Focus on profit as mainland China firms pursue overseas assets
Overseas asset drive moves away from serving state goals and aims at easing political concerns
Mainland firms' offshore acquisitions are becoming less about serving strategic state goals and more about cold, hard profit.
"Chinese firms have taken a leaf out of the book of private equity players … they are looking at producing assets, looking at how you can leverage those assets," said David Wood, the head of Australian investment banking at Bank of America Merrill Lynch.
In the past, mainland firms would favour greenfield resources projects. Nowadays they would bid for more developed assets with revenue streams, around which they could build a funding model.
Minmetals' US$5.85 billion bid for Peruvian copper mine Las Bambas last month is a good example. The mine is at the late stage of development and the investment looks highly profitable.
Kim Eng analyst Alexander Latzer subtracts the US$3.5 billion that Glencore has sunk into the mine from the purchase price, and estimates that Minmetals will be getting copper reserves at 10 US cents per pound. "It's a very reasonable cost."
Mainland firms are also less concerned about securing control positions in the offshore firms they buy. This is partly to ease regulatory and political concerns in countries where the assets are targeted. US lawmakers blocked the bid from CNOOC (64 per cent owned by the government) for energy firm Unocal in 2005 because the asset was too strategic and because CNOOC was bidding for the whole firm.
These days, mainland firms are bidding for minority stakes. This reduces the nervousness of lawmakers and regulators, and lets mainland firms focus purely on the cash and business pay-off of a purchase.
One example is Dongfeng Motor's purchase of a stake in PSA Peugeot Citroen. Dongfeng originally eyed a controlling 30 per cent stake in the French carmaker but settled for a more politically palatable 14 per cent, making it equal partners with the French government and the Peugeot family.
Acquisitions are increasingly coming from privately run firms bidding for offshore businesses that help them expand out of the saturated domestic market.
Lenovo leads this model. It struggled initially with its US$1.7 billion buyout of the IBM's personal computer business, but eventually made a success of the investment. Its US$2.9 billion acquisition of Motorola's handset business, in January, will help it crack the US phone market.