A quick update to a post from May about a paper from PricewaterhouseCoopers, the business advisory services firm, on the changing trends in M&A in China. We have now somewhat belatedly come across a 12-minute podcast version.
Three members of the firm, Alan Chu, China Business Services Leader in the U.S., Curt Moldenhauer, Transaction Services partner in Shanghai and Malcolm MacDonald, Transaction Services partner in Beijing, discuss the impact of the new five-year plan on M&A and the prospects for domestic, inbound and outbound deals as a result of Chinese firms having a combination of access to a fast growing domestic market and cheap capital. No great surprises, to our minds, but the trio rounds up the trends and issues into a coherent overview.
Filed under Economy, Markets
The marketplace for M&A deals in China is changing, with many western companies fearing a less hospitable reception as a result of new tax rules and regulations. PricewaterhouseCoopers, an international management consultancy, has a new paper in its 10 Minutes series arguing that the change is far broader than that as China’s priorities shift from acquiring capital to accelerating structural reforms, a change that “calls for a fundamental shift in deal-making strategy” on the part of foreign companies.
Its key points:
- Inbound and outbound M&A in China is booming, as Chinese industries consolidate domestically and expand globally.
- Foreign investors are entering or expanding in China for the China market instead of just manufacturing in China for export markets.
- As a result, they are reassessing what Chinese partners bring to the table and cautiously exploring alternatives to wholly foreign-owned enterprises.
- Private equity has emerged as an important provider of growth capital.
- Some investors recognize that new regulations affecting M&A may be creating short-term concern, but the long-term trend is toward greater clarity in a maturing system.
Those highlights read a bit penny plain, and the underlying piece adds some color, but do they fit with your experience?
China plans to vet proposed foreign takeovers of Chinese companies in the interests of national security. The State Council says it is establishing a ministerial level committee under the National Development and Reform Commission and the commerce ministry. It will start work next month and look at proposed foreign acquisitions in areas involving national defense, agriculture, energy, resources, infrastructure, transport, technology and equipment manufacturing. It will assess their impact on economic stability, social order and the country’s technology R&D efforts.
China is not the first country to set up such inter-agency scrutiny, though not many have given theirs such a broad remit. The U.S., for example, has its Committee on Foreign Investment in the United States (CFIUS). Its mandate is narrowly national security, though some conservatives want it broadened and the committee strengthened in response to China’s growing foreign direct investment.
China attracted $106 billion in foreign direct investment in 2010, up 17% on the previous (global financial crisis wracked) year. Foreign companies have not previously faced formal review of their proposed direct investments in China on national security grounds, although informal barriers have long existed and Beijing has always held an ultimate veto. In 2008 China introduced an anti-monopoly law (and promised the national security review mechanism that has now been announced). Coca-Cola’s $2.4 billion bid to take over Huiyuan Juice in 2009 was one that got stymied on competition grounds. Before that ArcelorMittal and Russia’s Evraz Group were rebuffed in attempts to buy into the steel industry.
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Reuters is reporting that Sinochem won’t proceed with a possible bid for the world’s largest fertilizer maker, Canada’s Potash Corp., currently subject to hostile $39 billion offer from Australia’s mining giant, BHP Billiton. The state-owned chemicals group had been consulting with investment bank advisors about putting together a consortium counterbid, possibly involving several sovereign wealth funds including Singapore’s Temasek. Reuters says its sources say these discussions are dead.
Potash Corp. produces a fifth of the world’s potash. (The picture above is of a Potash Corp. mine in Saskatchewan.) While the industrial logic for a Chinese bid for the leading producer of the nutrient most essential to boosting grain production to meet China’s booming food needs was there, at least for China, any bid that would have given a customer ownership of its supplier, and thus great pricing power, was always going to be looked on askance by the Canadian government. And the more so if the bidder for such a strategic asset was not just foreign but Chinese.
This political sensitivity may have been behind Sinochem’s decision not to proceed — and we should say that Sinochem has made no public pronouncement on any aspect of its intentions in all of this beyond that it is watching the situation with interest. Our suspicion is that Sinochem has no appetite for being involved in a hostile takeover battle. State-owned companies anywhere rarely launch hostile bids and when they do, they usually end up battered and bruised. Sinochem will no doubt remember the $18.5 billion hostile bid for Unocal of California by CNOOC in 2005 which ended with China’s third-largest oil producer withdrawing with its tail between its legs after running into a wall of xenophobia.
The lesson for China’s state owned would-be multinationals is that minority partnering is a more politically adroit way to go, as the state-owned aluminum group Chinalco did in 2008 when it bought into Rio-Tinto in partnership with Alcoa. Though that wasn’t an entirely happy story in the end, it did minimize political opposition to Chinese ownership of foreign natural-resource assets.
Sinochem’s exploration of a consortium bid would have been along the same tactical lines. Even if that particular proposed deal couldn’t be made to work, either because the numbers didn’t add up or the Canadian government was seen as likely to block any foreign-led bid, the thought of taking a stake large enough to have a voice at the table but small enough not to ruffle nationalistic feathers remains sound. A Canadian-led white-knight bid for Potash Corp. is still on the cards to thwart BHP Billiton. If it happens, this Bystander wouldn’t be surprised to see Sinochem as a minority partner yet.
The consolidation of the global natural resources industry in response to the bursting of the the commodities bubble of the early years of the decade and the subsequent global recession means one of two things: more joint ventures such as the one between BHP Billiton and Rio Tinto in iron ore or more combinations within a limited group of companies who need global economies of scale.
The collapse of Chinalco’s proposed $19.5 billion investment in Rio earlier this month makes it a potential bidder for either Anglo American or Xstrata, who have embarked on a merger dance of their own. Anglo’s iron ore, platinum, coal and copper assets make it the better prize for Chinalco. Xstrata’s scrappy entrepreneurial management style would sit uncomfortably with the state-controlled giant, making the Swiss-based company a more natural partner for Brazil’s Vale. Chinalco would also be better placed to circumvent the labour and monopoly concerns the South African government has raised that any bidder for Anglo will have to deal with.
Chinalco, though, will have to come up with a deal that values Anglo at somewhere upwards of $45 billion. Anglo shareholders have already rejected Xstrata’s no premium bid, and a 30% premium is the benchmark for successful mining industry mergers. Anglo’s current market capitalisation is $35 billion. Nor would Chinalco be likely to be able to squeeze out the $700 million-1.5 billion of cost savings (taxed and capitalised worth $3 billion-6 billion) that Xstrata sees in Anglo that could justify a lower bid price.
Filed under Economy, Markets
There was obviously some wounded pride following the collapse of Chinalco’s proposed $19.5 billion investment in Rio Tinto. But to add insult to injury, Rio is now proposing an iron-ore joint venture with BHP Billiton in Western Australia.
Such a combination would account for 80% of the exports from one of China’s main sources of supply, Australia. To Chen Yanhai, who heads the raw materials department at the Ministry of Industry and Information Technology, “The potential deal has an obvious color of monopoly. The joint venture is likely to have a big impact on the Chinese steel industry as China is the world’s biggest iron ore importer” (from CCTV via Reuters). “The deal should be subject to Chinese anti-monopoly law,” Chen adds.
That sting in the tail will raise some eyebrows among international M&A bankers. China’s anti-monopoly law says the ministry has to approve business combinations if the joint global revenue of the companies involved exceeds 10 billion yuan ($1.5 billion) or 2 billion yuan in China if two or more of the firms involved each cross a threshold of 400 million yuan of revenue in China during the previous accounting year. Both BHP and Rio have blazed past that. In the year ended June 30, the former’s revenue in China was $11.7 billion while the latter’s was $10.8 billion.
It is unclear what remedies would be imposed if the Rio-BHP deal was found to be monopolistic by Beijing (or even if it could apply such a ruling), but Chen indicated aid to domestic miners could be one. There have already been discussions around this between Canberra and Beijing at the diplomatic level, we hear. And BHP says it and Rio would be discussing the potential regulatory issues with Chinese officials, according to Reuters.
Meanwhile, Chinalco has to decide what to do with the stake in Rio it does hold, and whether to take up its allotment of Rio’s rights issue that is replacing its investment. It could dump its stock with a grumpy flourish and take the loss, not do that but not take up its rights issue allotment, thus diluting its stake, or take up its rights and hang in to see what develops. Patience rather than petulance might well be the right virtue in this instance.
Taiwan’s three largest auto parts makers, Tong Yang Industry, TYC Brother Industrial and Depo Auto Parts Industrial, are open to investment from the mainland, Bloomberg reports. China’s car makers would get core design and manufacturing technologies they lack as assemblers and Taiwan’s parts makers would get access to on of the world’s still growing car markets. SAIC and Geely, who have acquired auto technologies in the U.K. and South Korea and Australia respectively, would be the most likely be in the vanguard of investors. Beijing lifted its ban on Taiwan investment on April 29 (see: “First Cross-Strait M&A Deals Struck“); for its part Taipei is considering opening 65 industries to mainland investment.
An unsourced report in Taiwan’s Commercial Times (here via Bloomberg) says that some of the first companies on the island to offer to sell stakes in themselves to Chinese companies may include state-owned ones. Chinese companies will be able to take part ownership of Taiwanese companies, and vice versa, from the end of this week as part of the formal improvement of ties between Beijing and Taipei.
The first mainland investment in Taiwan we’ve heard of is China Mobile’s plans to take a $530 million 12% stake in Taiwan’s FarEasTone. The first known deal, however, was in the opposite direction. Taiwanese chip maker United Microelectronics says it will buy China’s He Jian Technology in a $285 million deal that will give it 85% of the company.
A rare piece of good news for China’s beleaguered steelmakers: BHP Billiton is walking away from its bid for Rio Tinto. Aluminum Corp. of China, Chinalco and other Chinese steelmakers were among the most outspoken about fears that the combination of two of the largest natural resources companies would have too much control over iron ore prices. As we noted in Chinalco Gets Australia’s Limited Nod For Rio Tinto Stake, the Chinese steelmaker went as far as taking a stake in Rio Tinto to ensure it would have a place at the negotiating table.
BHP said the reason for dropping the bid was that asset sales that antitrust regulators in Europe would likely require would have to be done at fire-sale prices and that financing would have been difficult to secure in the current global financial crisis. Further, servicing the high level of debt that would have been involved would have been risky at a time of tight credit and diminished cash flows following the collapse in world commodity prices.
One sign of the impact of the crisis on the all-share bid is that its value had fallen from $140 billion when it was made a year ago to $66 billion now.
A sidelight on our global world: Belgian brewing giant InBev is taking over the storied U.S. brewer, Anheuser-Busch. The $52 billion roll-up of roll-ups would create the world’s largest brewer and one of the five largest consumer products companies. The pair said today that they have closed the deal now it has the regulatory clearances it needs. The big ones: the U.S., the E.U. and the U.K; the last one: China. The Commerce Ministry today approved InBev’s takeover of Anheuser-Busch’s Chinese operations under the new anti-monopoly law, but put limits on future acquisitions by the combined company. Anheuser-Busch owns 27% of China’s largest brewer, Tsingtao Beer; InBev has 28.5% of Zhujiang Beer. Anheuser-Busch InBev, as the combined company will be known, will also not be allowed to link up with the two other leading Chinese breweries, Huarun Snow Beer and Beijing Yanjing Beer. Global consolidation stops at the border.