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Chinese outbound M&A into Europe and Poland

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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 …

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


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  • 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?
  • Transcript

    • 1. How to lure a dragonChinese investment into Europe & PolandLawrence Chia,Global Chinese Services Group Co-ChairmanRegional Managing PartnerDeloitte Financial Advisory Services, Asia PacificApril 2012 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 2. How to lure a dragon: outbound M&A to Europe & PolandContentsChinese M&A activityChinese outbound M&A activityChinese outbound M&A activity into EuropeChinese outbound M&A into Central & Eastern EuropeWhy invest in Poland?Chinese outbound M&A in PolandLooking forward – trends for 2012 and beyondQuestions & Answers2 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 3. Chinese M&A activity3 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 4. How to lure a dragon: outbound M&A to Europe & PolandThe global perspective – Global M&A activity impacted by the GFC –yet still up despite the Eurozone sovereign debt crisis4 © 2012 Deloitte & Touche Financial Advisory Services Pte Ltd
    • 5. How to lure a dragon: outbound M&A to Europe & PolandYet composition of Chinese M&A activity is changing for a growing Chinese outbo und M&A is accounting M&A statistics propo rtion of overall Chinese Source: mergermarket5 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 6. Chinese outbound M&A activity6 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 7. How to lure a dragon: outbound M&A to Europe & PolandChinese outbound M&A activity is growing rapidly –mostly in the Energy & Resources sector7 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 8. How to lure a dragon: outbound M&A to Europe & PolandHowever outbound activity into Europe is growing strongly – and isset to continue expanding. Source: mergermarket8 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 9. Chinese outbound M&A activity intoEurope9 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 10. How to lure a dragon: outbound M&A to Europe & PolandAcquisitions in Europe have surged over the past two years Source: mergermarket10 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 11. How to lure a dragon: outbound M&A to Europe & PolandChinese buyers into Europe are diversifying their portfolios Source: mergermarket Source: mergermarket11 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 12. Chinese outbound M&A into Central &Eastern Europe12 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 13. How to lure a dragon: outbound M&A to Europe & PolandChinese M&A into CEE still a relatively youthful phenomenon – yetthe market is maturing Source: Thomson Source: Thomson13 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 14. How to lure a dragon: outbound M&A to Europe & PolandDiversification evident by spread of deal-making into Belarus &Latvia Top five Chinese investments into the CEE, 2007-2011 Value Year Target Sector Country (US$m) BorsodChem Zrt 2010 MFG Hungary 1,701 (58% stake) Digital Sky 2010 GFSI Russia 300 Technologies Ltd 2009 Nobel Oil Group E&R Russia 300 BorsodChem Zrt 2010 MFG Hungary 244 (9.5% stake) BorsodChem Zrt 2010 MFG Hungary 190 (38% stake) Source: Thomson Source: Thomson14 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 15. Why invest in Poland?15 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 16. How to lure a dragon: outbound M&A to Europe & PolandWhy invest in Poland?16 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 17. How to lure a dragon: outbound M&A to Europe & PolandAbout those Polish special economic zones Polands special economic zones were created to: •Accelerate the economic development of regions •Manage post-industrial property and infrastructure •Create new jobs •Attract foreign investors to Poland. And they have been successful, with Polish ministry of economy figures showing that they have brought in US$20bn worth of investments into Poland and created 50,000 new jobs They work by creating the following tax exemptions: •Large enterprises – from 30% to 50% of eligible costs •Mid-sized enterprises – from 40% to 60% of eligible costs •Small enterprises3 – from 50% to 70% of eligible costs.17 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 18. How to lure a dragon: outbound M&A to Europe & PolandWho has already invested in Poland – and vice versa? Some Polish firms operating in Some Chinese firms operating in China Poland Amber Foods Consumer Food Sany Heavy Polska Heavy machinery Industry Axtone Rail Bicton Pharma Huawei Telecoms Groupa Black Business ZTE Telecoms Point Services KGHM Mining China Minmetals Mining Kopex Mining Marganski & China CNR Corp Rail Myslowski Aviation Renewable Zaklady Lotnicze Shanghai Electric energy Polfa Lodz Pharma Selena Chemicals Zhongxin Pharma Pharmaceuticals W Kruk Luxury goods18 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 19. Chinese outbound M&A in Poland19 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 20. How to lure a dragon: outbound M&A to Europe & PolandJust four Chinese outbound deals into Poland have been recordedsince 2005 (excluding FDI figures) Date Target Target Short Bidder Bidder Bidder Value Target Name Industry Description Name Industry Territory (US$m) Huta Stalowa Wola Mnfr industrial Guangxi Liugong 01/20/2011 MFG MFG China 58.97 SA Oddzial I machinery Mach Co Ltd Mnfr,whl Foxconn Dell Inc-Polish 08/24/2008 TMT personal Technology Co TMT Taiwan - Plant computers Ltd Delphi Corp- Mnfr,whl auto BeijingWest Inds 10/09/2009 MFG MFG China - Facilities,Krosno components Co Whl construction Guangxi Liugong 01/20/2010 Dressta Sp zoo MFG MFG China - equipment Mach Co Ltd Source: mergermarket20 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 21. How to lure a dragon: outbound M&A to Europe & PolandDelving into the detail – The Huta Stalowa dealUnique obstacles…•HSWs close and long-running association with the Polish armed forces,which dates back to the late 1930s.•The protracted nature of negotiations regarding wages and job securitybetween HSW and the Polish Workers Union following the initiation of thedeal.…And solutions•Rain-makers on both sides of the deal structured the transaction so thatGuangxi were able to buy HSW’s civilian arm – its military arm remaining inthe hands of its original (Polish) owners.•After an extended period of time, an agreement was reached amounting to a3% pay rise but with a 54 month employment guarantee. Both solutions clearly demonstrate that compromise is key21 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 22. How to lure a dragon: outbound M&A to Europe & Poland…Looking forward, trade ties between China and Poland areincreasing rapidly… Polish President Bronislaw Komorowski expects Chinese investments into Poland to reach around €400m per year which is likely to occur in 2015 If 2008 outbound FDI/outbound M&A figures are discounted (because of the distorting impact of the GFC on such metrics), the goodness of fit between Chinese ODI and outbound M&A by value has historically been strongly correlated. Source: Bank of Poland, Deloitte research22 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 23. How to lure a dragon: outbound M&A to Europe & Poland…With a number of potential deals already in the pipeline… Target Bidder Target Target Industry Bidder country country Tri-Ring Group FLT Krasnik Poland Manufacturing China Corporation Pharma-related China Pharma Polpharma Poland SME Toluene diisocyanate Poland Manufacturing Wanhua Chinadivision of Zachem LOT Poland Transportation Air China China Malopolska Siec Poland Telecoms Huawei China Szerokopasmowa Source: mergermarket23 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 24. How to lure a dragon: outbound M&A to Europe & Poland…and cross-border investments likely to surge in the near future Warsaw Business Journal, March 20 2012 mergermarket, March 7 2012Reuters, March15 201224 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 25. Looking forward – trends for 2012 andbeyond25 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 26. How to lure a dragon: outbound M&A to Europe & PolandHow do Chinese investors perceive the Polish market?Chinese interest in Poland is being primarily driven by:•Low labor costs – the mean polish wage is just 25% that of the averageacross Western EuropeThe decision to set Poland as a pivot for developing our business in European marketswas mainly because of the low labor cost there”. Chairman, Nuctech Poland•Well-educated workforce“The local education level meets our requirements” . Chairman, Nuctech Poland•Strategic location“We are targeting the European market partly because, unlike Africa, it is mature andcomposed of high-end clients, which encourages upgrades and innovation”. Chairman, Nuctech Poland•EU member“Businessmen now hold very undecided views about investment in Poland and otherEuropean countries, mainly because of the increasing uncertainties of the Europeaneconomy”.Director, Foreign Trade and Economic Cooperation Department ,Guangdong.26 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 27. How to lure a dragon: outbound M&A to Europe & PolandHow do Chinese investors perceive the Polish market? (continued)• Complex legal framework“The legal system, especially that of labor statutes in Europe, is too complicated. Thebest path is to start with sales and some contracted projects to get familiar with localcircumstances before increasing investment in the region directly”. Senior Researcher, Ministry of Commerce“The COVEC incident reminded us of something that we havent taken into fullconsideration previously“. Guangxi Liugong M&A managerdiscussing why the HSW/Guangxi deal was delayed27 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 28. How to lure a dragon: outbound M&A to Europe & PolandWhat Polish industries will be the most popular from the Chinesepoint of view? Chinese outbound investment patterns typically begin with simple resource extraction deals… The history of Chinese outbound investment by sector…Moving intoConsumer goodsA) to introduce …All these dealsback to China or B) now needto increase market indigenousshare overseas… financial support…28 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 29. How to lure a dragon: outbound M&A to Europe & PolandWhat can be done in order to attract Chinese investors to Poland?• Make entry easy“The Schengen visa allows our staff to travel freely between its 25 member countries – they have to apply for an additional UK visa if they need to visit London.” Huawei spokesperson• Education counts“We want to make a decision at the beginning of next year. We want the center to be in one place and were looking at Germany, the UK, France, Italy and Sweden – countries with the best engineers and education.“ Head of Public Affairs, Huawei Europe• Be open and transparent“The UK is uniquely open to Chinese buyers while the authorities do not particularly regard China as a threat. Most mature markets have foreign investment regulations.” Chinese deal-maker, Financial Times29 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 30. How to lure a dragon: outbound M&A to Europe & PolandWhat can be done in order to attract Chinese investors to Poland?(continued)• Have a plan“Beijing officials were so impressed by the UK government’s new “national infrastructure plan”, which sets out 40 priority projects including a new high speed rail link from London to the north, new ports, a broadband scheme and investment in energy networks, that they have asked the US Treasury secretary, to come up with a similar list of projects.” ‘Open approach attracts Chinese investors’ Financial Times, 20/01/2012• Promote special economic zones and EU support“Its tough attracting Chinese businesses to North Rhine-Westphalia (NRW). We are not like Bavaria. That’s famous. NRW is hardly known and we can’t rely on financial incentives to attract companies to the region.” Head of NRWInvest30 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 31. How to lure a dragon: outbound M&A to Europe & PolandOutbound M&A vital to building true globalizers……with the process likely to continue across Europe as the effects ofthe Eurozone crisis riseSome key Chinese outbound acquisitions in Europe stemming from the global economicdownturn:•Wanhua Industrial Group’s US$1.7bn buy of a 58% stake in Hungary’s Borsodchem in 2011 fromPermira.•Shandong Heavy Industry Group’s US$663m buy of Italy’s Ferretti Yachts in 2011.•China Three Gorges Corporation’s US$3.5bn win of a 21% stake in Portugal’s Energias dePortugal in 2011.•China State Grid’s US4513m acquisition of a 25% stake in Portugal’s REN in 201231 Deloitte ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 32. How to lure a dragon: outbound M&A to Europe & Poland…But the outbound deal-making process is difficult• M&A can be a force for good• …But it can also be very divisive, distorting market forces and driving inequality.• Good deal-making relies on experience• The cross-border deal-making space can be complex! Tentative GO!32 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 33. Questions & Answers33 ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve
    • 34. ©2010 Deloitte Touche Tohmatsu Limited. All rights reserve