Chinese M&A – Belt and Road boom

November 2017  |  FEATURE |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

November 2017 Issue

In the 18 months leading up to 2017, Chinese firms completed a record numbers of outbound M&A deals, with around $1 trillion worth of overseas dealmaking.

However, the dealmaking bubble has burst. Chinese acquirers have been reined in by changing priorities in Beijing and by growing economic headwinds, both globally and domestically. According to Mergermarket, the total value of outbound M&A in Q1 2017 fell by more than two-thirds to only $25.5bn year-on-year from $84.2bn in Q1 2016.

Regulatory crackdown

Chinese organisations have been banned from investing in certain overseas industries and markets, following a number of deals financed by what the Chinese government deemed excessive borrowing. Foreign currency approval has also proven problematic. China’s foreign currency reserves were heavily depleted in 2016, with the country burning through nearly $320bn last year. Furthermore, regulators in China have begun to scrutinise sectors considered non-strategic or where valuations have become very high, such as entertainment.

Tightening the Belt

Despite the M&A crackdown, there is, however, still ongoing outbound M&A activity involving Chinese acquirers, thanks to the Belt and Road Initiative – an ambitious development campaign through which China wants to boost trade and stimulate economic growth across Asia and elsewhere. Through the initiative, many Chinese companies are embarking on a buying spree across the Belt and Road trade routes. Since 2013, the Belt and Road plan has been associated with railway construction in Laos, Kenya and Ethiopia, and port expansion in Pakistan and Greece, among others.

Outside of the developing world, the UK has also emerged as a major target for Belt and Road deals. As of mid-August, the UK was second behind Singapore in terms of the total value of Chinese takeovers. According to Reuters, Chinese buyers completed 29 acquisitions of UK companies in the first half of 2017 for a total of £13bn, including the China Investment Corporation’s £10.5bn deal for warehouse company Logicor.

Elsewhere, other notable Belt and Road deals include the $1.8bn purchase of an 8 percent ownership interest in an Abu Dhabi oil company by state-owned oil giant China National Petroleum Corp, and HNA Group’s $1bn acquisition of logistics company CWT Ltd. In early September, Chinese investors also agreed a deal for China’s second largest container port after the state owned China Merchants Port agreed a $920m deal for Terminal de Contêineres de Paranguá TCP from US private equity firm Advent International.

Though Chinese takeovers globally so far this year are down 42 percent compared with the same period last year, dealmaking across the 68 countries that are part of the Belt and Road initiative has remained vibrant. There has been $33bn worth of deals announced, already surpassing the $31bn recorded for the whole of 2016.

One of the reasons for the explosion of deals on the Belt and Road route, regardless of the general M&A crackdown, is that the Chinese state believes that the initiative could be the catalyst for a new phase of globalisation. The document setting out the plan states that: “Our joint endeavour to promote the Belt and Road Initiative provides new opportunities and impetus for international cooperation. It helps to usher in a new era of globalisation that is open, inclusive and beneficial to all”. In May, Chinese president Xi Jinping pledged $124bn to the initiative to facilitate dealmaking.

Chinese expansion

However, the Belt and Road plan is not merely about improving globalisation and infrastructure networks. Given the slowing of China’s growth, the plan will be imperative for the future of the country’s exports, particularly given that the ‘Belt’ aspect of the plan refers to the highly valuable trade routes which stretch from China through Europe and up to Scandinavia. The route encompasses around 65 percent of the world’s population, about a third of the world’s GDP and roughly a quarter of all goods and services traded.

Despite the initiative’s altruistic overtones, there are concerns that China is using the Belt and Road plan to further its political influence in certain regions. The US’ withdrawal from the Trans-Pacific Partnership has weakened its influence in Asia and created a power vacuum. Accordingly, deals are still winning Chinese government approval where desired.

The nebulous nature of the initiative has meant that dealmaking has continued in certain jurisdictions and across particular industries. It is often difficult to define exactly what qualifies as a Belt and Road project, as well as which countries are involved in the initiative. Accordingly, the Belt and Road label has been applied rather ambiguously by Chinese lawmakers and companies alike in order to win quick approval for a transaction.

Undoubtedly, there are questions about the Belt and Road initiative. For instance, do the highly indebted Chinese state and overleveraged SOEs really have the financial firepower to sustain this project? And are the terms attractive and transparent enough for foreign companies? Regardless, the initiative is a shot in the arm for globalisation at a time when the US is retreating from the world scene. The reasoning behind the Belt and Road scheme is certainly complex; however, it is clear that the M&A landscape is changing, thanks in no small part to evolving priorities in Beijing.

© Financier Worldwide

BY

Richard Summerfield