Chinese M&A boom faces regulatory checks
Record dealmaking in 2016 has raised concerns from regulators in China and overseas
HNA closed its $6.5bn buyout of software distributor Ingram Micro in December, putting it in control of the US’s 64th-largest company by revenues. A few months earlier, the conglomerate, with holdings in insurance, airlines and department stores, agreed to pay about $6.5bn for a 25 per cent stake in Hilton Worldwide Holdings, which is 254th on the list of the biggest companies in the US.
Aggressively acquisitive groups such as HNA helped China dominate cross-border dealmaking in 2016. Companies from the country agreed $220.4bn in acquisitions, or about 16 per cent of global cross border activity, according to data from Thomson Reuters.
But the record figures for China, slightly more than double the volume of deals last year, have also sparked a fierce backlash from regulators in both foreign markets and at home.
As regulatory reviews for many of the deals struck in 2016 extend into the new year — ChemChina’s $44bn takeover of Swiss agrochemical group Syngenta, China’s largest-ever cross-border takeover, included — questions have emerged over what kind of Chinese groups will succeed in swallowing up foreign assets in 2017.
“The whole architecture and lens through which we evaluate Chinese buyers changed during 2016,” says Colin Banfield, joint head of global cross-border mergers and acquisitions at Citi.
“Previously, the test was predicated on whether the Chinese buyer could get the deal signed up under competitive dynamics. Now, the test is whether post signing, they can actually make it to the finish line given heightened regulatory hurdles in the target markets and foreign exchange restrictions.”
Regulators around the world have come down hard on Chinese investment this year, often citing vague national security concerns.
The Australian Treasury, for example, said in August that China’s State Grid would not be allowed to take over Ausgrid for $7.5bn. Deals inked in Germany, the Netherlands and Norway were upended this year by the Committee on Foreign Investment in the US on grounds that the national assets involved in the acquisitions presented risks to US security.
One of those failed buyouts was that of troubled German chipmaker Aixtron by a Chinese investor group for €670m, which US President Barack Obama blocked over national security concerns. A consortium of Chinese investors aiming to buy a lighting unit from Philips for $3bn received similar treatment at the start of the year.
The Chinese government has protested that the blocking of deals was protectionism. However, in the final months of 2016, China’s own foreign exchange regulator has become one of the biggest hurdles for Chinese groups seeking to buy businesses overseas.
Fearing cross-border M&A has been used by Chinese groups to move capital offshore, the State Administration for Foreign Exchange (Safe) has signalled that it will crack down on acquisitions it deems speculative in nature. “Strategic” acquisitions, or ones that have synergies with the buyer’s business at home, will be allowed.
“The approval process in China has become longer, more complicated, with more questions,” says Philip Li, partner at Freshfields Bruckhaus Deringer, noting that gaining approval from Safe now takes four to six months, compared to two to three months at the beginning of the year.
Guidelines from Beijing regarding future dealmaking have so far been ambiguous. In late December, the Ministry of Commerce said it was monitoring closely all cross-border deals involving the purchase of land, hotels, film production and entertainment assets.
Several of this year’s biggest deals — and which lack obvious connections to the buyers’ original businesses in China — fall in this area.
Dalian Wanda, the property developer that also owns yachtmaker Sunseeker and the AMC cinema chain, agreed to pay about $1bn for Dick Clark Productions, the US company behind the Golden Globe Awards, and $3.5bn for Legendary Entertainment, which has financed blockbuster films such as The Dark Knight.
The year’s biggest failed deal was Anbang Insurance’s attempted $14bn takeover of Starwood Hotels & Resorts, which ended with China’s regulators quietly blocking the transaction.
HNA’s buying spree has also included billions of dollars in hotel assets, including Hilton Worldwide, Carlson Hotels and Red Lion Hotels Corp.
Similar deals will probably go forward in 2017, bankers say. But the state is set to have a bigger role in deciding what types of acquisitions will be allowed to progress, and which companies can pursue them.
“Strategic deals will go ahead. But not just deals that are strategic for the company, deals that are strategic for China Inc,” says Apoorva Shah, co-head of M&A in Asia ex-Japan at Nomura.