China’s overseas buying spree will gather pace, despite weaker yuan
In the second part of a series on the impact of the yuan’s depreciation, we look at the effects on Chinese companies making acquisitions abroad
The dramatic devaluation of the yuan is making overseas acquisitions far more expensive for Chinese companies.
But far from denting their appetite for foreign assets, their recent buying spree is likely to speed up, according to analysts and industry insiders.
Onshore yuan closed at 6.8912 against the US dollar on Friday afternoon, marking a 1.1 per cent weekly drop, the biggest so far this year. China’s currency depreciated against the greenback by 5 per cent in 2015, and by Friday it had weakened by a further 6 per cent.
The rapid depreciation has pushed up the cost of foreign acquisitions by Chinese firms, because their major capital source is denominated in yuan.
According to data from Dealogic, Chinese companies had completed 470 outbound merger and acquisition (M&A) deals as of November 16, with a total value of US$ 52.41 billion.
However, the value of deals under “pending” status – meaning transactions that have not been settled yet - is almost three times greater, at US$156.33 billion, with 220 M&A deals yet to close.
The biggest pending deal is ChemChina’s US$43 billion purchase of Swiss seed giant Syngenta. The acquisition price was around 282.51 billion yuan when the deal was first announced on February 3, but now stands at 296 billion yuan, an increase of around 14 billion yuan.
Last week, the European Commission announced that it has pushed back its deadline for a decision on whether to approve the deal to March 29.
“It does not necessarily mean that the Chinese companies will have to prepare the exact amount for the currency exchange losses, as many of them are seeking overseas loans by using domestic assets as collateral. But the depreciation of the yuan would require a higher value of collateral for the same amount of loans,” said Jeffery Jin, a project manager with a Beijing based conglomerate.
Jin said currency hedging was an option for outbound acquirers, although many of them would not bet on the yuan’s continued depreciation.
Jin’s company had completed an M&A deal in the UK worth around half a billion yuan last year, and is on the way to closing a deal to acquire a US-based movie studio.
“But for sure the cost is picking up quickly as the yuan keeps falling,” he said. “As for the cash settlement part, it is vitally important to make sure you get the currency swap quota from the foreign exchange authority as soon as possible, and get the banks to make the settlement as soon as possible.”
Keith Pogson, a senior partner at accounting firm EY, said it made sense that some outbound deals carried out by Chinese firms might be brought under renewed negotiation, or even fall apart, given the intensive depreciation of the currency.
However, the yuan devaluation “is unlikely to put an end” to the trend of Chinese companies snapping up overseas assets.
“There was obviously a clearly signposted reversal of that trend after the central bank intervened in the market last year; money was clearly flowing out of the mainland, from an M&A perspective, in foreign currency-yielding assets, particularly those with strong real estate elements, such as hotels and cinemas,” he said.
“I think it is highly likely that we will see more of these sorts of deals.”
Brett McGonegal, chief executive of Hong Kong based Capital Link International, said: “I don’t believe the current yuan weakness will quell overseas M&A. In fact, it may actually speed it up.
“The currency weakness has hurt many onshore businesses, and is likely to increase the need for foreign exposure and returns.
“Chinese overseas M&A is not being driven by a currency carry or arbitrage. It is a much larger phenomenon that factors in cost of capital as only one variable amongst many others.
“This large scale acquisition spree that the Chinese have embarked upon is critical to succeeding - part of a well thought out strategy that entails moving away from quantity into quality. I don’t see near term currency weakness deterring this quest for scale, reach and intellectual property.”
Dealogic figures show that China’s outbound M&A value in the first nine months of this year has overtaken the US as the world’s largest, though the value of withdrawn deals is also rising.
The government is encouraging enterprises, both state-owned and privately owned, to strategically procure global technology, resources and know-how, Pogson said.
As a result, Chinese banks are increasing their clout in financing international M&A deals.
The nation’s lenders were the mandated lead arrangers in US$19.9 billion of global syndicated loans for M&A in the first eight months, raising their share of that market to 4.4 percent from 0.9 percent in 2015, data compiled by Bloomberg show.