China’s cross-border deals are on the up, both in volume and value terms. During 2012, $5.9 billion worth of private equity-backed cross-border deals closed, 61 percent more than the $3.6 billion deals closed during 2011, according to data from Thomson Reuters.
Of course, there is still hesitation in some quarters about doing business with Chinese buyers – and not just for technology businesses with implications for national security.
Take this year’s most widely-publicised deal: the takeover bid from CDH Investments-backed Shuanghui International for US pork producer Smithfields Group.
Sadly, the timing could hardly have been worse: the announcement that Shuanghui had offered $7.1 billion (including a $4.7 billion equity cheque) for Smithfields came just two months after the carcasses of 20,000 pigs were seen floating down the Huangpu River to Shanghai.
Shuanghui wasn’t involved in the dead pig scandal – but it had previously been forced to recall meat products that may have been tainted by a feed additive.
“This potential merger raises real food safety concerns that should alarm consumers,” US Congresswoman Rosa DeLauro was quoted as saying in the press. “We know that Chinese food products have been a threat to public health and that Shuanghui was found to have produced and sold tainted pork. I have deep doubts about whether this merger best serves American consumers.”
However, concerns like these are also creating opportunities. Private equity firms have de-listed a number of Chinese businesses that are trading in the US at undervalued prices due to speculation over accounting fraud.
For example, in May CITIC Capital completed an $890 million buyout of NASDAQ-listed AsiaInfo Linkage, paying a 53 percent premium to its 30-day trading average. Shortly after, The Blackstone Group offered $662 million to take private Pactera Technology, a 43 percent premium over its share price before the deal went public.
Sources estimate that close to $10 billion has been deployed by private equity in this way – even though the lack of transparency at these companies (as well as the high premiums paid) inevitably increases risk.
“Their share prices have done nothing but tank for the last two-and-a-half years, and quite a few have been targeted directly by SEC investigations, short [sellers] or [involve] rampant suspicion of accounting irregularities,” says Peter Fuhrman, chairman and founder of China First Capital.
Re-listing the privatised companies would be difficult in the current climate, given the regulatory freeze on IPOs in China and a weak reception for IPOs in Hong Kong.
Exits are possible. Fosun and AXA Private Equity’s (very uncontroversial) acquisition of cross-border firm A Capital’s stake in Club Méditerranée produced “strong returns”, according to an A Capital statement (A Capital, together with Fosun, acquired a 7.1 percent stake in Club Med in 2010, which was later increased to 10 percent).
However, André Loeskrug-Pietri, founder and managing partner of A Capital, warns that partnering with Chinese companies can be risky. Not all corporations move as quickly as Fosun (the deal was closed within 90 days) and many remain opaque, with a chairman unwilling to cede control of management.
Nonetheless, China cross-border M&A will continue to build, sources say. Juan Delgado-Moireira, a managing director at Hamilton Lane in Hong Kong, says Chinese companies will increasingly look to the mature markets of the US and Europe to purchase quality businesses – and “private equity will be at the heart of this strategy”. ?