August 3, 2018 / 9:05 AM / 10 months ago

China M&A picks up – for now

* Loans: Sino-US tensions threaten rebound in outbound acquisition financings

By Prakash Chakravarti, Yan Jiang and Evelynn Lin

Hong Kong, Aug 3 (TRLPC) - A recent flurry of outbound Chinese acquisition financings could be short-lived as deteriorating relations between China and the US curb investment and raise the prospect of a global trade war.

While Chinese state and privately owned companies are once again raising new loans for foreign acquisitions, deal sizes are far less exuberant than in recent years. Notably, recent targets have been in Europe, Asia and Latin America rather than the US.

In the biggest recent example, privately owned Tianqi Lithium is raising a US$3.5bn term loan to finance its US$4.066bn purchase of a 23.77% stake in Sociedad Quimica y Minera de Chile, the world’s second-largest lithium producer.

Other deals include state-owned Tsinghua Unigroup’s proposed €2.2bn acquisition of French smartcard components maker Linxens, as well as smaller Chinese purchases in Japan, New Zealand and Luxembourg.

“There are some signs of a pick-up in M&A activities, but further recovery is very difficult,” said James Ma, a Hong Kong-based partner at global law firm Paul Hastings.

“It is now extremely hard to buy any US assets and other countries are also tightening national security checks against Chinese acquirers. Therefore, execution is becoming more complicated and the cost is rising.”

Chinese companies spent only US$1.6bn on US assets in the first six months of 2018, almost 80% lower than the same time last year, whereas Chinese acquisitions of European assets rose 39% to US$45.1bn in the same period, according to Thomson Reuters data.


Outbound M&A activity plunged in 2017 by a third to US$140bn from 2016’s record levels of US$218bn after Beijing imposed capital controls to stem speculative investment and stabilise a weakening renminbi.

This put the brakes on some of China’s most acquisitive conglomerates, including Anbang Insurance Group, Dalian Wanda Group, Fosun Group and HNA Group, which faced lengthy approvals for their outbound deals.

Formal regulation on overseas acquisitions, effective on March 1, encourages genuine foreign investment but restricts ‘speculative’ deals in sectors such as overseas property, hotels, entertainment, sports clubs and film industries.

“We welcome the new rule, as we can now do business in a clearer and more regulated environment,” a senior loan banker at a Chinese bank said.

“Whatever the policy, Chinese firms are keen to diversify globally with acquisitions. And the weakening of the renminbi will only drive that demand stronger,” a second senior banker at a Chinese bank said.

In addition to the US$3.5bn loan for Tianqi Lithium’s SQM investment, which was underwritten by China Citic Bank and its Hong Kong-based subsidiary, several more overseas acquisitions have produced opportunities for Chinese and international lenders.

Technology conglomerate Tsinghua Unigroup wrapped up a €1.5bn (US$1.75bn) 12-month bridge loan in July to finance its Linxens acquisition via Credit Suisse, Deutsche Bank, Industrial and Commercial Bank of China and Natixis.

Ningbo Joyson Electronics is raising a US$1.2bn five-year loan to fund its US$1.588bn purchase of bankrupt Japanese airbag maker Takata via China Merchants Bank, Deutsche and Mizuho Bank, in addition to a US$500m loan from ICBC.

CDH Investments is also preparing a US$700m dual-tranche loan, via Bank of China Macau branch, to back its acquisition of Australian liver cancer treatment specialist Sirtex Medical.

Smaller outbound acquisitions, such as state-owned China Southern Power Grid’s €400m purchase of a 25.48% stake in Luxembourg-based utility Encevo and a US$300m bid by CDH and others for New Zealand honey maker Manuka Health could also provide opportunities.


The current crop of outbound acquisitions is set to lift Chinese M&A lending in the second half of 2018, after a first-half tally of US$3.75bn that was largely due to one deal.

A €3.07bn five-year term loan, signed in May, for China’s Zhejiang Geely Holding Group backed its acquisition of an 8.2% stake in Swedish truckmaker AB Volvo.

Rising geopolitical and regulatory risks, however, threaten to derail deal-making for Chinese buyers.

Tougher US restrictions on Chinese investment in strategic sectors, including technology, present significant challenges to acquisitions and financing.

The US House of Representatives passed a bill proposing to tighten foreign investment rules in late June, which has prompted China to consider amending its existing investment rules in retaliation.

Foreigners seeking strategic stakes in listed Chinese groups could face national security reviews under draft rules published by China’s commerce ministry last week.

“We see there is a cautious recovery of Chinese outbound investments in recent months. However, the pipeline still looks thin amid a challenging global macroeconomic environment and the risks of the China-US trade war as well as the Chinese government’s moves to deleverage the economy,” the first loan banker from a Chinese bank said. ( Reporting By Prakash Chakravarti, Yan Jiang and Evelynn Lin; Editing by Tessa Walsh and Steve Garton)

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