Outbound M&A Starts Strong In 2014

Wanxiang cleared to bid for Fisker

After logging another strong year in 2013, outbound acquisitions by Chinese firms are getting off to another strong start in the New Year with 3 major new deals in the headlines last week. These latest deals reflect a broad range of targets, both in terms of industries and company health, in a welcome relief from an old pattern that saw Chinese companies often chase sickly, troubled western firms.
The new shift could greatly reduce the potential for future integration risk for the Chinese buyers, though they will still need to look out for problems like cultural differences and political factors as their global M&A enters this new phase.

Last year saw Chinese companies on track to spend more than $60 billion on overseas assets, equal to or surpassing the $62.1 billion the year before and placing China ahead of Japan as Asia’s biggest outbound investor. Last year’s buying binge was led by 2 mega-deals in North America, as CNOOC (HKEx: 883; NYSE: CEO) bought Canadian energy exploration firm Nexen for $15.1 billion and Shuanghui purchased leading US pork products maker Smithfield for $4.7 billion.

The first blockbuster deal of the New Year came last week with word that Chinese private equity company Fosun International (HKEx: 656) was selected to buy 80 percent of the insurance arm of state-owned Caixa Geral de Depositos for 1 billion euros ($1.4 billion), beating out a rival US bidder. (English article) Fosun has been one of China’s most active private equity firms on the global stage lately, also joining a group that bid 540 million euros for French resort operator Club Med (Paris: CLM) last year.

Around the same time Fosun’s latest deal was announced last week, renowned steamed bun maker Goubuli also revealed it had reached a preliminary agreement to buy a major US coffee chain. (previous post) Tianjin-based Goubuli didn’t reveal the name of its target, but said the chain operated hundreds of stores in more than 40 global markets, in a deal likely to be valued in the hundreds of millions or even a billion dollars.

The week closed with yet another potential deal making headlines, when a US judge ruled that leading Chinese auto parts maker Wanxiang could take part in the bidding for Fisker Automotive, a bankrupt former high flyer that rose to fame on its new energy cars. (English article) Fisker was previously planning to sell itself to Hong Kong-led group, but the judge said that Wanxiang should be allowed to offer a competitive bid.

A deal for the debt-laden Fisker is likely to be much smaller, with Wanxiang saying it will offer an initial bid of $35 million. Wanxiang also won the bidding last year in a similar deal, which saw it purchase bankrupt A123 Systems, a maker of batteries for new energy vehicles.

These 3 latest deals represent a wide range of acquisition targets that reflect what lies ahead in 2014 as Chinese firms diversify their global buying. The Wanxiang deal follows a previous pattern seen for much of the last decade, which had Chinese firms purchase struggling western assets at bargain prices. Many of those deals, including the landmark 2005 purchase of IBM’s PC business by Lenovo, later led to major headaches for Chinese buyers who lacked the skills needed to turn the struggling assets around.

The Fosun deal represents a newer trend that has seen Chinese private equity firms start investing in undervalued assets abroad, competing with major western names like Carlyle and KKR. Goubuli represents yet another new direction that has seen Chinese food and catering companies purchase foreign assets in a bid to improve their own quality.

The latest Wanxiang deal looks slightly better than earlier Chinese purchases of troubled assets, as Fisker is relatively small and has proprietary technology, and thus could be easier to turn around. Fosun and Goubuli are breaking more strongly with the past by purchasing assets that are already relatively healthy and thus should be easier to manage.

While these new deals look more intelligent and thus stand a better chance of success than earlier ones, the Chinese buyers will still need to watch out for non-financial issues, such as worker unions and political sensitivities that almost killed the Nexen and A123 Systems deals last year. If they can successfully do that, then 2014 could quite possibly see outbound Chinese M&A rise to new highs, putting China squarely on the global map for major asset buying.

Bottom line: 2014 looks set to be another strong year for outbound Chinese M&A, led by food, energy and private equity deals.

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