spent China outbound Oil & Gas M&A deal value (US$m) by region, abroad while South American acquisitions made H1 2010 up more than one-quarter of total outbound 1% 1% M&A investments, Oil & Gas buys in Africa added another 21% of the whole. 21%

North America South America 51% Africa Central Asia Northern Europe

27%

48 Top 20 China outbound Oil & Gas deals, 2003 - H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 24/06/2009 C Addax Oil & Gas Canada Sinopec International China 8,800 Corporation Petroleum Exploration and Production Corporation 14/07/2006 C Oil Company Oil & Gas Russia BP plc; Petroliam Nasional China Rosneftegaz Russia 5,345 OAO (7.58% Stake) Berhad; China National Petroleum Corporation 12/04/2010 C Syncrude Canada Ltd Oil & Gas Canada Sinopec International China ConocoPhillips USA 4,650 (9.03% Stake) Petroleum Exploration and Production Corporation 22/08/2005 C PetroKazakhstan Inc Oil & Gas Canada CNPC International Limited China 3,932 07/07/2008 C Awilco Offshore ASA Oil & Gas Limited China 3,777 20/06/2006 C OAO Udmurtneft Oil & Gas Russia China Petroleum & Chemical China TNK-BP Holding OAO Russia 3,500 Corporation 14/03/2010 P Bridas Corporation Oil & Gas Argentina CNOOC International Limited China Bridas Energy Holdings Ltd Argentina 3,100 (50% Stake) 28/03/2010 P Sonangol Sinopec Oil & Gas Angola Sinopec Corporation Hong Sinopec Overseas Oil & Gas China 2,457 International Limited Hongkong International Kong Limited (55% Stake) Limited 09/01/2006 C South Atlantic Oil & Gas Nigeria China National Offshore Oil Hong South Atlantic Petroleum Nigeria 2,268 Petroleum (OML 130) Corporation Ltd Kong Ltd. (45% Stake) 25/10/2006 C Argymak Trans Oil & Gas CITIC Group China CITIC Canada Petroleum Canada 1,910 Service LLP; Limited Karazhanbasmunai, JSC; Tulpar Munai Services LLP 25/09/2008 C Tanganyika Oil Oil & Gas Canada China Petroleum & Chemical China 1,813 Company Ltd. Corporation 09/05/2007 C Renowned Nation Oil & Gas Kazakhstan CITIC Resources Holdings Hong CITIC Group China 1,042 Limited Limited Kong 30/09/2009 C JSC KazMunaiGas Oil & Gas Kazakhstan Fullbloom Investment China 939 Exploration Production Corporation (11% Stake) 13/05/2010 C Penn West Energy Trust Oil & Gas Canada China Investment Corporation China Penn West Energy Trust Canada 799 ( properties in ) (45% Stake) 11/06/2007 C Peru Copper Inc. Oil & Gas Canada Aluminum Corporation of China 779 China (Chinalco) 24/10/2003 C Gorgon Project (12.5% Oil & Gas Australia China National Offshore Oil China Plc; Netherlands 701 stake) Corporation Ltd ; ExxonMobil Corporation 12/08/2009 C Emerald Energy Plc Oil & Gas United International China 694 Kingdom Corporation 20/12/2005 C Petro-Canada (Syrian Oil & Gas Syrian Arab Fulin Investments S.A.R.L; China Petro-Canada Resources Inc Canada 574 Production Sharing Republic ONGC Nile Ganga BV Contracts) 31/03/2008 C AED Oil Limited (assets Oil & Gas Australia Sinopec International China AED Oil Limited Australia 561 held under AC/P22, Petroleum Exploration and AC/L6 and AC/RL1, Production Corporation including the Puffin and Talbot fields) (60% Stake) 02/02/2008 C SOCO Yemen Pty Oil & Gas Yemen Sinochem Petroleum Limited China SOCO International Plc United 465 Limited (Australia) Kingdom

C = Completed; P = Pending

Emerging from the twilight: the next chapter of Chinese outbound M&A 49 Top five China outbound Oil & Gas deals, H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 12/04/2010 C Syncrude Canada Ltd Oil & Gas Canada Sinopec International China ConocoPhillips USA 4,650 (9.03% Stake) Petroleum Exploration and Production Corporation 14/03/2010 P Bridas Corporation Oil & Gas Argentina CNOOC International Limited China Bridas Energy Holdings Ltd Argentina 3,100 (50% Stake) 28/03/2010 P Sonangol Sinopec Oil & Gas Angola Sinopec Corporation Hong Sinopec Overseas Oil & Gas China 2,457 International Limited Hongkong International Kong Limited (55% Stake) Limited 13/05/2010 C Penn West Energy Trust Oil & Gas Canada China Investment Corporation China Penn West Energy Trust Canada 799 (oil sands properties in Alberta) (45% Stake) 13/05/2010 C Penn West Energy Trust Oil & Gas Canada China Investment Corporation China 425 (5.24% Stake)

C = Completed; P = Pending

The largest Oil & Gas sector acquisition undertaken The most notable Oil & Gas sector acquisition abroad was Sinopec's previously-mentioned undertaken over the first half of 2010 was the US$8.8bn buy of Addax Petroleum, the Canadian previously-mentioned stake buy of Syncrude by Oil and Gas exploration and production firm, Sinopec for US$4.65bn. Next up was CNOOC’s announced in June 2009. Mitsubishi, the Japanese US$3.1bn acquisition of a 50% interest in industrials giant, was initially rumored to be in Bridas Corporation, the Argentinean Oil & Gas the running for the asset, with the state-owned exploration and production firm in Q1 2010. The Korea National Oil Company and India’s ONGC deal will see CNOOC expand its proven reserves Videsh, the overseas division of the country’s Oil and average daily production figures to 318m and Natural Gas Corporation, also believed to have barrels-of-oil-equivalent (BOE) and 46,000 BOE, been interested in the target. Ultimately, Sinopec respectively. sealed the deal fairly quickly, with regulatory The third-largest acquisition was another Sinopec authorities across the globe all speedily giving buy, and saw the company snap up a 55% Sinopec their endorsement to take over the firm. stake in Sonangol Sinopec International (SSI), The second-largest transaction saw China National an Angola-based firm which is engaged in Oil & Petroleum Corporation (CNPC), the Chinese state- Gas exploration and production, for US$2.5bn owned petroleum company, teaming up with BP in March 2010. Sinopec is presumably targeting and , the UK and Malaysian Oil giants SSI’s 50% stake holding in Angola’s oil block respectively, to purchase a 7.6% stake in OAO 18, which reportedly holds around 700m BOE in Rosneft Oil, the Russian Oil and Gas producer, reserves. So far, 11 test wells have been drilled, from Rosneftegaz, the state-owned Russian eight of which have proven to be economically investment , for US$5.3bn back viable. in Q3 2006. The deal saw CNPC invest US$500m in the acquisition vehicle, which was majority- backed by an unnamed Russian investor.

50 China's M&A investments into Brazil, India, and Russia

Historical data China outbound M&A activity in Brazil, India and Russia, 2003 - H1 2010 Chinese M&A acquisitions of Brazilian, Indian and Russian assets have totaled some 52 transactions, 10 10,000 valued at US$15.3bn, over the past seven-and- a-half years. Activity peaked in 2006 and 2007, when 10 transactions a year were undertaken 8 8,000 in these countries as the economic boom plateaued. However, Chinese outbound deal flow eased over 2008 and 2009, falling to eight, 6 6,000 then seven deals respectively over these two years. Nonetheless, a resurgence in dealmaking could be on the cards, especially given the recent Deal volume 4 4,000 uptick in activity: seven deals already came to Deal value (US$m) market over the first half of 2010, while deal values are at their highest levels since 2006, all 2 2,000 of which points to a bullish M&A market over the second half of the year. Compared with overall Chinese outbound trends 0 0 however, M&A deal flow into Brazil, India, and 2003 2004 2005 2006 2007 2008 2009 H1 2010 Russia has remained relatively stagnant, with less Deal volume Deal value (US$m) than one-in-ten (9.2%) outbound acquisitions targeting assets in the three countries. At the same time, 10.4% of all outbound M&A by deal value has been invested in Brazil, India, or Russia. China outbound M&A activity in Brazil, India and Russia by volume, 2003 - H1 2010

10 1 A resurgence in Chinese 2 dealmaking in Brazil, 8 2

India & Russia could be e 6 2 2 on the cards, especially

given the recent uptick in volum Deal 4 8 8 2 2 activity: seven deals 7 5 1 2 already came to market 3 3 over the first half of 2010, 2 2 0 while deal values are at 2003 2004 2005 2006 2007 2008 2009 H1 2010 their highest levels since India Russia Brazil 2006.

Emerging from the twilight: the next chapter of Chinese outbound M&A 51 China outbound M&A activity in Brazil, India and Russia by Geographically, India has traditionally been disclosed value (US$m), 2003 - H1 2010 where the bulk of Chinese outbound bidders have hunted for BRIC targets, accounting for 12,000 79% of all transactions between 2003 and 2008. However, this dominance has started to fade of 10 10,000 late, with deal flows into India over 2009 and H1 2010 falling to less than 50% of the total.

) 8,000 From a deal value perspective, outbound investment spiked in 2006 following the twin buys of Russian firms OAO Udmurtneft and 6,000 Rosneft Oil by China Petroleum & Chemical 8,845 Corporation and CNPC respectively, for a

Deal value (US$m value Deal 4,000 combined US$8.8bn. However, in the two years following, Chinese investment into Russia slowed and has only recently shown signs of life again. 2,000 1402,111 130 400 Chinese investments into India are also 359 600 115 29 1,168 116 1,175 2 decreasing in significance of late, while in respect 0 of deal values, Brazil’s star is shining more 2003 2004 2005 2006 2007 2008 2009 H1 2010 brightly. Prior to 2009, buys of Brazilian assets India Russia Brazil totaled some US$140m. Since then however, the country has witnessed acquisitions worth a total of US$2.5bn.

China outbound M&A activity in Brazil, India and Russia as % of overall outbound M&A

% 50 45 Outbound investment 40 spiked in 2006 following 35 the twin buys of Russian 30 firms OAO Udmurtneft all activity 25 and Rosneft Oil by China 20

% of over Petroleum & Chemical 15 Corporation and CNPC 10

5 respectively, for a

0 combined US$8.8bn. 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total

Deal volume Deal value (US$m)

52 Indeed, Chinese investments into Brazil, India M&A deal size split by volume, 2003 - H1 2010 and Russia have risen in value over recent years. Between 2003 and 2008, just 11% of 10 all outbound M&A transactions into these countries by volume were valued at US$250m 3 or more. However, over 2009 and H1 2010, 8 this proportion rose to 50%. Furthermore, over the first half of 2010 alone, 57% of all 1 6 1 1

Chinese purchases in these jurisdictions were e 6 valued at or over US$250m. Deal flow was led by the aforementioned May 2010 acquisition 2 2 3 of seven Brazilian transmission companies of 7 Deal volum Deal 4 Plena Transmissoras, the provider of power 3 transmission services, by the State Grid 2 1 3 3 Corporation of China, for US$1.7bn. 2 2 1 Chinese bidders are seemingly focused on 2 2 2 acquisitions in the Energy, Mining and Utilities 1 1 1 1 1 sectors of Brazil, India and Russia, with such 0 2003 2004 2005 2006 2007 2008 2009 H1 2010 purchases accounting for around one-quarter of all deal volumes by sector. Of these, Energy, Not disclosed US$500m the most frequent, although Brazilian buys were also fairly numerous. Purchases of Brazilian, Indian and Russian Financial Services and Industrials & Chemicals Outbound M&A deal size split by volume (%), 2003 - H1 2010 targets also accounted for a further 17 deals, with the majority of them taking place in India (seven transactions in Financial Services, and 100 14 14 10 seven in Industrials & Chemicals). Two of the 90 30 remaining transactions took place in Brazil, while 34 12 the final was transacted in Russia. 80 70 60 60 29

) 10 43 60 87 48 Between 2003 and 2008, 50 100 33 20 40 just 11% of all outbound (% volume Deal 43 30 20 29 M&A transactions into 30 17 20 40 Brazil, India & Russia by 33 10 20 10 13 14 14 15 volume were valued at 0 US$250m or more. 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total Not disclosed US$500m H1 2010, this proportion rose to 50%.

Emerging from the twilight: the next chapter of Chinese outbound M&A 53 Outbound M&A deal size split by value (%), 2003 - H1 2010 It was a similar story when looking at outbound deal values, with Energy, Mining & Utilities % acquisitions making up the lion’s share of China’s 100 total M&A investment in the three countries. Such bidders spent a cumulative US$12.5bn buying up 90 such assets, – the bulk of them in Russia, where a 80 38 total of US$9.2bn was invested over the period. Buys in Brazil were also relatively large, with 70 62 bidders paying out a total of US$2.6bn for assets 66 such as the 21.6% stake in MMX Mineracao e 60 80 88 78 95 Metalicos that Wuhan Iron and Steel Company 50 100 acquired for US$400m in late 2009. 40 Deal value (%) value Deal 52 30

20 36 34 15 Energy, Mining and 10 20 1 12 1 4 10 2 8 0 Utilities bidders spent a 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total cumulative US$12.5bn US$500m buying up Brazilian, Indian and Russian assets,

Outbound M&A deal volume by sector, 2003 - H1 2010 – the bulk of them in Russia, where a total of 14 US$9.2bn was invested 12 over the period. 4 10 e 8 2 3

6 Deal volum Deal

7 4 7 6 6 1 2 4 3 2 2 2 0 1 1 1 ical TMT Leisu re Services Services , Mining Business Fi nancial & Utilities & Biotech Industrials Consumer gy Agricultu re & Chemicals ansportation Construction Tr Ener Pharma, Med Russia India Brazil

54 Outbound M&A deal value (US$m) by sector, 2003 - H1 2010 Buys in Brazil were also 14,000 relatively large, with 12,000 bidders paying out a total 2,571 10,000 of US$2.6bn for assets ) 685 such as the 21.6% stake in 8,000 MMX Mineracao e 6,000

Deal value (US$m value Deal 9,245 Metalicos that Wuhan 4,000 Iron and Steel Company 2,000 acquired for US$400m in 10 1,243 1,243 535 224 140 120 70 56 40 33 late 2009. 0 e ical TMT Leisur inancial Services Services , Mining Business F & Utilities & Biotech Industrials Consumer gy Agricultu re & Chemicals Construction Ener Pharma, Med Russia India Brazil

Emerging from the twilight: the next chapter of Chinese outbound M&A 55 China's M&A investments into Brazil

Ricardo de Carvalho, Chinese Services At the same time, Carvalho highlights the Group Leader for Brazil, talked to favorable political relationship between the mergermarket about prospective Chinese Chinese and Brazilian governments, citing the outbound M&A activity there. fact that “Brazil is a melting pot of cultures. As a result, it is a very open and inclusive Carvalho is bullish on future Chinese interest economy, meaning that Chinese bidders are in Brazil, saying that M&A flows from China always welcome here.” He goes on to mention are likely to boom over the coming months the recent signing of a five-year action plan and years. “Less than 10% of the top 200 which will further encourage trade and energy Chinese businesses have a presence in Brazil, cooperation between the two countries as a and I believe that this situation is likely to be case in point, adding that “such ties are already rectified sooner as opposed to later. Chinese strong. In 2009, China became Brazil’s top trade businesses are increasingly trying to source partner following Sinopec’s strategic agreement upstream assets which will provide them with with , Brazil’s state-run oil giant, which a cheap and plentiful supply of raw materials. will see the Chinese oil major lend US$10bn to its And Brazilian businesses are ideally suited to counterpart in return for a guaranteed supply of meet this demand, having become the world’s oil for the next decade.” third-largest agricultural products exporter in 2009. As additional key drivers supporting this Carvalho also opines that Brazil’s huge economic expected movement, China has become our potential will almost certainly attract further most important trading partner surpassing Chinese investments into the country. “Brazil is the US, while Brazil has a prominent presence a large country with approximately 190 million as key global exporter for several important people talking the same language. It has a stable commodities/ products as indicated below”. economy with investment grade status and foreign reserves in excess of US$250bn. It also has low and steady rates of inflation, growing Brazilian commodity exports, 2009 per capita income, solid financial markets

2009 % share of 2009 global and a highly-skilled workforce. Furthermore, global exports export ranking from a political perspective, Brazil is a working Soy Beans 21% 2 democracy with transparent judicial, executive, Iron Ore 17% 3 and legislative frameworks, despite foreign Oil 15% 2 investors sometimes complain on the high Meat 11% 2 taxation system and bureaucracy for opening Sugar 10% 1 new businesses. As a result, many Chinese businesses are investing here, or are starting to Coffee 5% 1 consider the country as a springboard to other Pulp 4% 4 M&A opportunities in the rest of South America.” Tobacco 4% 2 Ethanol 2% 2 The majority of such inbound investments Corn 2% 4 from Chinese bidders, aside from Energy and Orange Juice 2% 1 Mining buys, tend to be focused on Agriculture, Consumer, and Business Services sector Cotton 1% 5 acquisitions, as evidenced by the Noble Group's Aluminum 1% 6 US$70m purchase of Usina Petribu Paulista, the Leather 1% 3 Brazilian sugar mill company; and Meridiano, Source: Deloitte/MDIC

56 the Brazilian land-owning business. The Hong Kong-based global supply chain manager of Agricultural, Industrial and Energy products “Brazil is a very open and inclusive invested a further US$200m to expand Usina Petribu’s ethanol business, which currently has a economy, meaning that Chinese bidders total crushing capacity of 2m tons of sugar cane. are always welcome here.” Moreover, Carvalho also foresees that Chinese infrastructure plays will increase in frequency Ricardo de Carvalho as Brazil gears up to undertake massive Chinese Services Group Leader for Brazil infrastructure upgrades as the clock ticks down to the FIFA World Cup (2014) and the Olympics (2016), both of which are taking place at venues across the country. Another sector to watch out for is the automobile industry. Chinese car makers are already considering to install their assembling plants in Brazil and potentially creating opportunities for investments from Chinese auto parts companies. The multi-billion Petrobras deep water oil drilling projects, "Pre Salt Project”, will also generate great investment opportunities within the Oil & Gas industry. Nonetheless, while Brazil is certainly a fast- growing recipient of Chinese M&A investment, Carvalho is quick to point out that obstacles abound: “Chinese investors looking at making M&A acquisitions in Brazil should be aware that many Brazilians – while incredibly amenable to inbound M&A purchases – are wary of finding themselves swamped by a tidal wave of Chinese investment. Therefore try and formulate a partnership of equals with any potential vendor. At the same time, be sensitive to cultural differences, and show your counterpart that you are a reliable and sincere buyer.”

Emerging from the twilight: the next chapter of Chinese outbound M&A 57 Top five China outbound deals in Brazil, 2003 – H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 18/05/2010 P Plena Transmissoras SA Energy Brazil State Grid Corporation of China Plena Transmissoras SA Brazil 1,721 (Seven Brazilian trans- China mission companies) 30/11/2009 C MMX Mineracao e Mining Brazil Wuhan Iron and Steel China 400 Metalicos SA (21.52% Company Limited Stake) 18/04/2010 P Sul Americana de Mining Brazil Honbridge Holdings Limited Hong Votorantim Novos Brazil 390 Metais S.A Kong Negocios Ltda ; Lit Mining Cooperatief U.A. 08/02/2007 C Usina Petribu Paulista Agriculture Brazil Noble Group Limited Hong 70 Ltda; Meridiano Kong 18/07/2007 C Mhag Servicos e Mining Brazil Noble Group Limited Hong 60 Mineracao SA (30% Kong Stake)

C = Completed; P = Pending

As might be expected, the top five Chinese Looking forward, Chinese Mining investors are investments into Brazil over the past seven-and- continuing to eye acquisition opportunities in Brazil a-half years have all been among the Energy, as they continue their global hunt for control of Mining & Utilities and Agricultural sectors. The raw assets. Evergreen Industries, a privately-owned largest of these was State Grid Corporation's Chinese conglomerate, is one such firm. It recently aforementioned US$1.7bn acquisition of seven announced that it is seeking iron ore mines to Brazilian transmission companies belonging to secure an upstream supply for its subsidiaries, and Plena Transmissoras that were initially supposed is understood to be looking to acquire in Brazil. to be sold to Cemig, the Brazilian electricity Evergreen, which had total assets of US$2.4bn in distributor. 2009, is engaged in shipbuilding, mining, logistics, and oil field engineering, and could spend up The second-largest deal was the previously- to US$150m on targets with good quality iron mentioned US$400m acquisition of a 21.52% mines – either through a transformational deal or stake in MMX Mineracao e Metalicos, the iron and a minority stake acquisition. steel producer, by Wuhan Iron and Steel Company. A deal was finally concluded in November 2009 As a final remark, Ricardo comments that “it is after nearly six months of bargaining. According likely that China will become the most important to deal documentation, Wuhan and MMX are foreign investor in the coming years. Brazil has planning to create a JV, with Wuhan Iron and the potential to receive up to US$50bn in Chinese Steel constructing a large steelworks in Acu, Brazil, investments until 2015, based on the current which will be capable of producing 5m metric tons growing trend of Chinese outbound M&A activity of steel annually. In addition, Wuhan will have two and assuming there will not be another global seats on MMX’s board. crisis. Additionally, Brazil is expected to be the fifth largest global economy in the next decade Six months after this deal was announced, with several sectors having the potential to be Honbridge Holdings successfully completed the further consolidated and creating good market US$390m acquisition of SAM from Lit Mining entry acquisition opportunities for international Cooperatief and Votorantim Novos Negocios. SAM players like the Chinese fast-growing global is an iron ore exploration firm based chiefly in the companies”. states of Minas Gerais and Bahia, while Honbridge is principally engaged in the refining and trading of silicon.

58 China's M&A investments into India

Atul Dhawan, Chinese Services Group Dhawan continues, saying that Chinese Leader for India, gives his personal manufacturers in the TMT sector are already viewpoint on recent Chinese acquisitions cost efficient and may not look at India for cost of Indian assets, as well as his thoughts arbitrage opportunities. For example Lenovo, a on where this particular M&A market is Chinese computer hardware manufacturer already heading over H2 2010 and 2011. sells laptops and other equipment in India but – tellingly – does not have a manufacturing base Dhawan kicks off the conversation by noting that there. while Chinese businesses have been increasingly looking to enhance their presence in India over However, Dhawan is optimistic that if Chinese the past seven-and-a-half years, an explosion of manufacturing and India’s research and design outbound Chinese investment into the country capabilities could be brought together, potential has yet to be witnessed. “The biggest difficulty business synergies could be formidable – a trend facing Chinese bidders looking to transact in India which Huawei probably wanted to capture is political uncertainty. The uncertainties could following their decision to invest US$500m. pose constraints to buyers and vendors in the two Dhawan is also fairly bullish on valuations, noting countries.” that Indian vendors are known for their ability to Despite these concerns, deals are still coming to drive a hard bargain. “Indian business owners have the table, with Dhawan specifically highlighting an incredible aptitude to extract every last cent out potential deal flow in the Real Estate and of their buyers, and as a result of this, potential Construction sector. “There exist a large number Chinese bidders looking to acquire there should of opportunities for Chinese Real Estate developers be aware that deal price expectations are chiefly and Construction businesses to move into India, driven by sellers," he says. especially since modern construction techniques Dhawan offers some pointers for prospective have not been universally adopted here. For dealmakers looking to buy in India, explaining instance, Chinese contractors are able to construct that “bidders need to be transparent with their concrete slab building foundations much quicker approach, and this applies to both the target than their Indian counterparts.” business’s senior management as well as any Infrastructure is another area which could see regulatory authorities with an interest in the tie-up. frequent M&A activity stemming from China, Secondly, cultural understanding is very important. chiefly due to the massive infrastructure initiatives Bidders and targets alike need to respect cultural that have been recently announced by the boundaries before they become deal-breakers, government. “According to the Financial Times, one good example of this being that debate and India has been spending between 5-6% of its discussion is much more commonplace in Indian GDP on infrastructure developments, which will boardrooms than in their Chinese counterparts. equate to the building of 200,000km of roads, Lastly, bidders would do well to remember that and the construction or expansion of numerous India is a long-run play for investors. Indian targets airports and ports across the country.” However, will not take too kindly to M&A bids which are to some extent, he remains less bullish on M&A essentially short-term in nature.” opportunities in the latter two spaces, instead warning that it would be unlikely that Chinese investors would be allowed to take controlling stakes in such nationally sensitive installations.

Emerging from the twilight: the next chapter of Chinese outbound M&A 59 Top five China outbound deals in India, 2003 – H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 24/03/2006 C Ashapura Minechem Mining India Qingtongxia Aluminium China Sichuan Aostar Aluminum China 651 Ltd (Alumina plant in Group Company Ltd Co Ltd Kutch) (50% Stake) 05/12/2009 C General Motors Automotive India SAIC Motor Corporation China General Motors Company USA 650 Company Limited (Manufacturing Facilities in India) 28/12/2009 C General Motors India Automotive India Shanghai Automotive Industry China Motors Liquidation USA 500 Pvt Ltd (50% Stake) Corporation (Group) Company 30/06/2006 C Vodafone Essar Telecommunications: India Hutchison Hong Hinduja Ventures India 450 (Vodafone Group - Carriers Telecommunications Kong Indian arm) (5.11% International Limited Stake) 13/01/2008 C ICICI Financial Services Financial Services India Nomura International (Hong Hong 100 (formerly ICICI Kong) Limited Kong Holdings Ltd) (0.9% Stake) 14/08/2008 C RSP Design Consultants Construction India Baring Private Equity Asia Hong 100 (India) Private Ltd (40% Kong Stake)

C = Completed; P = Pending

The largest Chinese M&A acquisition into Hong Kong bidders have also been fairly active India since the beginning of 2003 saw China’s in the Indian market, the largest such deal being Qingtongxia Aluminum Group, buy a 50% stake Hutchison Telecommunications International’s in an aluminum smelter in Kutch, India, for 5.1% stake acquisition in Hutchison Essar, the US$651m. The vendor in this case was the JV Indian telecom carrier, for US$450m, back in Q2 between Sichuan Aostar and Ashapura Minechem, 2006. The vendor in this case was Hinduja TMT, the Chinese and Indian exporters of bentonite, the Indian IT company. Post acquisition, Hutchison bauxite and allied minerals respectively. Sichuan ended up owning an approximate 67% stake in Aostar exited the investment as it no longer fits its Hutchison Essar, which it later sold to the UK’s parent company's core strategy. Vodafone in February 2007 for US$13.7bn. The next transaction stemmed from the Prospective Chinese bidders in India may bankruptcy of General Motors in 2009, with the increasingly find targets in the consumer Shanghai Automotive Industry Corporation (SAIC) space. Indeed, Vancl, a Beijing online retailer, investing US$500m to acquire a 50% stake in is understood to be seeking JV opportunities in General Motors India (excluding its R&D center), India. Vancl is conducting research into the Indian the Indian vehicle manufacturer, from General B2C markets, taking the view that a JV with a Motors. SAIC also announced that it had created local partner would facilitate market entry. Vancl a JV with the beleaguered Automotive firm which specializes in the online retail of garments for men, will focus on Asian markets. This JV, General women, and children, as well as of household Motors SAIC, plans to invest US$650m in India textiles. over a period of time.

60 China's M&A investments into Russia

Oleg Berezin, Chinese Services Group stake buys or assets of a non-strategic character Leader for CIS & Russia, talks about recent will receive regulatory approval” Berezin cautions. Chinese M&A investments in the country. In view of the above constraints, he believes that Chinese buyers will be more focused on buying Berezin begins by giving a short history of Chinese non-controlling stakes in Russian Mining and investments into the country: “Traditionally, Energy companies. Chinese acquisitions of Russian assets have been relatively small in both value and volume terms. “What is important to take into account when However, of late, they have begun to grow fairly investing into Russia is that a very good piece of rapidly and are likely to continue to do so over the federal legislation can be interpreted differently next 18 months. Nevertheless, from an absolute by local officials. For example, at a first glance, level, the size of Chinese direct investments is likely Russian tax legislation seems to be very liberal with to remain constrained,” he says. a maximum corporate income tax rate of 20% and a personal income tax rate of 13%. In practice, Future Chinese buyers of Russian assets are likely however, the effective corporate income tax rate to be driven by one overriding factor: valuations. in some industries is 30% to 40%, due to the Berezin remarks that “many Russian companies corporate's inability to take advantage of certain were hit hard by the financial crisis, and as a result, tax breaks” Berezin says. He also notes that the many of them are still fundamentally undervalued other factors that suppress foreign investments into or are going up on the block at a discount as their Russia are a stifling bureaucracy, corruption and owners try to raise capital to service now-onerous infrastructural constraints. In particular, green-field debt obligations.” Sustaining this trend, he investments are particularly susceptible to difficulties explains, is the fact that both the Chinese and in necessary permissions from local authorities, Russian Governments are broadly supportive – especially with regards to water, electricity and gas with some exceptions – of Chinese firms buying connections. into Russia, ultimately making regulatory approvals easier to come by. With this in mind, Berezin offers three pieces of advice for Chinese bidders prospecting in Russia: Looking forward, Berezin expects to see Chinese “Firstly, engage external reputable advisors with acquisitions rise in value, as interest in Russian local experience as early as possible. There will assets increases at an almost exponential rate. The always come a time in any cross-border M&A bulk of these prospective buys will likely take place transaction where even hardened professionals in the resources, Construction and Real Estate are not able to extract bidders from messy deal industries, and, to a lesser extent, in the Consumer, situations. In particular, obtaining necessary Manufacturing and Financial Services sectors. information and details from public sources does “Chinese buys of Russian resources assets will not guarantee an understanding of all practical and almost certainly continue to come to market, as cultural interpretations. Secondly, look beyond the importers look to control supply networks of raw price metrics of a transaction. Having thorough materials. At the same time, Chinese consumer due diligence and PMI processes in place count for goods manufacturers are looking to grow market much more than achieving a sizable reduction in share in Russia, along with Construction and Real price, as they will indicate whether or not a target Estate businesses," he notes. is a good fit for your strategy. This also includes Although Chinese Oil & Gas majors are still very further profit repatriation and exit options as interested in acquiring Russian assets, Chinese ignoring these aspects at the purchase stage may firms will most likely be prevented from buying any result in business inefficiencies and losses in the further significant and/or strategic holdings due to future. Finally, act quickly – there are examples of protectionist interference. “In the past, such deals Chinese bidders floating around a Russian target have invariably collapsed, and as a result, Chinese only for it to be snapped from under their noses by Oil & Gas firms now recognize that only minority a rival bidder.”

Emerging from the twilight: the next chapter of Chinese outbound M&A 61 Top five China outbound deals in Russia, 2003 – H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 14/07/2006 C Rosneft Oil Company Energy Russia BP plc; Petroliam Nasional China Rosneftegaz Russia 5,345 OAO (7.58% Stake) Berhad; China National Petroleum Corporation 20/06/2006 C OAO Udmurtneft Energy Russia China Petroleum & Chemical China TNK-BP Holding OAO Russia 3,500 Corporation 22/03/2010 P Spring Vast Limited Mining Russia FinTronics Holding Company Hong Truffle Rich Holdings British 300 Limited Kong Limited Virgin Islands 12/04/2010 P Digital Sky Financial Services Russia Tencent Holdings Limited China 300 Technologies Limited (10.26% Stake) 15/10/2009 C Nobel Oil Group (45% Energy Russia China Investment Corporation China 100 Stake) 03/03/2009 C CenterObuv Trade Consumer: Retail Russia Sun Investments Partners Ltd Hong Raymar Capital Inc British 40 House ZAO (33% Kong Virgin Stake) Islands

C = Completed; P = Pending

Chinese acquisitions in Russia are dominated Russian gold mining assets. The miner owns eight by Energy and Mining buys, the most notable gold projects, all located in the north east of the of these being the consortium buy of a 7.58% country. Three of them are alluvial gold mining stake in OAO Rosneft Oil Company, the Russian operations, one is a proposed underground gold Oil & Gas producer, from Rosneftegaz, the mine and four are exploration projects. Based on state-owned Russian investment company. The the latest available data, Omchak’s mines contain bidding consortium included BP, CNPC, Petronas, an aggregate gold reserve of 1,193,000 ounces. (the Malaysian petroleum company), and an Being part of the BRIC quartet, Russia continues undisclosed Russian financial institution, with CNPC spending US$500m to engorge Rosneft to be an up-and-coming destination for Chinese shares in the target’s IPO placement. investment. In one such instance, TGK-2, the listed Russian power company, will reportedly CNPC is certainly no stranger to investing in participate in a joint project with the Huadian Russia. Less than one month prior, the business Corporation, the Chinese utilities firm, to build a had snapped up OAO Udmurtneft, the Russian thermal power station in Yaroslavl, Russia. There oil exploration company, for US$3.5bn from will be no financial participation from TGK-2, the TNK-BP Group, the Anglo-Russian Oil & who will own a 49% stake in the venture with Gas exploration and production company. Huadian owning the remainder. The total cost Immediately following the transaction, CNPC of construction is estimated at US$684.4m and flipped a 51% stake in the business back to OAO power generation is expected to start in 2013. Rosneft for an undisclosed sum. In addition, Alltech, the Russian investment The third-largest purchase in Russia by a Chinese holding, is purportedly in talks with CNOOC, the bidders saw FinTronics Holdings acquire Spring Korea Gas Corporation, and the Vast, an investment holding company with an Gas Corporation over the sale of a 30–-49% 80% interest in Omchak, the Russian-based gold stake in the gas extraction factory Pechora SPG. mining company. It is rumored that state-owned Chinese energy For their US$300m, FinTronics received a player CNOOC had the best chance of acquiring controlling stake in a veritable smorgasbord of the stake, which is currently valued at US$4bn.

62

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Emerging from the twilight: the next chapter of Chinese outbound M&A 65

China outbound historical data

China outbound M&A activity, 2003 - H1 2010

40 25,000

35

20,000 30

25 15,000 20

Deal volume 15 10,000 Deal value (US$m)

10 5,000 5

0 0

Q1 2003Q2 2003Q3 2003Q4 2003Q1 2004Q2 2004Q3 2004Q4 2004Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010 Deal volume Deal value (US$m)

China outbound M&A average deal size, 2003 - H1 2010

900

800

700

600

500

400

age deal size (US$m) 300 ver A 200

100

0

Q1 2003Q2 2003Q3 2003Q4 2003Q1 2004Q2 2004Q3 2004Q4 2004Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010 Average deal size (US$m)

Emerging from the twilight: the next chapter of Chinese outbound M&A 67 China outbound M&A deal size split by volume, 2003 - H1 2010 Chinese quarterly outbound M&A activity surged over the second half of 2009 and the first half 120 of 2010, averaging 36 acquisitions per quarter 10 over the period. In contrast, mean quarterly 100 9 deal volumes over the 2003 – H1 2009 period 11 amounted to just 16 transactions, demonstrating 9 9 80 to good effect that this particular deal class is 11 8 e truly here to stay. 9 13 12 8 4 41 From a valuations perspective, average outbound 60 6 7 deal flow on a quarterly basis has – by and large 4 7 Deal volum Deal 4 – remained below US$500m, with the mean only 4 2 40 8 26 37 35 6 28 rising above this amount in Q1 2008, primarily 1 19 2 18 due to Chinalco and Alcoa’s US$14bn acquisition 3 21 11 of a 12% stake in Rio Tinto. Since then, average 20 10 11 15 11 13 deal values have remained somewhat trendless, 2 23 17 15 12 9 8 9 with quarterly means fluctuating between 0 4 2003 2004 2005 2006 2007 2008 2009 H1 2010 US$54m and US$471m.

Not disclosed US$500m

China outbound M&A deal size split by volume (%), 2003 - H1 2010

% 100 4 9 7 12 10 10 9 Quarterly average 7 11 10 90 4 8 5 9 8 8 outbound deal flow has 11 12 9 13 80 15 10 10 14 10 12 remained below US$500m 70 14 for the majority of the 60 34 35 36 2003-H1 2010 period, 56 47 37 39 50 39 40 with the mean only rising 40 Deal volume (%) volume Deal above this amount in Q1 30 15 17 21 7 11 16 14 20 2008, primarily due to 7 14 10 23 20 Chinalco and Alcoa’s 15 20 15 17 17 17 10 0 US$14bn acquisition of a 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total

Not disclosed US$500m

68 From a deal-volume viewpoint, the number of China outbound M&A deal size split by value (%), 2003 - H1 2010 Chinese outbound M&A deals in the first half of 2010 has remained broadly similar to that of % previous years, with 30% of all transactions being 100 valued at over US$100m. Throughout 2009, 27% 90 of all outbound deals were worth more than this 29 amount, while over the entire period in question, 80 acquisitions worth US$100m or more also 70 61 equaled 30% of totals. 69 67 73 74 60 81 79 However, examining deal value over the past 26 81 seven-and-a-half years paints a different picture. 50 In H1 2010, transactions valued at more than 40 Deal value (%) value Deal US$500m accounted for 79% of all outbound 20 30 16 M&A deal value, compared with just 73% in 12 2009 and 74% over the whole period. Similarly, 16 20 12 12 13 10 deals valued in the range of US$15m – US$100m 24 12 8 9 10 9 7 7 amounted to just 6% of overall deal value in H1 6 5 9 6 1 9 1 5 6 7 1 5 1 6 <1 2010, compared with 8% in 2009. 0 4 2003 2004 2005 2006 2007 2008 2009 H1 2010 Total Chinese outbound private equity volumes show a recent surge in the number of overseas buyouts US$500m of foreign private equity firms from portfolio companies ultimately bought by Chinese corporates. In H2 2009, just eight outbound private equity transactions were completed, compared with 13 over the first half of 2010. Quarterly private equity deal valuations Nonetheless, while private equity volumes have risen of late, valuations have remained have risen above the US$1bn mark on stubbornly low, with just US$567m in buyouts only four occasions over the past seven- being conducted in H1 2010. In fact, quarterly private equity deal valuations have risen above and-a-half years, most noticeably in Q1 the US$1bn mark on only four occasions over the 2008. past seven-and-a-half years, most noticeably in Q1 2008.

Emerging from the twilight: the next chapter of Chinese outbound M&A 69 China outbound private equity M&A activity by deal volume, 2003 - H1 2010

9

8

7

6

5

4 Deal volume 3

2

1

0

Q1 2003Q2 2003Q3 2003Q4 2003Q1 2004Q2 2004Q3 2004Q4 2004Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010 Buyouts Exits

China outbound private equity M&A activity by deal value (US$m) 2003 - H1 2010

5,000

4,000

3,000

Deal value (US$m) 2,000

1,000

0

Q1 2003Q2 2003Q3 2003Q4 2003Q1 2004Q2 2004Q3 2004Q4 2004Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009Q1 2010Q2 2010 Buyouts Exits

70 Over the past seven-and-a-half years, Energy, China outbound M&A deal volume by sector, 2003 - H1 2010 Mining and Utilities acquisitions accounted for fully 30% of all Chinese outbound buys 2% 2% 1% by volume. 20% of deals were of Industrials 1% & Chemicals targets, and another 17% of 3% Energy, Mining & Utlilities 3% transactions were acquisitions in the TMT Industrials & Chemicals 5% 29% industry. Interestingly, Consumer Retail and TMT Financial Services – traditionally sectors which Consumer 7% garner the most M&A publicity – were targeted Financial Services by only 10% and 7% of acquisitions respectively. Business Services Cumulative deal value showed that the impact Transportation 10% from Energy, Mining & Utilities deals was Pharma, Medical & Biotech proportionally greater than the proportional Agriculture volume of those transactions, as a result of the Leisure outsized values of such deals. Indeed, Chinese 20% Construction bidders spent a total of US$94.8bn on these 17% Real Estate foreign assets. Furthermore, buyers invested an additional US$19.6bn making acquisitions in the Financial Services sector, and another US$11.1bn in the Industrials & Chemicals sector.

China outbound M&A deal value (US$m) by sector, 2003 - H1 2010

1% 1% <1% 1% <1% 1% <1% Energy, Mining & Utlilities 3% Over the past seven-and-a- Financial Services 6% half years, Energy, Mining Industrials & Chemicals TMT 8% and Utilities acquisitions Consumer accounted for fully 30% of Agriculture Business Services all Chinese outbound buys Construction 13% by volume. 65% Pharma, Medical & Biotech Transportation Real Estate Leisure

Emerging from the twilight: the next chapter of Chinese outbound M&A 71 China outbound M&A deal volume by sector, H1 2010 Interestingly, outbound Chinese M&A sector splits 2% in H1 2010 by volume were broadly unchanged, 3% 1% 3% with Energy, Mining and Utilities acquisitions 4% Energy, Mining & Utlilities still accounting for the lion’s share of deal Industrials & Chemicals flow. In fact, the dominance of this particular 7% TMT sector increased by 10 percentage points to a 39% Consumer 40% market share over the period. Meanwhile, 7% Financial Services Industrials & Chemicals transactions continued to Leisure make up one-fifth of the total number of China's Agriculture outbound purchases. Pharma, Medical & Biotech However, while Energy, Mining and Utilities 14% Business Services transactions continued to account for the Real Estate bulk of the market by value over H1 2010, the relative amount spent on Financial Services buys 20% has dwindled, while the proportional amount China outbound M&A deal value (US$m) by sector, H1 2010 invested in Industrials & Chemicals acquisitions – traditionally a defensive sector – has risen. <1% <1% <1% <1% 1% Looking at outbound country splits, Chinese <1% Energy, Mining & Utlilities 5% acquirers have undertaken 153 acquisitions of Industrials & Chemicals North American assets since the beginning of 8% Financial Services 2003, amounting to more than one-quarter Agriculture (27%) of outbound deals. Western Europe and TMT South East Asia were also popular destinations 10% Consumer in which to transact, accounting for a further 92 Pharma, Medical & Biotech and 88 outbound deals respectively. Purchases of Leisure Australasian assets also accounted for 14% of all Business Services purchases (equating to some 80 acquisitions). Real Estate 74%

China outbound M&A deal volume by region, 2003 - H1 2010

1% North America 2% 1% Western Europe 2% 1% While Energy, Mining and 2% 1% South East Asia Utilities transactions 3% Australasia 3% 27% South Asia continued to account for 4% Japan South America the bulk of the market by 7% Africa value over H1 2010, the Central & Eastern Europe Korea relative amount spent on Northern Europe Financial Services buys Middle East 14% 16% Central Asia dwindled over the period. North Asia 16% Southern Europe

72 The picture remained broadly unchanged when China outbound M&A deal value (US$m) by region, 2003 - H1 2010 looking at outbound deal value, with North 1% North America American purchases totaling some US$41.6bn 1% Western Europe 1% <1% and Western European acquisitions amounting 2% <1% South East Asia 3% to US$30.6bn. Another US$13.3bn was spent on Australasia 5% acquiring South East Asian targets. Africa 28% One very interesting point about outbound 5% Central & Eastern Europe deal flow by geography between the long run South America (2003-H1 2010) and the short run (H1 2010 only) 7% Northern Europe is the sharp rise in the relative proportion of bids Central Asia targeting Australasian businesses. Over the first South Asia six months of 2010, one-fifth of all outbound 8% Middle East deals focused on such targets, six percentage Korea points more than witnessed during the whole 21% Japan seven-and-a-half year period. 9% Southern Europe At the same time, the largest jump in terms of 9% North Asia actual spending by geography was in South China outbound M&A deal volume by region, H1 2010 America. Between 2003 and H1 2010, the 2% North America continent witnessed just 5% of the total amount 3% 2% 3% spent abroad on outbound acquisitions; yet Australasia 4% when looking at H1 2010 data alone, buys in 27% Western Europe South America accounted for 26% of overall 4% South East Asia M&A investments abroad. This sudden spike 4% Central & Eastern Europe can be chiefly attributed to CNOOC's US$3.1bn Japan 4% acquisition of a 50% stake in Argentinean Oil Northern Europe & Gas exploration and production firm Bridas 4% South America Corporation in March 2010. South Asia Africa 10% 19% Middle East Central Asia 14% Korea

China outbound M&A deal value (US$m) by region, H1 2010 <1% <1% North America <1% <1% South America 3% <1% 3% Africa 7% Northern Europe 31% Western Europe Australasia 8% South East Asia Central & Eastern Europe Central Asia 9% Japan South Asia Middle East 12% 25% Korea

Emerging from the twilight: the next chapter of Chinese outbound M&A 73 Top 20 China outbound deals, 2003 – H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 01/02/2008 C Rio Tinto Plc (12% Mining United Alcoa Inc; Aluminum China 14,000 Stake) Kingdom Corporation of China (Chinalco) 24/06/2009 C Addax Petroleum Energy Canada Sinopec International China 8,800 Corporation Petroleum Exploration and Production Corporation 25/10/2007 C Standard Bank Group Financial Services South Industrial and Commercial China 5,413 Limited (20% Stake) Africa Bank of China Limited 14/07/2006 C Rosneft Oil Company Energy Russia BP plc; Petroliam Nasional China Rosneftegaz Russia 5,345 OAO (7.58% Stake) Berhad; China National Petroleum Corporation 12/04/2010 C Syncrude Canada Ltd Energy Canada Sinopec International China ConocoPhillips USA 4,650 (9.03% Stake) Petroleum Exploration and Production Corporation 22/08/2005 C PetroKazakhstan Inc Energy Canada CNPC International Limited China 3,932 07/07/2008 C Awilco Offshore ASA Energy Norway China Oilfield Services Limited China 3,777 20/06/2006 C OAO Udmurtneft Energy Russia China Petroleum & Chemical China TNK-BP Holding OAO Russia 3,500 Corporation 14/03/2008 C Tuas Power Limited Energy Singapore SinoSing Power Pte Ltd China Pte Ltd Singapore 3,103 14/03/2010 P Bridas Corporation Energy Argentina CNOOC International Limited China Bridas Energy Holdings Ltd Argentina 3,100 (50% Stake) 20/05/2007 C Blackstone Group Financial Services USA China Investment Corporation China 3,000 Holdings LLC (Minority Stake) 23/07/2007 C Barclays Plc (3.1% Financial Services United China Development Bank China 2,980 Stake) Kingdom 13/08/2009 C Felix Resources Limited Mining Australia Yanzhou Coal Mining China 2,568 Company Ltd 31/08/2004 C National Grid Transco Utilities (other) United Plc; Cheung Hong United 2,494 plc (North England Kingdom Kong Infrastructure Holdings Kong Kingdom distribution network) Limited; Li Ka Shing (Overseas) Foundation 28/03/2010 P Sonangol Sinopec Energy Angola Sinopec Corporation Hong Sinopec Overseas Oil & Gas China 2,457 International Limited Hongkong International Kong Limited (55% Stake) Limited 09/01/2006 C South Atlantic Energy Nigeria China National Offshore Oil Hong South Atlantic Petroleum Nigeria 2,268 Petroleum (OML 130) Corporation Ltd Kong Ltd. (45% Stake) 25/10/2006 C Argymak Trans Energy Kazakhstan CITIC Group China CITIC Canada Petroleum Canada 1,910 Service LLP; Limited Karazhanbasmunai, JSC; Tulpar Munai Services LLP 25/09/2008 C Tanganyika Oil Energy Canada China Petroleum & Chemical China 1,813 Company Ltd. Corporation 28/03/2010 C Volvo Cars Corporation Automotive Sweden Zhejiang Geely Holding Group China Ford Motor Company USA 1,800 Company Limited

C = Completed; P = Pending

74 The largest Chinese outbound transaction to take place since the beginning of 2003 saw Chinalco, the Chinese aluminum producer, along with Alcoa, its US counterpart, take a 12% stake in Rio Tinto, the world’s largest Mining company, for US$14bn in February 2008. Alcoa spent a total of US$1.2bn on the investment, with the remainder coming from Shining Prospect, Chinalco's wholly- owned acquisition vehicle based in Singapore. The deal was brokered primarily as a blocking maneuver to prevent BHP Billiton’s previous bid for control of Rio Tinto, which, if completed, would have resulted in a change to the pricing structure of aluminum, a product which is of vital importance to Chinese manufacturers. Interestingly, Chinalco received financing equal to the total deal value from state-owned China Development Bank in order to secure the target. The second-largest deal was an Energy transaction and saw Sinopec acquire complete control of Addax Petroleum, a Canadian corporation, for US$8.8bn in June 2009. The offer price stood at a premium of 15.7% to Addax’s share price the day prior to the announcement, which was more than enough to convince shareholders to sell. Ultimately, 98% did so, much more than the 67% threshold required.

Emerging from the twilight: the next chapter of Chinese outbound M&A 75 Top 20 China outbound deals, H1 2010

Announced Status Target Company Target Sector Target Bidder Company Bidder Seller Company Seller Value Country Location Country (US$m) 12/04/2010 C Syncrude Canada Ltd Energy Canada Sinopec International China ConocoPhillips USA 4,650 (9.03% Stake) Petroleum Exploration and Production Corporation 14/03/2010 P Bridas Corporation Energy Argentina CNOOC International Limited China Bridas Energy Holdings Ltd Argentina 3,100 (50% Stake) 28/03/2010 P Sonangol Sinopec Energy Angola Sinopec Corporation Hong Sinopec Overseas Oil & Gas China 2,457 International Limited Hongkong International Kong Limited (55% Stake) Limited 28/03/2010 C Volvo Cars Corporation Automotive Sweden Zhejiang Geely Holding Group China Ford Motor Company USA 1,800 Company Limited 18/05/2010 P Plena Transmissoras SA Energy Brazil State Grid Corporation of China Plena Transmissoras SA Brazil 1,721 (Seven Brazilian trans- China mission companies) 23/03/2010 C CraFarms Ltd (Certain Agriculture New Natural Dairy NZ Holdings Ltd Hong CraFarms Ltd New 1,058 assets) Zealand Kong Zealand 04/02/2010 C Apax Partners LLP Financial Services United China Investment Corporation China 956 (2.3% Stake) Kingdom 13/05/2010 C Penn West Energy Trust Energy Canada China Investment Corporation China Penn West Energy Trust Canada 799 (oil sands properties in Alberta) (45% Stake) 04/03/2010 C ACL Bank Public Financial Services Thailand Industrial and Commercial China 453 Company Limited Bank of China Limited (80.74% Stake) 13/05/2010 C Penn West Energy Trust Energy Canada China Investment Corporation China 425 (5.24% Stake) 18/04/2010 P Sul Americana de Mining Brazil Honbridge Holdings Limited Hong Votorantim Novos Brazil 390 Metais S.A Kong Negocios Ltda ; Lit Mining Cooperatief U.A. 28/04/2010 C Seabank Power Limited Energy United Cheung Kong Infrastructure Hong BG Group Plc United 322 (50% Stake) Kingdom Holdings Limited Kong Kingdom 22/03/2010 P Spring Vast Limited Mining Russia FinTronics Holding Company Hong Truffle Rich Holdings British 300 Limited Kong Limited Virgin Islands 12/04/2010 P Digital Sky Financial Services Russia Tencent Holdings Limited China 300 Technologies Limited (10.26% Stake) 06/01/2010 P African Minerals Mining Channel China Railway Materials China 244 Limited (12.5% Stake) Islands Commercial Corporation 01/03/2010 C Chariot Resources Mining Canada CST Mining Group Limited Hong 211 Limited Kong 24/03/2010 C Iron Metals Mining British China Life Insurance (Overseas) Hong Belmore Overseas Limited British 200 International Limited Virgin Company Limited Kong Virgin Islands Islands 17/04/2010 P PPL Holdings Pte Ltd Industrial Singapore Yangzijiang Shipbuilding China Baker Technology Limited Singapore 155 Products and Holdings Ltd; Mediterranean Services Success Group Inc 12/03/2010 C Cape Lambert Lady Mining Australia CST Mining Group Limited Hong Cape Lambert Iron Ore Australia 124 Annie Exploration Kong Limited Pty Ltd 06/04/2010 P Gloucester Coal Ltd Mining Australia Noble Group Limited Hong 118 (12.3% Stake) Kong

C = Completed; P = Pending

76 Sinopec has also been acquisitive over the near- term, completing this year's largest outbound acquisition thus far in the first half of 2010. The deal in question was the US$4.65bn acquisition of a 9.03% stake in Syncrude Canada, the Canadian crude oil producer, which was announced in April 2010. The deal came about as vendor ConocoPhillips aimed to divest up to US$10bn in assets, looking to create additional value for shareholders. Next up was the aforementioned US$3.1bn 50% stake acquisition by compatriot CNOOC, in Argentina’s Bridas Corporation, an Oil & Gas exploration and production company headquartered in the British Virgin Islands. The deal was by far the largest acquisition undertaken in South America over the period, with the second-largest South American investment taking place just two months later and witnessing the State Grid Corporation of China, the state-owned electricity distributor and power company, acquire seven Brazilian transmission companies of Plena Transmissoras, the Brazilian provider of power transmission services, for US$1.7bn.

The largest outbound M&A deal to be undertaken in South America saw CNOOC purchase a 50% stake in Argentina's Bridas Corporation.

Emerging from the twilight: the next chapter of Chinese outbound M&A 77 Key contacts

Chinese Services Group Leadership Co-Chairman Co-Chairman Global Programme Director Lawrence Chia Mark Robinson Timothy Klatte Beijing Shanghai Tel: +86 10 8520 7758 Tel: +1 416 601 6065 Tel: +86 21 6141 2760 Email: [email protected] Email: [email protected] Email: [email protected]

Regional Contacts - Report Contributors M&A Partner M&A Partner Consulting Partner Anita Ding Eric Leung Po Hou Shanghai Hong Kong Beijing Tel: +86 21 6141 1648 Tel: +852 2852 6603 Tel: +86 10 8512 5337 Email: [email protected] Email: [email protected] Email: [email protected]

Tax Partner Tax Partner Vivian Jiang Kevin Ng Shanghai Beijing Tel: +86 21 6141 1098 Tel: +86 10 8520 7501 Email: [email protected] Email: [email protected]

National Industry Practice Leadership Consumer Business & Transportation Life Science & Technology, Media & Eric Tang Yvonne Wu Telecommunications Shanghai William Chou Tel: +86 755 8246 3255 Ext.8085 Tel: +86 21 6141 1570 Beijing Email: [email protected] Email: [email protected] Tel: +86 10 8520 7102 Email: [email protected] Energy & Resources Manufacturing Charles Yeung Rosa Yang Hong Kong SAR Shanghai Tel: +852 2852 5601 Tel: +86 21 6141 1578 Email:[email protected] Email: [email protected] Global Financial Services Industry Real Estate Dora Liu Richard Ho Shanghai Hong Kong SAR Tel: +86 21 6141 1848 Tel: +852 2852 1071 Email: [email protected] Email: [email protected] Dr. Peng-Cheng Wang Beijing Tel: +86 10 8520 7123 Email: [email protected]

78 Global CSG contacts

CSG Asia Pacific CSG Europe South & Southern Africa Dirk Dewitte Mark Casey Australia Austria Tel: +352 45145 2363 Tel: +27 11 806 5205 Keith Jones Herbert Kovar Email: [email protected] Email: [email protected] Tel: +61 8 9365 7233 Tel: +431 53 700 3600 Email: [email protected] Email: [email protected] Malta West & Central Africa Nick Captur Evans Tomety Guam Belgium Tel: +356 2343 2714 Tel: +234 01 2717 800 Daniel Fitzgerald Coen Ysebaert Email: [email protected] Email: [email protected] Tel: +1 371 646 3884 Tel: +32 9 393 7536 Email: [email protected] Email: [email protected] Netherlands Mauritius Roger Brands Jean-Noel Wong India Central Europe Tel: +31 8828 81097 Tel: +230 203 8000 Atul Dhawan John Ploem Email: [email protected] Email: [email protected] Tel: +91 124 679 2030 Tel: +420 246 042 634 Email: [email protected] Email: [email protected] Norway The Middle East Kjetil Nevstad Ahmed Nimer Commonwealth of Independent Tel: +47 23 27 92 98 Tel: +971 2 674 1659 Claudia Lauw States Email: [email protected] Email: [email protected] Tel: +62 21 2312879 Ext.6993 Oleg Berezin Email: [email protected] Tel: +749 5 787 0600 Ext.2188 Portugal CSG North & South America Email: [email protected] Luis Miguel Belo Japan Tel: +351 21 0427-611 Ext.5111 Brazil Hitoshi Matsumoto Cyprus Email: [email protected] Ricardo de Carvalho Tel: +81 3 6213 3501 Christis M. Christoforou Tel: +55 11 5186 1776 Email: [email protected] Tel: +357 22 360 411 Spain Email: [email protected] Email: [email protected] Fernando Pasamon Malaysia Tel: +34 915 145000 Ext.1576 Canada Theng Hooi Tan Denmark Email: [email protected] Mark Robinson Tel: +603 7723 6590 Klaus Honoré Tel: +1 416 601 6065 Email: [email protected] Tel: +45 36 102 734 Sweden Email: [email protected] Email: [email protected] Torbjorn Hagenius New Zealand Tel: +46 75 246 3168 Caribbean Cluster Jenny Liu Finland Email: [email protected] John Johnston Tel: +64 9 303 0788 Petri Heinonen Tel: +1 441 299 1301 Email: [email protected] Tel: +358 20 755 5460 Switzerland Email: [email protected] Email: [email protected] Reto Savoia Tel: +41 44 421 6357 Central & South America Diane Yap France Email: [email protected] Eduardo De Bonis Tel: +63 2 812 0535 Eric Dugelay Tel: +54 11 5129 2003 Email: [email protected] Tel: +33 1 5561 5413 Turkey Email: [email protected] Email: [email protected] Anthony Wilson Singapore Tel: +90 212 366 6063 Chile Ernest Kan Germany Email: [email protected] Juan Echeverria Tel: +65 6530 5517 Mathias Kessler Tel: +562 7 297 224 Email: [email protected] Tel: +49 211 8772 2601 United Kingdom Email: [email protected] Email: [email protected] Colin Hudson Tel: +44 20 7007 0857 Colombia Nak Sup Ko Greece Email: [email protected] Carlos Amador Lopez Tel: + 82 2 6676 1103 George Cambanis Tel: +57 1 546 1810 Email: [email protected] Tel: +30 210 678 1226 CSG Africa & The Middle East Email: [email protected] Email: [email protected] Taiwan Angola Ecuador Scott Lee Iceland Rui Santos Silva Jorge Brito Tel: +866 2 2545 9988 Ext.7800 Agnar Már Olsen Tel: +351 9175 41598 Tel: +539 4 245 2770 Email: [email protected] Tel: +354 580 3155 Email: [email protected] Email: [email protected] Email: [email protected] Thailand Eastern Africa Mexico Subhasakdi Krishnamra Ireland Nikhil Hira David Tel: +66 2676 5700 Lorraine Griffin Tel: +254 0 20 4230 377 Tel: +52 656 688 6518 Email: [email protected] Tel: +353 1 417 2992 Email: [email protected] Email: [email protected] Email: [email protected] Vietnam Francophone Africa Ha Thi Thu Thanh Israel Eric Dugelay Clarence Kwan Tel: +84 4 3852 1117 Amity Weber Tel: +33 1 5561 5413 Tel: +1 212 436 5470 Email: [email protected] Tel: +972 3 608 5549 Email: [email protected] Email: [email protected] Email: [email protected] Francophone Africa Italy Francois De Senneville (Tax) Domenico Russo Tel: +33 1 5561 6476 Tel: +39 02 8332 5098 Email: [email protected] Email: [email protected]

Emerging from the twilight: the next chapter of Chinese outbound M&A 79 Contact details for Deloitte’s China Practice

Beijing Hong Kong SAR Suzhou Deloitte Touche Tohmatsu CPA Ltd. Deloitte Touche Tohmatsu Deloitte Business Advisory Services Beijing Branch 35/F One Pacific Place (Shanghai) Limited 8/F Deloitte Tower 88 Queensway Suzhou Branch The Towers, Oriental Plaza Hong Kong Suite 908, Century Financial Tower 1 East Chang An Avenue Tel: +852 2852 1600 1 Suhua Road, Industrial Park Beijing 100738, PRC Fax: +852 2541 1911 Suzhou 215021, PRC Tel: +86 10 8520 7788 Tel: +86 512 6289 1238 Fax: +86 10 8518 1218 Macau SAR Fax: +86 512 6762 3338 Deloitte Touche Tohmatsu Chongqing 19/F The Macau Square Apartment H-N Tianjin Deloitte & Touche Financial Advisory 43-53A Av. do Infante D. Henrique Deloitte Touche Tohmatsu CPA Ltd. Services (China) Limited Macau Tianjin Branch Room 10-12 Tel: +853 2871 2998 30/F The Exchange North Tower 13/F International Trade Center Fax: +853 2871 3033 189 Nanjing Road Chongqing Heping District 38 Qing Nian Road Nanjing Tianjin 300051, PRC Yu Zhong District Deloitte Touche Tohmatsu CPA Ltd. Tel: +86 22 2320 6688 Chongqing 400010, PRC Nanjing Branch Fax: +86 22 2320 6699 Tel: +86 23 6310 6206 11/F Golden Eagle Plaza Fax: +86 23 6310 6170 89 Hanzhong Road Wuhan Nanjing 210029, PRC Deloitte & Touche Financial Advisory Tel: +86 25 5790 8880 Services Limited Deloitte Touche Tohmatsu CPA Ltd. Fax: +86 25 8691 8776 Wuhan Liaison Office Dalian Branch Unit 2, 38/F New World International Room 1503 Senmao Building Shanghai Trade Tower 147 Zhongshan Road Deloitte Touche Tohmatsu CPA Ltd. 568 Jianshe Avenue Dalian 116011, PRC 30/F Bund Center Wuhan 430022, PRC Tel: +86 411 8371 2888 222 Yan An Road East Tel: +86 27 8526 6618 Fax: +86 411 8360 3297 Shanghai 200002, PRC Fax: +86 27 8526 7032 Tel: +86 21 6141 8888 Guangzhou Fax: +86 21 6335 0003 Deloitte Touche Tohmatsu CPA Ltd. Deloitte & Touche Financial Advisory Guangzhou Branch Shenzhen Services Limited 26/F Teemtower Deloitte Touche Tohmatsu CPA Ltd. Xiamen Liaison Office 208 Tianhe Road Shenzhen Branch Unit E, 26/F International Plaza Guangzhou 510620, PRC 13/F China Resources Building 8 Lujiang Road, Siming District Tel: +86 20 8396 9228 5001 Shennan Road East Xiamen 361001, PRC Fax: +86 20 3888 0119 / 0121 Shenzhen 518010, PRC Tel: +86 592 2107 298 Tel: +86 755 8246 3255 Fax: +86 592 2107 259 Hangzhou Fax: +86 755 8246 3186 Deloitte Business Advisory Services (Hangzhou) Company Limited Room 605, Partition A EAC Corporate Office 18 Jiaogong Road Hangzhou 310013, PRC Tel: +86 571 2811 1900 Fax: +86 571 2811 1904

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