Mergers & Acquisitions

Will China’s stalling shopping spree regain its pace in 2018? Geely and Fosun offer a clue

PUBLISHED : Friday, 09 March, 2018, 4:50pm
UPDATED : Friday, 09 March, 2018, 11:18pm

When Geely Automobile’s first compact car, the CK, rolled off the assembly line at Li Shufu’s factory in Hangzhou, it was a lookalike of a Mercedes-Benz W203 C-Class sedan, featuring the German marque’s horizontal bar grille and round headlamps. The resemblance was close enough for Mercedes’ owner Daimler AG to issue a cease-and-desist letter to Li to stop the knock-off.

In his own defence, Li famously observed that a car is essentially the combination of four wheels, an engine with two sofas. “By taking down a car part by part, one gets a basic idea of how a car is put together,” he said during a 2009 interview with state broadcaster China Central Television.

Fast forward a decade from the CK model, Li is now Daimler’s largest single shareholder, after having paid an estimated US$9 billion to amass a 9.69 per cent stake from the open market. His company, which began life as a maker of refrigerator compressors in Zhejiang province, lavished an estimated US$4.3 billion last year alone in global acquisitions, buying 49.9 per cent of Malaysia’s largest carmaker Proton, 51 per cent of the UK sports car maker Lotus Cars, and 8.2 per cent of Swedish truck maker AB Volvo. For good measure, Geely also bought 51.1 per cent of Saxo Bank, the Danish online financial products trading platform.

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In 2006, Geely paid US$1.9 billion to buy Volvo Cars as well as Manganese Bronze, the company that assembles the iconic London black taxi.

That’s no mean feat for a farmer’s son from Taizhou, a city of 6 million people in the hub of China’s private entrepreneurship. Wenzhou, the global factory for shoes and cigarette lighters, lies to the south, while the provincial capital Hangzhou - home to the world’s biggest online shopping platform Alibaba Group Holdings - lies further north.

Li, with a net worth estimated at US$17.4 billion for a 10th position on the Hurun China Rich List, epitomises how entrepreneurs in the world’s most populous nation had been lifted through the economy's 9.8-per cent per annum average growth since 1992.

In the five years since 2013 during the first term of Chinese President Xi Jinping, private entrepreneurs made up between 29 and 48 per cent of China’s top 10 outbound acquisitions, according to MergerMarket’s data.

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Five years earlier during the second term of former president Hu Jintao, state-owned companies dominated China’s global acquisitions of energy assets, mines and raw material producers, with private businesses making up between zero and 13 per cent of deals during the period.

“Private enterprises started to surface in a major way only in the last few years, such that investment from that sector into North America and Europe overtook those of state owned enterprises in 2016 in terms of total deal value,” said Teo Ee Von, a Beijing-based special counsel of international law firm Baker McKenzie who advises on corporate transactions. “A decade ago, Chinese outbound acquisitions were mainly driven by state-owned enterprises buying energy and natural resource assets.”

Financial services, technology and transportation assets were the biggest recipients of Chinese capital in the last two years, underscoring the broader diversity of interests that private enterprises sought, compared with their state-owned peers earlier.

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After quadrupling from 2013 to 2016, China’s global mergers and acquisitions shrank by 39 per cent last year to US$121.9 billion, according to MergerMarket’s data.

Concerned about freewheeling acquisitions - mostly funded by borrowings - and a flood of capital leaving the country, China’s regulators and policymakers brought the boom down. A quartet of the country’s biggest asset buyers - Anbang Group, Dalian Wanda Group, Fosun Group and HNA Group - were put on notice, forcing at least three of them to slash their assets to repay debt.

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The hiatus may just be temporary, Teo said, and it won’t derail the long-term presence of private enterprises’ in global mergers and acquisitions. With China’s foreign exchange reserve back on a rising trend for almost a year after a prolonged decline, she noted the outbound acquisition and currency control measures have been relaxed. 

“With an increased supply of financing and the continuation of the Belt and Road Initiative, we do expect an upturn of China’s outbound M&A activities in 2018,” Teo said.

China’s cabinet, the State Council, issued a circular last August setting out the nation’s policy on outbound investment, with a list of investments categorised as “encouraged”, “restricted” or “prohibited”. Purchases of hotels, entertainment assets or golf courses would be deemed unnecessary and “restricted.”

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The “clarification and codification” of the China outbound M&A rules has helped to align the country’s outbound activities with its national strategic interests, said Christopher Chua, head of China mergers and acquisitions at Credit Suisse. “This is a healthy development, as the regulatory objective is to filter out deals that have questionable or no strategic intent.” 

One of the deals that Chinese regulators rejected was Wanda’s US$1 billion purchase of Dick Clark Productions, the company behind the Golden Globe Awards. 

HNA, which had to sell off assets including three of the four plots of land it bought at record prices in Hong Kong, was allowed to complete its takeover of CWT, the Singapore logistics firm. Even Fosun, one of the companies under scrutiny, managed to complete its acquisition of the French fashion house Lanvin, for an undisclosed price.

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Other examples of Chinese deals that did not make it through US regulatory scrutiny include Canyon Bridge Capital’s takeover of Lattice Semiconductor, Zhongwang USA’s purchase of Aleris and Ant Financial’s bid for Moneygram, due to national security concerns. Ant is a unit of Alibaba Group Holding, owner of the South China Morning Post

Chinese investors cancelled or withdrew 19 announced deals worth over US$12 billion in North America and Europe last year for both commercial and regulator reasons, according to Baker McKenzie. 

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Still, the volume of China’s outbound M&As will be “relatively stable” this year compared to the past couple of years, said Houston Huang, head of China investment banking at JPMorgan Chase & Co. 

“Deals related to the Belt and Road Initiative and sectors encouraged by the government will see strong appetite, particularly those that can position China higher on the global value chain, and to cater for the increasing aspiration of Chinese consumers for better quality and variety of products and services.”

For Geely’s founder, the search goes on as he scours the globe for suitable takeover targets to “sustain growth, upgrade technology and reap benefits from consolidating resources,” Li told China Securities News this week in Beijing.