Paul Hastings Identifies Top Inbound and Outbound China M&A Trends

July 21, 2014

Paul Hastings Identifies Top Inbound and Outbound China M&A Trends:

Pace of both outbound and inbound M&A is unlikely to slow for the rest of this year, despite economic headwinds and decelerating growth in China
Chinese investors are shifting away from natural resources and increasingly focusing on gaining foreign market access, acquiring technology, real estate and food security
Further relaxation of regulations on Chinese companies going outbound expected
Warehousing projects, logistics and stabilized assets are hot sectors for investors looking inbound

Hong Kong, July 21, 2014 - As investors gain more confidence in the global economy, the wheels of the Chinese inbound and outbound M&A industry are expected to turn continuously for the rest of 2014.

Vivian Lam, Partner, Corporate Department at Paul Hastings, says: “The slowdown of the Chinese economy will not have a negative impact on Chinese companies going abroad. On the contrary, more state-owned and privately-owned companies will be encouraged to go offshore to find global opportunities.

“They will make the decisions from a commercial perspective rather than from a political standpoint. The industries they are interested in will be more diversified, such as food, consumer goods, real estate, TMT, and financing, due to the relaxation of government regulation.”

David Blumenfeld, Partner, Real Estate Department at Paul Hastings, adds: “Although onshore liquidity appears to be tight, clients tell us they are seeing opportunities. Many international institutional investors are sitting on the side lines, waiting to get back in when prices moderate to reflect the changes in the market.

“People are becoming more realistic, as economic growth slows and transitional challenges loom. Investors are looking at a number of structures to finance deals including equity and mezzanine debt. The search by Chinese real estate investors for trophy properties in leading international financial centers continues to intensify.”

TRENDS IN OUTBOUND M&A FROM CHINA FOR THE REST OF 2014

1. Pace of overseas acquisitions by Chinese companies unlikely to slow

Companies listed in China are expected to be increasingly engaged in global M&A as Chinese corporates and markets gradually integrate more with the global markets. A record US$34 billion of overseas acquisitions by Chinese companies have been announced so far this year (as of May), this is compared with US$21 billion during the same period last year, according to Dealogic. Paul Hastings expects this to continue throughout 2014. This wave of acquisitions will no longer be dominated by state-owned enterprises and will also include privately-owned companies, hot sectors include property, TMT and agribusiness. Notable examples of real estate acquisitions by Chinese investors include: Fosun Property Holdings’ purchase of the City of London office building, Lloyds Chambers for US$103 million and Greenland’s stake in the US$5 billion Atlantic Yards development in New York.

2. New priorities for Chinese investors

Chinese investors are shifting away from natural resources and increasingly focusing on gaining foreign market access, acquiring technology and food security. China has spent the past decade and more than US$200 billion acquiring mines and oilfields from Australia to Argentina but now the country is turning its focus to the food industry. Mainland Chinese and Hong Kong-listed firms spent US$12.3 billion abroad on takeovers and investments in food, drink or agriculture in the last year, the most in at least a decade, according to National Australia Bank.

An example of this is WH Group’s (previously Shuanghui International Holdings) purchase of Smithfield Foods for US$7 billion (including debt), last year. Paul Hastings represented WH Group and helped navigate the politically sensitive takeover which was the most talked about deal of 2013.

3. Perception of China Inc. beginning to change in the West

The significance of the WH Group deal was that it gave Chinese companies more confidence, and demonstrated that it is not as difficult to complete deals in US as was once perceived.

Bright Food Group is another example of China’s M&A push into the food industry in the West. In 2011 the company purchased Manassen Foods Australia, then in late May it bought a controlling stake in Tnuva, Israel’s biggest food producer, for US$960 million.

4. Further relaxation of regulations on Chinese companies expected

With greater relaxation of restrictions in approvals and licenses that Chinese companies need to do outbound M&A, the risks of failing to seal the deal are greatly reduced. The new rules, announced in May, that only deals valued at more than US$1 billion will require a full review by China’s National Development and Reform Commission (NDRC), mean less delays and less uncertainty - creating a level playing field for Chinese bidders versus those from other countries. Also, the long awaited State Administration of Foreign Exchange (SAFE) of the People’s Republic of China rules on cross border securities will open up the way deal financing is structured.

TRENDS IN INBOUND M&A FROM CHINA FOR THE REST OF 2014

1. Inbound investors waiting to pounce

The total inbound M&A deal activity in the first quarter of 2014 already accounts for 1/3 (31.4%) of total 2013 inbound deal values (US$23.7 billion), according to Mergermarket’s Trend Report Q1 2014. For real estate, there is a bottleneck of investors waiting to enter the market. Prices of certain property segments have declined which means sellers are waiting until prices rebound to sell.

2. Hot sector – logistics investments

Over the past 18 months, there has been a noticeable increase in interest from investors for logistics and warehousing projects. Investors have identified that China does not have enough first tier warehouses. A lot of this is due to the increase in high value products that need to be stored, requiring air conditioning and direct access to shipping. Limited warehouses of this type indicate that in 2014 we can expect investors to be fairly bullish in this sector.

Recent examples of logistics deals include a deal in April where Paul Hastings represented Forterra Trust, a Singapore-listed real estate fund, in its sale of the Beijing Logistics Park to Singapore-listed real estate fund Global Logistic Properties Limited. In May, Dutch-giant APG Asset Management announced a US$650 million commitment to Chinese warehousing developer and operator e-Shang to develop a joint venture. Last year, the Carlyle Group and The Townsend Group entered into a US$200 million strategic partnership with Shanghai Yupei Group to develop and operate logistics warehouses in China.

3. Hot sector – stabilized assets

Another type of investment that has been popular and is seeing a flood of institutional money is first class stabilized assets, such as office buildings in Shanghai, Beijing and Hong Kong, which offer investors stable albeit lower returns. In terms of geography, Paul Hastings expects inbound investors to be most interested in tier one cities because they are comfortable with the risk/return ratios, especially on the residential side.