Booming China Outbound M&A Set to Grow

27 Feb, 2014

Consumer and leisure deal trends mirror shifting focus of Chinese economy

As M&A remains sluggish on the global stage, China continues to perform strongly, with transactions soaring in volume and continuing to rise in value. The latest China Outbound M&A Trends report from Squire Sanders’ Global Corporate Practice, in partnership with Mergermarket, reveals robust deal activity, a 37% surge in volume and 17% jump in value in 2013, and every indication for growth in 2014.  While the energy and resources sector still dominates as the prime investment focus (followed by industrials and chemicals) for Chinese acquirers, the consumer and leisure sectors have also shot up in volume and value.

Key findings of the report are:

  • In 2013 Chinese buyers carried out 220 deals worth US$68.9bn – 59 more deals than in 2012, and  a 17% increase in value; large-ticket deals (more than US$500m) were up, to 32 from 25 in 2012
  • Hong Kong as a business launch pad – it continues to punch above its weight in value terms, comprising 30% of outbound Chinese deal value in 2013, compared to 21% in 2012
  • Energy and resources remain dominant, with seven out of ten of the highest value deals (in 2013); deal volume in the sector increased 30% year on year to 59 deals in 2013, though value only saw 1% growth
  • Consumer M&A has grown, especially in value terms – to 9% (2012-13) from 3%  (2008-2011) – and deals in the leisure sector have trebled in volume to 6% (2012-13) from 2% (2008-2011) and are up fivefold in share of value to 5% from 1% in the same period
  • Chinese private equity exits more than doubled – 2013 saw 22 exits valued US$8.3bn, up from nine in 2012, valued at US$1.4bn
  • As target regions, North America and Western Europe continue to jostle for prime position – for number of deals Western Europe has now increased its share 31% (2012-2013) from 21% (2008-2011) and North America has dipped (to 21% from 26%) in the same period
  • North America takes top spot for share of deal value at 34% (2012-2013), up from 20% (in 2008-2011), followed by Western Europe (with 18%, down from 32% in same period) and then Australasia (constant at 12%)
  • Renewed interest in regional consolidation is indicated by deals in neighboring Asian economies – eg SE Asia as a target region saw its share of deal numbers drop (to 10% in 2012-2013 from 14% in 2008-2011),  but almost double in share of value (to 11% from 6%)
  • Among individual countries, the US dominates in volume and value of deals, followed by Australia; the UK and Germany follow in deal volume, but are eclipsed by Singapore and then Japan in terms of deal value.

Value is key as outbound is diversifying

Stephen Chelberg, Asia Pacific Chair, Squire Sanders’ Global Corporate Practice, commented: “Despite dips in GDP growth, China’s global M&A activity has not diminished; instead it remains a key tool for expansion overseas.  Overall outbound activity looks increasingly sophisticated with buyers acquiring not just resources but also expertise, intellectual property, technology and brands. Value is the critical deciding factor – trends suggest that buyers are shrewdly seeking out better value targets but also willing to pay more for key strategic assets.  That is certainly the case in all the Asian countries and in Western Europe, where the share of deal value is up – even in Sub-Saharan Africa where deal value in 2013 was more than double that in 2012.

“Core to China’s economic growth,” explains Mr. Chelberg, “is the need to secure energy and resources for its industrial base; however, other sectors are on the rise, such as industrials and chemicals (up 7% in volume and 19% in value on 2012 figures), and  TMT, where deal volume increased 14% and value tripled in 2013.  Of course, recent M&A trends, such as the targeting of consumer assets, reflect wider changes in the Chinese economy and society, and as well as the desire of businesses to increase profitability and competitiveness in overseas markets.  We can look forward to a growing number of deals in the consumer sector in 2014.”

Consumer and leisure

Dan Roules, Shanghai office managing partner, said: “The striking threefold increase in value of consumer deals between 2008 and 2013 has been driven in part by the monumental Shuanghui International US$6.9bn purchase of  Smithfield Foods, but with that deal aside consumer acquisitions are still on the up.  As the Chinese middle class grows, consumer demand for a wider variety of products has increased. Companies and investors have been active in food (everything from coffee to wineries) and luxury items such as watches and jewellery.

“What is also striking,” adds Mr. Roules, “is the noticeable spike not just in consumer but in leisure sector deals.  In this area transactions will always be smaller than other more capital-intensive sectors, so the data in our report represents a substantial surge in activity.  Of particular interest among buyers have been hotels and resorts, especially in Europe, representing bargain value to cash-rich investors.”

Private equity

“Private equity buyouts were scattered across a range of sectors,” explains partner Jenny Liu, private equity specialist in the Beijing office, “with the largest buyout in 2013 in the leisure sector: China’s Jynwel Capital, along with a US consortium, buying the Park Lane Hotel in New York for US$660m.  And exits have risen substantially.  This year we can expect assets purchased at the bottom of the market in 2009 to come to the end of their holding period, typically around five years.”

Energy and resources

“China’s thirst for energy is not a new story,” says Mao Tong, Corporate partner in Hong Kong. “What is new is that the shale gas phenomenon in the US has given a new impetus and flavour to Chinese energy sector dealmaking.  For instance we’ve seen Sinochem International gain access to shale deposits through its 40% stake in Pioneer Natural Resources Wolfcamp oil field.  While energy sector deals may be part of a more diverse outbound M&A picture in the future, Chinese tie-ups with experienced North American energy firms are likely to continue, as companies look to gain technical and management knowhow and ultimately to tap the enormous potential of shale gas back in China.”

US ‘open for business’?

“China outbound M&A in North America,” says James Hsu, partner in Squire Sanders’ Los Angeles office, “has been growing, with an all-time high of 48 deals in 2013. In North America energy and resources remain the chief focus of course, but consumer and TMT, where there is keen Chinese interest in US entertainment industries, are sectors to watch.  TMT deals represent 17% of all North American M&A activity (2012-2013), the biggest share after energy, mining and utilities and then industrials and chemicals, though only 1% in value.

“Historically one of the major challenges for Chinese acquirers in the region has been the regulatory environment.  The spread of recent deal activity, and Shuanghui’s acquisition of Smithfield, suggest that a turning point has been reached and the US, certainly, is more open for business when it comes to Chinese investment, than ever before. As Chinese businesses and investors from a wider array of industries look to cross-border M&A in 2014, they may find highly attractive targets in the US, without any of the regulatory delays that sometimes accompany large energy and resources deals.”

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