China’s $246bn deal spree crumbling as sellers balk

Bloomberg

China’s biggest-ever foreign acquisition frenzy is ending almost as dramatically as it began. After stunning the world with a record $246 billion of announced outbound takeovers in 2016, Chinese dealmakers are now struggling to cope with tighter capital controls and increasingly wary counterparties. Cross-border purchases plunged 67 percent during the first four months of this year, the biggest drop for a comparable period since the depths of the global financial crisis in 2009, according to data compiled by Bloomberg.
Analysts see few signs of a rebound as Chinese regulators make it difficult for acquirers to move money overseas. Foreign sellers have also thrown up new hurdles after getting spooked by a string of canceled deals. Some are forcing suitors to pay unusually large penalties if offers fall through, while others are shunning Chinese bids in favor of lower-priced offers from elsewhere.
“China’s outbound M&A activity will likely remain slow for the rest of this year,” said Bee-chun Boo, a Beijing-based partner at the mergers and acquisitions practice of law firm Baker & McKenzie LLP.
The drop-off in deals should help stem capital flight and stabilize China’s battered currency. But it could also undermine a big pillar of support for corporate valuations around the world. Last year’s 137 percent surge in Chinese takeovers vaulted the country to No. 2 behind the US on the ranking of global acquirers.
Cooling off the buying frenzy has become a policy priority in Beijing. Through the end of September, authorities plan to curb offshore acquisitions of $1 billion or more in industries outside a buyer’s core business, people with knowledge of the matter said in November. They’ll also ban most investments of $10 billion or more and restrict foreign property purchases exceeding $1 billion by state-owned enterprises, the people said.
Even previously announced deals are vulnerable. Chinese developer Shandong Tyan Home Co. in April blamed capital controls for backing out of talks to acquire Barrick Gold Corp.’s stake in an Australian mine for $1.3 billion. The $1 billion purchase of Dick Clark Productions Inc. by billionaire Wang Jianlin’s Dalian Wanda Group Co. was called off in March, after people with knowledge of the matter said the conglomerate was having difficulty moving money out of China.
That same month, Beijing-based property firm Macrolink Group ended discussions to buy a 600 million-pound ($777 million) plot of land in London from St. Modwen Properties Plc for a similar reason, according to people familiar with the matter. A person who answered the phone at Macrolink’s headquarters said no executives were available to comment, and the company didn’t immediately reply to emailed queries.
“Capital controls have clearly had a dampening effect on China’s outbound M&A activity,” Joseph Gallagher, head of mergers and acquisitions for the Asia-Pacific region at Credit Suisse Group AG, said in an interview in Hong Kong. “Chinese companies, especially those that are domestically-listed, will likely have a much harder time to do deals as they typically do not have offshore financing vehicles or access to offshore funding,” Gallagher said.
There are exceptions, of course. HNA Group Co., a Chinese aviation-to-hotels conglomerate, has embarked on a flurry of overseas purchases this year — ranging from a nearly 10 percent stake in Deutsche Bank AG to the $1 billion takeover of Singapore logistics provider CWT Ltd. Deals seen as important for Chinese economic development have also won official approval, including the country’s biggest-ever overseas purchase, the $43 billion acquisition of Switzerland-based seed maker Syngenta AG by China National Chemical Corp.
To get around capital controls, some acquirers have tried to secure financing from the overseas branches of Chinese lenders by pledging their onshore assets as collateral, according to law firm Clifford Chance. Other strategies include pursuing smaller deals and teaming up with offshore private-equity firms, said Baker & McKenzie’s Boo.