China delivers record outbound M&A resultsDOWNLOAD
19 October 2011: Outbound merger and acquisition (M&A) activity in China reached record-breaking levels in 2010 with a total deal value of US$62 billion (up 157 % on the previous year), according to the latest report from professional services firm Deloitte, “Borderless, boundless: 2011 Greater China outbound M&A spotlight.”
Keith Jones, Leader of Deloitte’s Chinese Services Group in Australia said that despite ongoing economic volatility and a slight decline in total deal values in the first half of 2011, Chinese outbound investment would play an increasingly important role in driving the global economy, with the Energy and Resources (E&R) sector continuing to benefit from a still booming China.
“Energy and resources projects accounted for almost a third of China’s outbound investments in 2010 with a total deal value of US$49B, 31% of which was invested in acquiring Australian E&R assets,” Mr Jones said.
The second wave
Mr Jones said that while E&R companies would continue to be the most popular sector for outbound investment, a shift in focus by the Chinese Government would benefit more value-added industries, such as Consumer Business & Transportation (CB&T) and Technology, Media & Telecommunications (TMT), which together accounted for 29% of total deal volume in the first half of 2011.
“Ratified earlier this year, the Chinese Government’s 12th Five Year Plan has shifted the focus from rapid expansion to balanced and sustainable growth. This means we’ll see a gradual decline in the outright acquisition of resources that we’ve traditionally seen as Chinese companies begin to pursue a diversified set of objectives designed to encourage the acquisition of less tangible assets such as new technologies, operational best practices and brands,” Mr Jones said.
“This second wave of investment means corporate China is on the cusp of a spending spree that is likely to see a resurgence in outbound investment that will be increasingly driven by the Chinese Government’s strategy to not only bring China to the world, but the world to China.”
“As a result, relationship building, lobbying and collaborative partnerships are quickly becoming key for many of China’s cross-border activities and we’re seeing more joint ventures and strategic partnerships with foreign counterparts in order to bring the best international technologies and operations into China.”
Regulatory Change creates greater scrutiny
“The first wave of Chinese outbound investment provided excellent experience for Chinese investors and was focussed on the rapid acquisition of strategic resources. However, a number of costly projects are yet to deliver value,” Mr Jones said.
“That experience has no doubt been a catalyst for the Chinese Government’s decision to introduce a raft of new regulations designed to ensure that State Owned Enterprises (SOEs) don’t pursue international investments that are overpriced, strategically unsound or are unlikely to succeed.”
Under the new rules, SOEs looking at offshore acquisitions will now have to get a third-party appraiser to independently value their target and provide the State-Owned Assets Supervision and Administration Commission (SASAC) with the results.
“The new regulations have elevated the importance of deal price and profitability in Chinese acquisitions to a new high and, as a result, we’ve already seen some real-life deal breakers where SOEs have backed away from major negotiations due to concerns they won’t be able to justify the deal’s value to SASAC.”
Mr Jones said that while the first half of this year saw a decline in large-cap deals, lower mid-market acquisitions ($15-$250US) surged during 2010, rising from 37% to 61% of the market.
“This rising popularity of smaller scale acquisitions could be a result of these new regulations designed to encourage greater pricing discipline or it could be because of the financing structures Chinese companies are now offering,” he said.
New financing options appeal to emerging markets
“These financing structures have proven very attractive to new mining ventures that require significant capital expenditure to fund excavation and infrastructure development, particularly in emerging markets, where increasing amounts of Chinese E&R investment appears to be focused.”
Mr Jones said that with global competition for resources continuing to rise, Chinese E&R companies looking for quality assets were extending their reach to some of the world’s most remote, undeveloped and dangerous regions, including the DRC, Mongolia, Yemen, Syria and Angola.
“Every Mining or Oil & Gas operation needs adequate transportation, energy and water infrastructure in place to support the extraction and production of the resource. Without those things, the investment is probably not going to be viable and an otherwise attractive deal may become a complex catch-22 situation,” Mr Jones said.=
“Chinese companies keen on investing in emerging markets are addressing the problem by taking on the task of constructing the infrastructure necessary to make projects viable, but lowering their M&A bids as a partial recompense for this fiscal effort.”
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