Where China Put Its Big Bucks In 2010: Down South America Way

South America dominates the list of the biggest overseas acquisitions by Chinese companies this year. The two biggest to date: Sinopec’s $7 billion purchase of 40% of the Brazil assets of the Spanish energy group, Repsol; and the $5.6 billion CNOOC is spending in two phases for 50% of Bridas Corp., the investment vehicle of the Argentine vertically integrated energy group, Bridas. Bridas Corp.’s primary asset is Pan-American Energy (PAE). The partners are buying out BP’s 60% stake in PAE as BP raises cash to put in a piggy bank for any obligations arising out of the Deepwater Horizon accident, turning what looked in March like an iffy investment by CNOOC into something much more promising by the end of November.

Sinopec has since also picked up the U.S. oil company Occidental’s production and development assets in Argentina for $2.5 billion, the fourth biggest overseas investment by a Chinese company this year. The third biggest was Sinochem’s $3.1 billion purchase of a 40% stake in Statoil’s Peregrino subsalt field off the Brazilian coast. Add in a couple of smaller deals in Venezuela and Chinese firms have secured this year stakes in six projects that will eventually be producing upwards of 570,000 barrels of oil a day.

China’s state oil companies have long had a toe-hold in the region, but this year represents a big step forward, including diversifying China’s energy dependence on Venezuela. These deals have not only secured future oil supplies, they are also piecing together a vertical supply chain that includes refining, trading and storage — and further downstream power generation and distribution. State Grid, the world’s largest power utility and another state-owned behemoth, spent nearly $1 billion to acquire seven power distributors in Brazil as part of a deal it has won to be operate the power distribution system in densely populated southeastern Brazil.

Taken together those seven acquisitions would make a list of the ten largest overseas acquisitions by Chinese companies in 2010. As well as securing energy supplies for China’s own fast growing economy, Chinese companies will be well positioned to profit from the domestic growth of the emerging economies of South America.

In comparison the other big overseas acquisitions of the year seem small beer. PetroChina spent $1.6 billion to acquire Arrow, an Australian coal seam and power distribution company, in a joint bid with Royal Dutch Shell valued at $3.2 billion overall. Chinalco spent $1.3 billion to buy 45% of Rio Tinto’s Simandou iron ore business in Guinea through its Chalco subsidiary. China Huaneng Group, the country’s largest electricity producer, paid $1.2 billion for GMR Infrastructure’s 50% stake in InterGen, a U.S.-based utility that runs power plants in Britain, the Netherlands, Mexico, Australia and the Philippines.

The biggest industrial foreign acquisition was Geely’s $1.8 billion acquisition of Volvo from Ford Motor, the largest piece of business done by a company not state owned. The next largest industrial acquisition was the purchase of Nexteer, a parts-maker bought from GM by Pacific Century Motors, a joint venture between Tempo Group and the investment arm of the Beijing municipal government, a deal valued at less than $500 million.

Sinochem Reportedly Backs Off Potash Corp., But How Far?

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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.