Asia roundtable: Expect Chinese outbound M&A to grow

Chinese buyers have snapped up more than $100bn in overseas assets this year and participants in sister publication PEI’s Asia roundtable say the appetite for foreign deals is set to grow.

China’s outbound deals reached $111 billion in the first half of 2016, exceeding last year’s total of $108 billion, and that appetite for overseas deals is set to grow, according to Private Equity International’s Asia roundtable participants.

This surge has been driven by a range of factors, including a growing middle class in China, which is driving huge increases in consumption.

“From a strategic perspective, Chinese overseas acquisitions make good sense, i.e. the buying of commodities, technology, best practices, and/or customers, and we would expect that to grow,” Wen Tan, co-head of private equity Asia at Aberdeen Asset Management, said.

Chinese investment in Australian agribusiness hit A$375 million ($287 million; €252 million) in 2015. Three deals accounted for nearly half of Chinese investment in the sector last year – the Beingmate investment in Darnum/Fonterra, Tanma Bearing Group’s acquisition of the Wollogorang and Wentworth stations and Dashang’s investment in Glenrock Station. These totalled A$170 million, according to a report by KPMG and the University of Sydney.

Dennis Kwan, a managing director with placement agent MVision, predicts the trend will continue and increase with a broader universe of buyers. The Chinese government is doing its part to encourage investment overseas, through initiatives such as One Belt One Road, which aims to strengthen trade relations between Europe and China through infrastructure investments.

Kwan noted that the OBOR initiative is spurring would-be acquirers to buy assets in transport, logistic, and infrastructure. The gas distribution business of the’s UK National Grid, for instance, has reportedly attracted the interest of two Chinese consortiums, one led by industrial conglomerate Fosun, and another backed by Hong Kong-based infrastructure company Cheung Kong, which is owned by billionaire investor Li Ka-Shing.

Private equity firms are also benefiting from more relaxed rules proposed by China’s National Development and Reform Commission in May.

For example, Hong Kong-based private equity firm PAG Asia Capital bought US printer company Lexmark in an all-cash deal that values the company at $3.6 billion, while Luye Pharma, a Hong Kong-listed pharmaceutical group backed by Beijing firm CITIC Capital, acquired a unit of Swiss drugmaker Acino for €245 million.

The outbound deal approval process has been simplified, too: deals larger than $2 billion in sensitive sectors such as media or telecom no longer need central government approval. Regulatory procedures will also be streamlined, so that NDRC provincial offices can approve foreign deals instead of passing them onto the State Council, China’s central government.

There are however improvements to be made in the way Chinese companies executive their outbound M&A, some participants said.

“It’s not necessarily in the most optimal form at the moment,” said Aberdeen AM’s Tan. “For example, there are some who do not use advisors at all. It’s already challenging doing M&A – let alone cross-border M&A – and to try to do that in-house is very surprising.”

Look out for the full Asia roundtable, featuring Aberdeen Asset Management, CLSA Capital Partners, Coller Capital, Debevoise & Plimpton, and MVision in the October issue of Private Equity International.