Across The Border
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Chinese conglomerates to continue targeting overseas financial institutions

As European governments sell down their stakes in banks, Chinese conglomerates are ready to move in

PUBLISHED : Wednesday, 18 January, 2017, 1:40pm
UPDATED : Wednesday, 18 January, 2017, 10:43pm

The drive by Chinese companies to acquire overseas financial institutions is set to continue this year, say analysts, with European companies high on their agenda.

Financial services acquisitions were common in 2016, with 81 deals completed according to PwC’s calculations, 50 of which were privately owned enterprises.

Already this year, there have been further investment by Chinese companies in overseas financial institutions. Last week HNA group acquired New Zealand-based asset financing company UDC from ANZ New Zealand, while Fosun, the Shanghai-based conglomerate and investment company, increased its stake in Portuguese bank BCP to 30 per cent by means of a rights issue.

It’s not all been success for Chinese firms, however, as also last week Portugal’s central bank selected the US private equity firm Lone Star over China’s Minsheng Financial Holdings to enter final discussions to purchase Novo Banco, the country’s third-largest lender.

Minsheng still has the opportunity to make a new offer.

“My sense is that notwithstanding some local headwinds, China’s outbound deal activity will remain robust in 2017, both in the financial services sector, and also more generally,” said Charles Butcher an M&A partner at Eversheds.

The financial services sector does have some advantages over others, however.

My sense is that notwithstanding some local headwinds, China’s outbound deal activity will remain robust in 2017, both in the financial services sector, and also more generally

“The sector may be less impacted by new outbound regulations as they are heavily regulated in any event,” said David Brown, China and Hong Kong transactions services leader at PwC, commenting at the launch of the its latest global M&A report.

“We expect continuing strong support for outbound insurance and asset management deals,” he added.

At the end of last year it was announced that overseas investment by Chinese companies would come under greater scrutiny, which analysts linked to concerns over capital flight.

Doubts over whether Chinese companies can fund their investments are already proving to be a concern. One reason why Portugal’s central bank did not choose Minsheng for the final discussions was that the Chinese bank had been unable to provide guarantees that it could put up the necessary funds, the Financial Times reported citing Portuguese banking sources.

The bankers said the failure may have been the result of Chinese restrictions on exporting capital, the paper reported.

Nonetheless, a number of European financial institutions are still looking attractive to external buyers, including Chinese ones.

Koen Vanhaerents, global head of capital markets at law firm Baker McKenzie in Brussels, said that there are four main types of financial services assets available in Europe: institutions in distress, primarily in Southern Europe; institutions in which governments have taken significant stakes that they are now looking to sell down; those looking to consolidate and get rid of operations in countries where they are not major players; and fintech companies looking for buyers or additional investment.

All are potentially available to Chinese companies looking to invest in financial services institutions, though there is some speculation that global moves towards protectionism might become a restricting factor.

In future there may be more concern about Chinese companies investing in systemically important assets, like banks, especially Chinese state-owned enterprises which could be portrayed as being part of the Chinese state
Koen Vanhaerents, global head of capital markets, Baker McKenzie

“Western Europe has historically had no real restrictions on overseas companies buying or investing in European businesses, but while it is too early to be sure, we have started to see some more protectionist rhetoric,” said Vanhaerents.

“In future there may be more concern about Chinese companies investing in systemically important assets, like banks, especially Chinese state-owned enterprises which could be portrayed as being part of the Chinese state,” he added.

While deals are continuing to take place, the acquisition of a company in the financial services sector can also serve as a launchpad for further future deals.

Last year, Fosun acquired Luxembourg-based private bank Hauck & Aufhäuser, whose managing director in Frankfurt Reinhard Pfingsten, told the South China Morning Post that one reason for the acquisition was the bank’s knowledge of German “Mittelstand”, or small- and medium-sized companies, and that Fosun could have more targets on its list.

Another benefit that a financial services firm can provide to a Chinese conglomerate seeking further acquisitions is financing.

“Last year we saw a number of Chinese companies look to acquire insurers overseas, as they can provide a platform for further acquisitions,” Brown said.

The cash held by the insurers can be used to fund further investments, something that is particularly attractive at a time when there are restrictions on capital leaving China.

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