BEIJING, China – The largest and well-known Chinese acquisition fever will be ending soon with a dramatic finish just like how it got started.
After acquiring a record of 246 billion dollars of declared buyouts in 2016, which shook the world, the deal makers of China are now having a hard time to handle the mounting worry of their counterparties and tightening asset controls. Cross-border trades dropped 67% in the 1st four months of 2017. This is the biggest decline as compared to the same period in rock bottom level of 2009’s global financial crisis based on the data from Bloomberg.
According to analysts, there are only small chances for the regain because Chinese controllers make it harder for acquirers to travel the money abroad. Foreign traders are also contributing to the situation because they are now alarmed with the past streak of lost transactions. Some of them are asking for a significant amount of penalty if the offers cannot be executed properly. Others are avoiding the Chinese bids and seek other cheap offers in other markets.
Bee-chun Boo, a partner at the mergers and acquisition practice of the law firm Baker & Mckenzie LLP based in China, said that China’s current situation where the outbound M&A activity is slow can possibly last for the entire year.
The decline in the Chinese transactions can, however, help strengthen the capital flight and calm the falling value of Chinese currency. On another hand, it might also weaken the foundation for commercial valuations in the whole world. The acquisition record of China last year is an astounding 137% which brought them second behind US on the standings of world’s acquirers.
Experts say that calming the fever of acquisition is one of China’s top priorities in terms of creating policies. China plans to control the offshore buyouts of 1 billion dollars or other industries not inside the buyer’s central operation by the end of September. Authorities are also looking to prohibit investments worth 10 billion dollars and above. They also plan to put limits on property acquisitions more than 1 billion dollars by the country’s businesses.
The declared deals are not exempted to the current transaction fallouts. Last month, Shandong Tyan Home Company, a developer based in China, already pointed the blame on the capital control’s move in calling off the deal to buy the stake in Barick Gold Corporation in an Australian mine for 1.3 billion dollars. Meanwhile, experts are speculating that the failed acquisition last March for the 1-billion dollar Dick Clark Productions Incorporated by Dalian Wanda Group Company owned by Wang Jialin is due to the struggle of transferring the money abroad.
According to sources, for the same reason last March, a property firm, Macrolink Group, also backed out in the 777-million dollar transaction to acquire a plot of property from St. Modwen Property Plc in London.
As what the head of mergers and acquisition for Asia Pacific at Credit Suisse Group AG, Joseph Gallagher has said in a statement that the capital control had adversely affected the Chinese outbound M&A activity.
On the other side of the situation, there are still some lights seen on the end of the tunnel. This is seen in the aviation-to-hotels company in China, HNA Group Company. This company has entered into a series of deals this year which ranges from the close to 10% stake at the Deutsche Bank AG up to the 1 billion dollar acquisition of CWT Ltd. Deals. These transactions are showing some developments on the economy of China which have already took nods from the officials. Another contributor is China’s largest ever buyout abroad by the China National Chemical Corporation which is 43-billion dollar worth of purchase to Syngenta AG in Switzerland.
The law firm Clifford Chance had advised acquirers to borrow a financial support from other Chinese lenders abroad by making their resources as collaterals in order to sidestep the capital control’s policies. As an additional strategy, Boo from Baker & McKenzie said that acquirers should just seek small-time transactions and join up with international private-stock forms.
According to the risk consultancy firm in New York, the doubts about the deals from Chinese acquirers are still mounting. Sellers are asking the buyers to approve the breaking of fees that could reach 10% of the transaction’s value, which is 2% higher from the past fees.
Recently, the group of companies headed by Zhengzhou Coal Mining Machinery Group Company has settled a 10% break fee on their 592-million dollar deal to acquire the generators and starter business from Robert Bosch GmbHs. Last March, C C Land Holdings, a Chinese developer, has settled a 287.5 million-pound security for the 1.15 billion pound deal to acquire Cheesegrater tower from Oxford Properties Group Incorporated and British Land Company in London.
Companies are still turning to other options because of the impending risks of delays and fallouts in the Chinese deals despite the banker’s statement that most offshore sellers are still choosing Chinese buyers. According to sources, last April, a UK property developer, Capital and Counties Property Plc, ignored a greater bid from HNA and decided to sell the Olympia Exhibition Center to the German buyers.
Fang Jian, a Chinese managing partner at Linklaters LLP law firm, said that considering the difficulties that the acquirers of China are experiencing, the number of transactions will probably finish with 40-50% lower than the 2016 level.
Terence Foo, a Chinese co-managing partner at Clifford Chance, already said that they are already expecting a fewer volume of large transactions and the number of Chinese international property purchases can possibly decline dramatically.