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Categorized | Financial

Chinese join the mega-dealmakers’ club


Posted on March 31, 2016

Chinese Chairman of ChemChinaRen Jianxin gestures as he speaks during a press conference of the Syngenta's annual results presentation at the company's headquarters in Basel on February 3, 2016. State-owned China National Chemical Corp on February 3, 2016 offered $43 billion in an agreed takeover for Swiss pesticide and seed giant Syngenta, in what would be by far the biggest-ever overseas acquisition by a Chinese firm. / AFP / MICHAEL BUHOLZER (Photo credit should read MICHAEL BUHOLZER/AFP/Getty Images)©AFP

Ren Jianxin , chairman of ChemChina

    A new class of Chinese dealmaker has joined the global heavyweights of mergers and acquisitions — business leaders with the connections, confidence and backing to pursue their own multibillion-dollar takeovers, and even gatecrash others.

    In an otherwise lacklustre quarter for M&A activity, it was the bids and bargaining from China’s biggest companies that drove the country’s cross-border deals to record highs, even as previously red-hot US takeover activity fell to a two-year low.

    China’s appetite for overseas assets helped push the overall value of cross-border M&A to $311bn — representing a record 46 per cent of the $682bn in deals in the first quarter, according to Thomson Reuters data. Chinese deals, at $101bn, accounted for roughly a third of that cross-border activity, an all-time high.

    They also took China’s percentage of total global M&A activity to its highest in any quarter: 15 per cent of deals in the period involved an overseas Chinese acquirer.

    China’s dealmaking surge helped to mask a 29 per cent fall in deal value in the US, to $256bn, as M&A activity was slowed by sharp market volatility in January. Europe’s first quarter values improved on the year before, however, rising 11 per cent to $181bn.

    For a handful of politically-connected Chinese business leaders — such as Anbang Insurance’s Wu Xiaohui, ChemChina’s Ren Jianxin and HNA Group’s Chen Feng — the takeover successes of early 2016 have served as an induction into an elite club of global dealmakers: those capable of consecutive billion-dollar deals in a matter of months.

    In several cases, the businessmen have asserted their status with higher bids for existing takeover targets — upending previously agreed deals, often with superior, all-cash offers.

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    That tactic was best highlighted in March by Anbang’s chairman, who stepped into a months-old deal between Starwood Hotels & Resorts and rival US hotel group Marriott International. Earlier this week, an emboldened Mr Wu raised his all-cash offer to $14bn for Starwood, heaping greater pressure on Marriott to increase its cash-and-stock bid. Despite repeated questions about the source of his funding and warnings from the Chinese insurance regulator, Mr Wu then attempted to put to rest questions over his ability to pay, telling Chinese media he had Rmb1tn in assets.

    Anbang’s original bid for Starwood came just one day after it had secured a $6.5bn deal for 15 prime US luxury hotel properties owned by private equity group Blackstone.

    “You get extra points for certainty right now because we are closer to a ‘risk-off’ than a ‘risk-on’ market,” explains Michael Carr, global co-head of M&A at Goldman Sachs, who says this partly explains why Chinese companies are winning the fiercest bidding wars.

    In February, ChemChina succeeded in the the biggest outbound acquisition a Chinese company has made to date with its $44bn all-cash buyout of Swiss agrochemical company Syngenta — the largest-ever takeover in the chemical sector. It came a mere four months after chairman Ren finalised a $7.7bn takeover of Italian tyremaker Pirelli.

    M&A-deals chart

    Chinese aviation and logistics conglomerate HNA Group also returned to the market in the first quarter, agreeing to buy US electronics distributor Ingram Micro for $6bn in February. Just months earlier, group chairman Chen Feng had added US-listed aircraft lessor Avolon Holdings for $2.6bn and closed a $2.8bn takeover of airport operator Swissport last year.

    But this spate of deals has not been solely based on the personalities of the chairmen themselves. Experts say low interest rates, coupled with a growing reliance on in-house investment banking expertise on the mainland, have enabled the wave of first-quarter deals.

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    “Now they have the liquidity and sophistication to do this,” says Raghu Narain, head of corporate advisory at Natixis. “These leaders have been able to amalgamate the resources that have allowed them to go out.”

    China’s central bank has cut interest rates six times during the past year and a half, lowering the cost of bank financing. In addition, mainland regulators have recently granted permission, or so-called “road passes”, for multiple companies to hunt down the same takeover target.

    In November, Beijing Enterprises Water Group, Beijing Capital Group and China Everbright International, were all found to be competing for German waste management company EEW. Beijing Enterprise won the contest in February for $1.6bn.

    Miranda So, a Hong Kong-based partner at Davis Polk & Wardwell, says: “A ‘road pass’ may not mean exclusivity for a Chinese buyer, as we have seen cases where a second Chinese buyer enters bidding for the same asset.”

    China’s appetite for dealmaking

    Date Target Acquirer Activity Value ($bn)*
    Feb 2 Syngenta (US) ChemChina Chemicals 46.8
    Mar 14 Starwood Hotels & Resorts (US) Anbang Insurance-led consortium Hotels and lodging 15.2
    Mar 13 Shenzhen Metro (China) China Vanke Transportation & infrastructure 9.2
    Mar 23 YTO Express (China) Dalian Dayang Trands Transportation & infrastructure 8.8
    Mar 13 Strategic Hotels (US) Anbang Insurance Hotels & lodging 6.5
    Feb 17 Ingram Micro (US) Tianjin Tianhai Invest Technology 6.3
    Jan 15 GE’s appliance business Qingdao Haier Household and personal products 5.4
    Feb 25 GreatWall Info Industry (China) China Greatwall Computer Technology 4.9
    Jan 26 Terex Corp (US) Zoomlion Machinery 4.7
    Mar 23 Liaoning Zhongwang (China) CRED Metals & Mining 4.7
    Mar 14 CITIC Real Estate (China) China Overseas Land & Invest Real estate 4.6
    Jan 12 Legendary Entertainment (US) Dalian Wanda Media & entertainment 3.5
    Notes: * Includes debt
    Source: Thomson Reuters

    Even as M&A activity slumped in the US, the trend of large corporates seeking to lower their US tax bills by acquiring an overseas-headquartered rival remained prevalent.

    For example, US conglomerate Johnson Controls agreed a $20bn reverse takeover of Ireland-based Tyco International — a deal that would have the same effect as a so-called ‘tax inversion’.

    Meanwhile, US company IHS agreed to combine in a $13bn all-stock deal with UK-based financial information provider Markit in a deal that would create a corporate information powerhouse based in London — and also lower its tax bills.

    Anu Aiyengar, JPMorgan’s head of M&A in North America, said deal activity had slowed down in certain sectors such as healthcare and tech, which were very busy in 2015, while others — such as financial services and industrials — have picked up.

    Bankers say one area that remains ripe for further dealmaking is the consumer sector, which produced some of last year’s blockbuster transactions but saw relatively little dealmaking activity in the first quarter.

    Jens Welter, head of consumer and retail group at Credit Suisse, says the buyers are there.

    “Strategic acquirers continue to be very confident and those that pursue a specific strategy are being rewarded when it comes to M&A . . .” he says. “Overall, the larger deals that captured the headlines last year were highly complex and relied on intricate structures. Some of that will continue to happen in highly consolidated sectors.”

    Buyout groups struggle with shortage of buyers

     

    Private equity dealmakers made it through tough conditions in the debt markets in early 2016 to secure not one but two $10bn-plus buyouts by the end of the first quarter.

    But in a twist that reflects the dominance of Chinese outbound dealmaking, the biggest buyout was Chinese insurer Anbang’s $15bn cash offer to take Starwood Hotels of the US private. Classic private equity buyout groups were not bidders.

    One of the big four private equity groups, Apollo Global Management, was involved in the next-largest buyout: the $12bn acquisition of home-security group ADT. Apollo is known for its unusual skill in navigating tough debt markets to leverage deals.

    Raising debt finance proved difficult as investors nursed losses on oil and gas company bonds and became unwilling to buy into junk bonds and leveraged loans, making buyout financing more volatile.

    This year Carlyle cut the price it could pay for Veritas — the biggest buyout announced in 2015 — to $7.4bn as banks struggled to sell the debt attached to it.

    In a reflection of these conditions, Apollo had arranged fully committed financing before it announced its cash offer for ADT, including a relatively large slug of equity — $4.5bn — from funds and co-investors.

    Thanks to those two large deals, private equity-backed M&A in the first quarter surged to $52.9bn by volume, according to data compiled by Thomson Reuters — a 36 per cent increase on the same period last year.

    Take out these two deals, though, and the total is only $25.5bn — lower even than the $29bn recorded in early 2015, which at the time was the slowest three months for buyouts since 2009.

    “In January and February we were all getting a bit worried,” said Karan Dinamani, a partner at Allen & Overy. “But in the last two weeks, several processes have started.

    “Whether that translates into deal activity remains to be seen.”

    In Europe $1bn-plus deals — such as EQT’s buyout of travel company Kuoni and KKR’s acquisition of a unit from Airbus — suggest private equity dealmaking may be on the mend. Last year’s $4bn buyout of LeasePlan, a Dutch car lessor, was also successfully financed in March.

    “The tone has definitely improved, as the success of LeasePlan showed,” said Klaus Hessberger, co-head of financial sponsors for Emea at JPMorgan.

    But in some situations “you might see a little less leverage and a little more equity being used”, he added.