June 29, 2016 / 11:15 PM / a year ago

China's 'left field' buyers shake up global M&A

5 Min Read

A woman walks past products of brand Lexy from KingClean Electric Co. Ltd placed at a shop in Beijing, China, June 16, 2016. Picture taken June 16, 2016.Jason Lee

HONG KONG (Reuters) - Foreign takeover bids by little-known Chinese companies, from real estate firms to a vacuum cleaner maker, are driving a surge in the due diligence industry as their targets and even rival suitors seek to answer the question, "Who are these guys?"

Facing a slowing economy at home, Chinese businesses are hunting for non-yuan assets abroad despite little foreign buyout experience. Chinese outbound M&A activity has more than doubled in two years, hitting a record $120 billion in total deal value so far in 2016, according to Thomson Reuters data.

Presented with offers from unfamiliar Chinese firms, sellers are kicking the tyres thoroughly to check on credibility and financing. Closer inspection may or may not be reassuring.

"There are question marks around some of the Chinese names," said Bill Sims, managing director at Stroz Friedberg (Asia) Ltd, a global risk and investigations firm.

"There is an issue of compliance. People want to know, where is all this money coming from? How is it being sourced? Are they going to pull out of the deals last minute?"

When global private equity firm KKR & Co (KKR.N) put high-end German coffee machine maker WMF on the sale block in January, four Chinese bidders emerged, including vacuum cleaner maker KingClean Electric Co Ltd (603355.SS).

New to the global M&A scene, KingClean bid about 1.67 billion euros ($1.9 billion) for WMF and only narrowly lost out to France's Groupe SEB (SEBF.PA), a person with direct knowledge of the sale process told Reuters. The Chinese company's bid package was solid and well-financed, the person added.

KingClean did not respond to a Reuters request for comment.

Another "left field buyer" was real estate firm Thaihot Group (000732.SZ), which beat out nearly two dozen bidders, including global and Asian firms, to buy the insurance unit of Dah Sing Financial Holdings (0440.HK), in Hong Kong's most expensive insurance M&A deal..

Thaihot paid 7 times price-to-book value to buy the business, while Chinese insurers on average trade at about 1.3 times, according to Thomson Reuters data.

The Logo of KingClean is seen at a shop in Beijing, China, June 16, 2016. Picture taken June 16, 2016.Jason Lee

The growing influence of Chinese and other Asian bidders is also visible in their increasing share of the global M&A market.

In the first half of 2016, announced M&A deals involving Asia-Pacific companies fell 17.7 percent from the same period a year earlier to $552.9 billion. But Asia's share of the global tally stood at 36 percent, well up from 22 percent in 2011, according to preliminary data from Thomson Reuters.

From Property to Transmissions

In early February, Chinese property developer Yinyi Real Estate Group (000981.SZ) bought Belgian auto transmission maker Punch Power for an undisclosed amount, beating a Chinese auto parts maker, despite Yinyi's limited auto parts experience.

"The due diligence industry has seen a boom in business in recent years as new and unknown bidders emerge out of China," said Andrew Vaughan Winterbottom, a Hong Kong-based associate at global risk consultancy, The Risk Advisory Group.

"Our clients are interested in identifying a bidder's source of funds, understanding whether they have links to the government, or are affiliated with larger state-run firms that have been investigated by Chinese anti-corruption authorities."

That sense of caution was underscored in late March when China's Anbang Insurance Group Co. [ANBANG.UL] and partners abruptly dropped a $14-billion offer for Starwood Hotels & Resorts Worldwide Inc. HOT.N

"Given that we are seeing more untested buyers asserting themselves in the global M&A landscape, it is becoming more of a 'seller beware' environment," said Mayooran Elalingam, Deutsche Bank head of Asia Pacific M&A.

Seller skittishness could slow the pace of Chinese outbound M&A growth. China International Capital Corp (3908.HK), the country's biggest investment bank, last month projected outbound deals to hit $150 billion this year.

"So there is some hesitancy and you may see a slowdown in the near term. But overall the trend is positive and the Chinese are making a big push and eventually the sellers will get more comfortable to the Chinese way," Sims added.

One head of M&A at a Wall Street bank said, "You don't want to underestimate the power of a new buyer just because haven't heard that name before."

Reporting by Denny Thomas; Editing by Kevin Drawbaugh

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