More Chinese firms to buy in Europe

PUBLISHED : Monday, 11 June, 2012, 12:00am
UPDATED : Monday, 11 June, 2012, 12:00am


Chinese firms are expected to increase their merger and acquisition activities this year as they seek opportunities arising from Europe's sovereign debt crisis.

Fang Jian, a managing partner at global law firm Linklaters, predicts that such deals would more than double from last year.

Over in Spain for instance, Telefonica, the country's largest phone company, has signed an agreement with China Unicom to sell almost half its stake in China Unicom back to China's No 2 telecom operator.

But Telefonica will remain a key shareholder in China Unicom, as it has agreed to retain a 5.01 per cent stake for 12 months after the sale's conclusion at the end of next month.

'The deal reflects [Telefonica's] ... decision to manage pro-actively its asset portfolio and will allow Telefonica to increase its financial flexibility,' the Spanish firm said.

The two companies remained committed to their strategic alliance, it added.

Telefonica recently posted a 53.9 per cent dive in first-quarter earnings to Euro748 million (HK$7.26 billion) from a year earlier despite flat revenues of Euro15.51 billion.

The lower profit was partly due to a Euro337 million write-down on its 10 per cent indirect stake in Telecom Italia and weaker sales in Europe.

Last year, mainland firms' overseas acquisition deals reached a record of US$42.9 billion, up 12 per cent from 2010, according to PricewaterhouseCoopers (PwC).

In all, 207 overseas acquisition deals were signed last year, up 10 per cent from 2010. 44 deals were with European firms, up from 25 such deals in 2010, according to PwC.

'Double is a conservative estimate,' said Linklaters' Fang. 'There are many who are keen to sell in Europe and interested buyers from both state-owned enterprises (SOE) and private companies on the mainland.' He said the growing flow in deals came as European firms were facing a liquidity squeeze and industry-wide changes, while debt-stricken nations such as Spain and Portugal were looking to reduce their equity in some companies.

'One government is particularly interested in selling its stake in an airport to a mainland SOE as a friendly gesture to the Chinese government, in the hope of building up the economic and trade relationship,' Fang said.

Chinese state-owned firms are interested to invest in or acquire European infrastructure and utility companies as they could deliver stable returns - an important consideration for players such as China Investment Corporation (CIC), the manager of China's sovereign wealth fund.

In January, CIC said it had bought an 8.68 per cent stake in Thames Water, a utility firm that serves London. The purchase was the fund's first in Britain.

Last month, the State Grid Corporation of China said it had agreed to buy electricity transmission assets in Brazil from Spain's Actividades de Construccion y Servicios for US$531 million and shouldering debts of US$411 million.

For years Beijing has been encouraging Chinese firms to invest abroad so as to gain greater global economic clout and to help reduce the nation's vast foreign-exchange reserves.

Fang says Chinese firms are likely to invest in or acquire manufacturing firms in Germany and Italy for their state-of-the-art technological capabilities.

As for Chinese steel firms with overcapacity problems, they may seek to buy manufacturing firms, such as a car company, to ensure stable demand for their steel products, Fang says.

He also says that European luxury brands and biotechnology and pharmaceutical firms are appealing investment targets to cashed-up private Chinese firms.

In the case of Fosun International, a Shanghai-based private conglomerate, it paid more than Euro84 million last year for a 9.5 per cent stake in Greek retail giant Folli Follie.

Last year, China's direct investment in Europe last year tripled to US$10 billion.