How much will Chinese companies invest in Europe and, specifically, Poland? Can we expect growth and how to lure the dragon? What are the most common challenges? For more information please visit http://www.deloitte.com/pl
In 2007, global M&A deal flows amounted to some 16,500 deals, worth US$3.7trillion dollars. In 2011, this figure had fallen to just 13,300 deals, worth US$2.2trillion dollars. As a result, over the 2007-2011 period, global M&A flows, on an annual basis actually shrank by around ≈ 4% per year, while values actually fell by around ≈10% per year However, despite the fall-out stemming from the GFC, global M&A volumes and values have recovered strongly over the past two years, showing growth rates of around 5% over 2010 and 2011. However, China M&A flows were not particularly impacted by the GFC. Over the same 2007-2011 time period, volumes fell by ≈3% , while values actually rose by ≈10%. Over 2010-2011, Chinese M&A values rose by ≈13% while volumes fell by ≈7%
In 2007 outbound volumes = 8.3% of overall volumes 2011 outbound volumes = 17.1% of overall volumes Therefore Chinese investors are increasingly looking for acquisitions overseas!
Over the 2007-2011 period, Chinese outbound M&A trends shows a steady rise in terms of both volumes and values, growing by an average of 12% per year in terms of volumes Indeed, in 2007, just 101 outbound deals, worth US$24bn were undertaken. In 2011, these figures had jumped to 183 transactions, worth US$64bn . However, in terms of overall figures, Chinese outbound M&A by volume is still comparatively very small ( 17% of all Chinese M&A by volume in 2011). In the US, the percentage of outbound deals to the overall is 26.3% . Also of note were outbound Financial Services deals . While only accounting for 42 actual transactions, they were all relatively large deals ( average size = US$500m+ per deal ) The bulk of this activity took place in the Energy & Resources sector – over the past five years such deals have made up around one-third of all Chinese outbound deals by volume and two-thirds by value.
Over the 2007-2011 period, more than o ne-in-five Chinese outbound deals were European purchases. However, at the same time, 45% were intra-Asian acquisitions. However, over 2010 and 2011, more than one quarter of all outbound buys were of European assets – So Chinese acquirers are obviously increasing their exposure to Europe
138 outbound deals worth some US$65bn undertaken over the past five years. By volume, the majority of this activity has occurred in the Manufacturing and Consumer Business & Transportation sectors. By value, the majority of these deal flows have occurred in the Energy & Resources sector (mostly acquisitions of London-listed Energy & Mining firms who actually operate elsewhere). Also of note were outbound Financial Services deals. While only accounting for 42 actual transactions, they were all relatively large deals (average size = US$500m+ per deal) Since 2009, Chinese acquisitions of European assets have risen arithmetically. If deal flow continues increasing in a similar fashion over the next three years (2012, 2013 and 2014), then more than half of all Chinese outbound M&A deals will be buys of European assets , with more than 100 Chinese M&A deals set to take place in 2014 alone – together forecast to be worth US$40bn.
Top graph shows that Chinese investment into Europe is not just focused on Western European targets. In fact, as the bottom graph shows, investments into the UK & Ireland, the largest single recipient region by volume over the past five years, dropped sharply over 2010-Q1 2012. Interestingly, investments into Central & Eastern Europe (CEE) increased over the two timeframes in question from comprising around 7.5% of all outbound M&A into Europe over 2007-2009, to 8.2% over the 2010-Q1 2012. Meanwhile, Germanic (comprising, Germany, Austria & Switzerland) acquisitions have also jumped from making up 19.2% of the total, to comprising 21.4% of the total over the two time periods in question. This is interesting as many consider that the sub region is a gateway into the CEE. Does it imply future deal flow into the CEE region?
According to Thomson data, Chinese M&A investments into Central & Eastern Europe have numbered some 40 deals, worth around US$3bn over the past five years – meaning that it’s a relatively youthful market but definitely one that is slowly maturing Looking at sector splits, it’s interesting to note that Manufacturing, Energy & Resources and Consumer Business & Transportation deals rose over 2010-2011 while TMT deals fell off . The fact that over 2010-2011, deals were undertaken in the Financial Services and Real Estate sector – both industries which didn’t see any activity previously.
Russian deals – more than 50% are Energy & Resources transactions Hungary deals – mostly Manufacturing deals Ukraine deals – majority are TMT deals- most from one bidder – Yantai Guofeng Investment Holdings Czech deals – Manufacturing sector transactions Top five deals – interesting to note that three of them are related to the takeover of Hungary’s BorsodChem by China’s Wanhua Group
Robust economic growth – between 1995 and 2011, Polish average GDP growth rate was 4.8% - far higher than the EU average (in 2011, the IMF calculated that the Eurozone grew by 1.5%) Well educated workforce – there are 500 academic institutions in Poland with 200,000 higher education students in full-time learning in 2009 – more than the total in France. At the same time, more than 50% of polish students speak fluent English. Strategic location – If the geographical center of the EU isn’t actually in Poland, it must be very close. In addition, Warsaw is less than 2,000km from the vast majority of Europe (in fact, only parts of Spain and Portugal are more than 2,000km away from the city). Large population – 38m people call Poland home making it the 6 th largest EU country. Furthermore, the proportion of those of working age (15-64) is 71%, higher than the EU average of 67%. EU support - Between 2007 and 2015 Poland will jointly receive over 67 billion EUR from the EU’s budget. Growing middle class – In 2010, Polish consumers spent some US$11bn on luxury good purchases. In addition, Poland's luxury market could grow by up to 50% in the next several years, said a recent management consultancy report.
One of the largest production investments into one of Poland’s special economic zones was by Chinese firm Nuctech and which involved the assembly of technologically advanced scanners with Rontgen lamps used to X-ray moving vehicles. Recently, the chairman of Nuctech’s local subsidiary said the parent company plans to inject more capital into the Warsaw company this year as well as transfering core maintenance technology to Poland. TCL Corp, a Guandong-based consumer electronics producer business is also looking to is planning to expand its Polish plant, which was established in 1998 with an investment of US$66m. Also Polish Special Economic Zones are establishing cooperative ventures with China . For example, the president of Pomeranian SEZ will sign a three-year contract with local authorities from Zhuhai, Guandong province in the near-future.
According to a memorandum of understanding, Sany Group , China's leading heavy equipment manufacturer, is to establish an assembly plant in Poland to serve markets throughout Eastern and Central Europe. Meanwhile, KGHM , Europe’s second-largest copper producer could team up with China Minmetals to do a joint M&A deal abroad reported Reuters in December 2011. China Minmetals has a history of co-operation with KGHM. Earlier this month, the Chinese company secured deliveries of copper cathodes from the Polish miner worth between US$1.83-3.66bn over the 2012-2016 period . China Minmetals has been present in Poland since 2007.
The above figure excludes all FDI figures The largest Chinese M&A acquisition of a Polish business saw Guangxi Liugong Machinery buy up the civilian operations of HSW for US$59m. The deal encountered a number of issues that were all successfully surmounted before the deal was completed.
The above are simply the unique issues that deal-makers advising both parties had to deal with – there were also myriad other concerns ranging from cross-border tax complications to IP concerns to legal complications (to name just a few) for them to resolve.
Looking forward, further outbound M&A activity into Poland is likely to take place as Chinese FDI metrics into Poland also increase. Therefore, we forecast that every one US$ that is invested by a Chinese business into Poland will result in a subsequent M&A investment of around 55 cents
Air China is allegedly the front-running bidder for LOT.
CIC could invest in Poland according to the Polish foreign investment agency. The comment came off the back of the agency signing a number of deals with the China Development Bank and with the National Development and Reform Commission (NDRC) in December 2011 when Polish President Bronislaw Komorowski visited Beijing. The deal with NDRC is especially important, because it defines benchmarks for annual investments by 2015 added the agency. Meanwhile, FSO Zeran , the Polish automotive company that has not been operating since the middle of last year, is reportedly in advanced talks with an investor. According to market speculation cited in the report, potential investors could be Chery , the Chinese automaker, and South Korean GM DAT. A deal with the Chinese investor could be signed in H1 2012.
Strengths: Low labor costs Well-educated workforce Strategic location Weaknesses Member of the EU – possible collapse of the Euro? Complex legal frameworks
Possible ‘lifecycle’ of Chinese outbound M&A activity: Large transformational E&R deals by SOEs – simply for resource extraction purposes Associated infrastructure & heavy Manufacturing acquisitions – primarily in support of the above. GFSI buys as Chinese businesses on the ground require follow-up financing CB&T & private sector parties start moving in as financing options become available and as they look to move up the value chain High-tech sector activity- Pharma & TMT deals begin to take place So where is Poland now? Probably still around phase 1 or 2. The fact that the Bank of China will open its first branch in Poland this April indicates that we are beginning to see the emergence of phase 3.
Other factors to consider : Forex fluctuations – how cheap is your currency? Risk of sovereign default – countries like the UK and Poland are more attractive than Eurozone countries as the likelihood of the Greek contagion spreading to them is much lower (they don’t use the Euro as their currency). Risk mitigation – Chinese investors prefer low-risk physical assets that carry steady returns. (more reasons on next slide)
Draw up a list – Chinese buyers like to see what options they have Poland’s special economic zones are well-received in China – because they are similar replications of China’s successful implementations of its own Special Economic zones that were first set up in the late 1970s.
Chinese companies in Fortune 500 have increased 130% over 5 years 46 total companies in 2010, surpassing France and Germany Will more emerge following their acquisitions across Europe over 2012 and 2013?
Trade between China and the CEE countries increased 34.1% in 2011 to $41.1bn, according to MOFCOM, above the annual average growth rate of 32%. Many CEE countries have substantial trade deficits with China, with their imports often being eight or 10 times that of exports to the world's second-largest economy = Reciprocity issues One of the difficulties some of the smaller CEE countries faced was amassing sufficient quantities of a particular item to be of interest to China = Is China too large for individual CEE-based businesses to handle?