Joint investment with overseas capital will become a trend
- emma3095
- 17 avr. 2017
- 5 min de lecture
In 2016, China continued to transition to a new growth model. The direct foreign investment increased by 130% on the basis of $ 41 billion US dollars in 2015. According to the data announced by the Ministry of Commerce on January 17, in 2016, the total actual transaction amount of overseas M & A implemented by Chinese enterprises reached 10.72 billion US dollars, with 18 categories of industry in 73 countries and regions and accounting for 60% of the amount of foreign investment of the whole year.
In the latest cross-border M&A report, the M&A Asia Pacific General Manager of Deutsche Bank, Mayooran Elalingam says China will continue to reshape the global M & A pattern in 2017, and the capital involvement of overseas institutions will play a more important role.
Financial speculation is not a major driving force for M&A
According to Deutsche Bank data, the total amount of M&A transactions in 2016 has reached 225 billion US dollars. If compared with 2006, the amount has increased by more than ten times. The proportion of the total amount of China's global M & A transactions also has increased from 3.2% to 19.1%, and the proportion of global cross-border M & A transactions has gone from 1.6% to 16%.
In an interview with the China Business Network, Mayooran said that the currency exchange rate is not the major driving force for cross-border M & A transactions. Strategic investors implement M & A transactions from the perspective of enterprises’ development strategy, so they are focused on resource-based M & A transactions, integration of upstream and downstream industries, high-tech transformation and so on.
“Some people think that the trend of resource acquisitions is about to disappear. I do not agree. China's demand for resources is still there and will not disappear.” Mayooran points out that, for the production-oriented enterprises, the fields shifting to the upstream of industrial chain have caught a lot of attention, such as robots, cars, and energy equipment. M & A transactions involving a shift to a higher level industry will not stop.
With regard to the choices of investment areas, Mayooran is more optimistic about rich resources in European high-end consumer brands, high-techs, internet and games and other fields. However, because of political uncertainties like gouvernement issues, ‘Brexit’, elections and so on, the economic growth is slower than the one of the United States and international capitals are not very optimistic about Europe. But Mayooran believes that, since China has good relationships with most of the European countries, power structure changes in Europe will not cause too much impact on China. Perhaps Europe will become a place of value depression.
According to Baker & McKenzie LLP, in 2016 Chinese investors were concentrated on Germany and Great Britain, as investments in these two countries accounted for 46% of their total investments in Europe. The amount of investments in Germany grew nearly 10 times, from $ 1.3 billion in 2015 to $ 12.1 last year. GB attracted $ 9 billion investments which was increased by 130%. The total amount of investments in Great Britain consists of transactions which were announced before the ‘Brexit’ and will be completed in the second half of the year. Hence, it is still early to estimate the impact of ‘Brexit’.
Finland, Switzerland and Ireland were also the main target countries of Chinese enterprises' foreign investments in 2016; they attracted $ 7.6 billion, $ 4.8 billion and $ 2.9 billion respectively. At the same time, investments in Italy, Portugal and France fell by 85%, 50% and 40% respectively in 2016, which was a result of Chinese investors' efforts to integrate their M & A projects in 2015.
“From the perspective of M & A environment, the pursuit of values is always accompanied by risks. I think some international buyers may be concerned about the prospects of economic growth in Europe and the future of EU, but the risks are not so high for China.”
Association with overseas capitals may become a trend
At the end of 2016, in the context of the fluctuation in stock market and the continuing depreciation of RMB, the regulators issued intensive supervision policies on capital exit and strengthened the supervision of M & A activities. In early December last year, the National Development and Reform Commission, the Ministry of Commerce, the People's Bank of China, and the SAFE issued a series of guidelines, which shows that they have already noticed the recent irrational foreign investment tendency in real estate, hotels, studios, entertainment, sports clubs and other areas. In January, the National Development and Reform Commission announced that, it will set up a negative list for foreign investments of state-owned enterprises. The state-owned enterprises are not allowed in principle to engage in non-core investments outside of the country, the authorization for decision-making of overseas investments shall not exceed two levels downwards, and a negative list will be set for state-owned enterprises’ foreign investments in order to implement classified supervision.
Mayooran believes that, China's overseas M & A enthusiasm will continue in 2017, but the overall scale will be smaller compared with 2016. In addition to the fact that Chinese government and enterprises will take a more cautious attitude towards cross-border investments, there is also another reason for sellers to be more cautious for Chinese buyers: they tend to believe that the possibility of risks will increase in project financing and regulatory approval.
“We observed, in some cases, that Chinese and non-Chinese buyers had similar offers, yet the seller eventually chose non-Chinese buyers. So now it seems that many factors may cause a decline for overseas M & A in 2017.” Mayooran added.
In fact, after the incredible performance in the first quarter of 2016, the number of new M & A transactions in Europe and North America began to decline. Last year, 30 M & A transactions were canceled, with the unprecedented total value of $ 74 billion. Among them, 10 M & A transactions in the United States were canceled, with a total value of $ 59 billion, accounting for nearly 80% of the total amount of canceled transactions. While in Europe 20 transactions were canceled with a total value of $ 16.3 billion.
An analysis report from the Baker & McKenzie noted that, the short-term control slowed capital outflows and allowed more stringent regulations for large volumes of transactions, real estate investments and some financial transactions. Changes in policy may originate obstacles in the approval process, extend the project time, but will not change China's overall strategy and policy of foreign investments.
As a result of capital control, it appears that enterprises tend to seek overseas capital intervention in cross-border M & A transactions. A few weeks ago, with the lead of Bain Capital, the domestic retailer Yonghui acquired the world’s largest retailer services company, Daymon in the United States. In Mayooran's view, for overseas acquisitions in 2017, there will be some advantages in joint investments with large institutional investors and private equity funds.
He believes that, many strategic investors from China are currently considering cooperation with overseas institutional investors or private equity funds. One of the reasons is that, most of the funds are coming from overseas, which means that Chines enterprises can directly conduct overseas acquisitions, reduce uncertainty in terms of funding and approval processes, and simplify the approval procedures at the same time.
“Some of the cooperative partners come from western private equity firms have a higher degree of credibility, which will resolve the seller's concerns about uncertainty.” Mayooran told reporters that, in the current environment, it is indeed considerable to do joint investments with overseas large institutional investors, but this kind of cooperation is still facing certain difficulties. The main divergences arises from the distribution of shares and company valuations. Nevertheless, investors will try to overcome these difficulties.
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