The emergence of China:
                     New frontiers in outbound M&A
                     November 2009




Global C...
Contents


2    Foreword

4    Executive summary and methodology

6    China outbound M&A overview
15   China outbound M&A...
Foreword


     China has truly stepped onto the world stage            Looking forward, Chinese outbound M&A activity
   ...
The emergence of China: New frontiers in outbound M&A   3
Executive summary
and methodology

     Outbound M&A overview                                all outbound M&A transactions...
The future                                              •	 Only	true	merger	and	acquisition	deals	will	
Outbound Energy, M...
China outbound M&A overview




Lawrence Chia, Head of Deloitte China M&A Services &
Global Chinese Services Group Co-Chai...
M&A trends of outbound cross-border M&A activity from China
              30                                              ...
Deal size split by volume                                                                                                 ...
Industrials sector, which had a 19 percent share in    Sector split of cross-border M&A activity
terms of volume, but just...
Geographic split of outbound cross-border M&A activity                                                      Chinese acquir...
2003-Q3 2009 period. Acquirers also splashed           Geographic split of outbound cross-border M&A activity
out a furthe...
Sector split of cross-border private equity M&A activity                                                                co...
Top 20 China outbound deals
 Ranking    Announced Status   Target company                Target      Target country     Bi...
Africa’s Standard Bank, a deal – as mentioned       the US and Europe as the Chinese regulatory
                          ...
China outbound M&A
activity into Australia




Keith Jones, Managing Partner of Deloitte's Western
Australia Region & Aust...
M&A trends of outbound cross-border M&A activity from China into Australia

                                              ...
exchange holdings away from US dollars and               Deal size split by volume
into buying into real assets in other m...
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
The Emergence Of China New Frontiers In Outbound M&A
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The Emergence Of China New Frontiers In Outbound M&A

  1. 1. The emergence of China: New frontiers in outbound M&A November 2009 Global Chinese Services Group
  2. 2. Contents 2 Foreword 4 Executive summary and methodology 6 China outbound M&A overview 15 China outbound M&A activity into Australia 21 China outbound M&A activity into the US Sector focus 27 Automotive 32 Oil and Gas 38 Financial Services 43 Mining 48 Deloitte Global Chinese Services Group overview 50 Deloitte contacts The emergence of China: New frontiers in outbound M&A 1
  3. 3. Foreword China has truly stepped onto the world stage Looking forward, Chinese outbound M&A activity following the turmoil that afflicted the global looks likely to continue to move from strength financial system in the second half of last year. to strength over 2010, driven by a largely- Nowhere is this more prevalent than in the unchanged appetite for deal-making in China, as Chinese outbound M&A market, where activity well as relatively attractive valuations for overseas remained solid over the first three quarters of assets. At the same time, Chinese acquirers are 2009, despite dire market conditions. Indeed, increasingly examining assets in Europe and outbound deal volumes over Q1-Q3 2009 South America, evidenced by the May 2009 accounted for 10 percent of overall Chinese M&A announcement that the China Development Bank activity, as well as close to one-quarter of M&A will lend US$10 billion to Petrobras, the state- investment – in comparison, foreign acquisitions owned Brazilian oil company, in exchange for a in 2007 comprised just 8.5 percent over all M&A guaranteed supply of oil over the next decade. volumes and 21 percent of values. Furthermore, Chinese authorities are also working to strengthen ties with the EU, in order to drive With outbound deal activity playing an tighter economic integration with the trading increasingly important role in determining bloc as well as gain market economy status, the direction of China's overall M&A market, recognition of which will most likely boost Chinese acquisitions of foreign assets have become acquisitions of European businesses in the future. increasingly sophisticated, as well as controversial. It therefore comes as no surprise that one-quarter In order to shed some light on other deal of China's 20 largest outbound transactions have drivers, as well as discuss any potential hurdles been announced over the previous three quarters, that Chinese firms are likely to encounter in the with a number of them, such as Yanzhou Coal future, Deloitte’s Global Chinese Services Group, Mining’s US$2.6 billion bid for Australia’s Felix together with mergermarket, has produced The Resources, encountering regulatory delays. emergence of China: New frontiers in outbound M&A, a thought-leadership report which looks to At the same time, China’s sovereign wealth fully illuminate potential Chinese acquirers on the fund is also beginning to leave its mark, directly ins-and-outs of purchasing foreign assets. accounting for two multi-billion dollar acquisitions since the beginning of 2007 – the US$3 billion acquisition of a minority stake in US buyout house Blackstone, as well as the US$1.5 billion 17.2 percent stake purchase in Canada’s Teck Resources, announced in July 2009. Public capital is also increasingly being utilized to fund outbound acquisitions, with the China Development Bank recently loaning the state-owned China National Petroleum Corporation US$30 billion in order to swell its outbound M&A war-chest. 2
  4. 4. The emergence of China: New frontiers in outbound M&A 3
  5. 5. Executive summary and methodology Outbound M&A overview all outbound M&A transactions and valuations Chinese outbound M&A flows (incorporating all have been for North American targets. These outbound acquisitions stemming from buyers proportions rose substantially when looking at located in Mainland China, Hong Kong, Taiwan outbound purchases for the Q1-Q3 2009 period, and Macau and targeting businesses situated to 32 percent and 70 percent, respectively. outside China) rebounded over the first three quarters of 2009, with quarterly volumes Sector focus expanding from just 10 announced transactions Energy, Mining & Utilities transactions continue in Q1 to 26 in Q3. Likewise, quarterly deal values to dominate Chinese M&A purchases abroad. rose over the same timeframe from US$1.3 billion Since the beginning of 2003, acquisitions in the to US$8.9 billion. sector have accounted for 29 percent of total outbound deal flow by volume and a massive Chinese acquisitions abroad are steadily rising in 65 percent of total deal valuations. Over Q1-Q3 value: 20.8 percent of all disclosed Chinese M&A 2009, these proportions increased to 40 percent transactions over 2003 to Q3 2009 were valued and 93 percent, respectively. at US$250 million or greater – a proportion which rose by 1.6 percentage points over the first Deal rationale and obstacles three-quarters of 2009. One factor influencing outbound deal flow stems from the fact that Chinese monetary authorities Private equity buyouts from China seem to are encouraging state-owned enterprises (SOEs) focus on portfolio companies located in the to acquire Energy, Mining & Utilities assets Industrials sector: 28 percent of all China-based abroad in order to utilize some of the economy’s private equity acquisitions over the 2003-Q3 massive foreign exchange reserves and diversify 2009 timeframe by both deal volume and value away from low-yielding US dollar-denominated were conducted in this space. Meanwhile, over government securities, as well as secure mining one-third (37 percent) of this activity by deal and energy resources to satisfy the country’s volume targeted businesses in South Asia, while growing appetite for manufacturing inputs. one-fifth of private equity activity by value was invested in Australasian businesses. Chinese SOEs are also looking to expand inorganically so that they can achieve significant Outbound M&A activity into Australia economies of scale, which will ultimately allow Chinese acquisitions into Australia totaled some them to achieve market share abroad and 58 transactions worth a total of US$9.3 billion strengthen their bottom line. over the 2003-Q3 2009 period. The majority of this deal flow was centered on the acquisition China’s post-merger integration (PMI) track of Australian Energy, Mining & Utilities assets, record is developing, however, with obvious which accounted for some 67 percent of overall corollaries for the long-term success of outbound deal volumes over the timeframe, as well as transactions. 86 percent of total valuations. Furthermore, the predominance of Energy, Mining & Utilities The impact of M&A regulations purchases has risen over the first three quarters Comprehensive revisions to China’s regulatory of 2009, with 75 percent of all deal volumes and regime, implemented in the summer of 2008 99 percent of all valuations being attributable to and 2009, signal that such Chinese business acquisitions in the space. policies are now comparable to the EU or North America. At the same time, issues of regulatory Outbound M&A activity into the US reciprocity are unlikely to arise in the near future Chinese acquisitions overseas tend to be focused as the major antitrust regimes are aware of the on assets located in North America. Since huge adverse impact such a charge would have 2003, roughly one-quarter and one-third of on future M&A flows. 4
  6. 6. The future • Only true merger and acquisition deals will Outbound Energy, Mining & Utilities transactions, be collated. Transactions to be included will primarily focusing on Australian assets, are likely usually involve a controlling stake in a company to continue into 2010. However, such transactions being transferred between two different are not going to get easier with time, with large parties. Where the stake acquired is less than Chinese bids for foreign assets in this space are 30 percent (10 percent in Asia-Pacific), the deal likely to be met with increasing resistance. will only be included if its value is greater than US$100 million. Chinese bidders will start returning to bid for • Transactions such as restructurings were assets in the Financial Services sector. While it is shareholders’ interests in total remain the largely accepted that some Chinese bidders made same will not be collated. Mergermarket does have undertaken poorly planned investments into not track property deals, Letters of intent, Western financial institutions in the past, pending Memorandums of understandings, Head of financial sector reforms in the EU and North agreement and Non-binding agreements. America will no doubt create lucrative investment • All US$ symbols refer to US dollars unless opportunities. otherwise stated. • The report includes deals from the below From a country perspective, China's vigorous locations: investment into US businesses is expected to - Mainland China (China); continue over the next 12 months with buyers - Hong Kong; eyeing assets in a bid to boost their technological - Taiwan; prowess. The most notable example of such a - Macau. trend was undoubtedly Lenvovo’s US$1.75 billion • According to mergermarket and for the acquisition of IBM’s personal computer division, purposes of this report, an outbound announced at the end of 2004. Anecdotal transaction is defined as a deal in which the evidence suggests that the jury is still out on the bidder is predominantly located in Mainland deal, with Lenovo recently reporting better-than- China, Hong Kong, Macau or Taiwan and the expected first quarter 2009 results after a difficult target business is predominantly located in any period following the acquisition. other country aside from mainland China, Hong Kong, Macau or Taiwan. Overall, the prognosis for Chinese outbound • For the purposes of this report, regional splits M&A activity is fundamentally strong, despite are defined as follows: significant operational and political barriers to - Germanic – Germany, Switzerland and deal flow continuing to hamper transactions. Austria; Looking forward, it is increasingly likely that - Iberia – Spain and Portugal; outbound values and volumes will eventually - Australasia – Australia and New Zealand; overcome such obstacles, ultimately resulting in - Benelux – The Netherlands, Belgium and the expansion of this particular market. - Luxembourg. • Any mention to the term ‘2003-Q3 2009’ Methodology throughout the report indicates that the • Historical data includes all mergermarket- period in question runs from 01/01/2003 to recorded transactions for the period 30/09/2009. Similarly, any mention to the 01/01/2003 to 30/09/2009. term ‘Q1-Q3 2009’ indicates that the period in • Transactions with a deal value of greater than question runs from 01/01/2009 to 30/09/2009. US$5 million are included. If the consideration • All data quoted is proprietary mergermarket is undisclosed, mergermarket will include deals data unless otherwise stated. on the basis of a reported or estimated value of over US$5 million. If the value is not disclosed, mergermarket will record a transaction if the target’s turnover is greater than US$10 million. The emergence of China: New frontiers in outbound M&A 5
  7. 7. China outbound M&A overview Lawrence Chia, Head of Deloitte China M&A Services & Global Chinese Services Group Co-Chairman remains optimistic on Chinese outbound M&A prospects, suggesting that strong home-grown deal drivers could overcome Chinese businesses’ concerns of overseas regulatory obstacles in the foreseeable future 6
  8. 8. M&A trends of outbound cross-border M&A activity from China 30 25,000 25 20,000 20 Deal value (US$m) 15,000 Deal volume 15 10,000 10 5,000 5 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 Deal volume Deal value (US$m) Source: mergermarket Outbound M&A activity from China has being conducted, Chinese outbound M&A flows increased significantly in recent times, coinciding remained relatively resilient, with the volume of with the rapid development of the wider cross-border acquisitions falling 28 percent over economy and the increasing presence of China the H2 2008-H1 2009 period compared to the on the world stage. Indeed, between 2003 same timeframe a year previously. In contrast, and the end of Q3 2009, Chinese businesses global M&A volumes dropped by 36 percent. Chia undertook 437 outbound acquisitions, worth believes that this relative robustness is attributable a total of US$116.8 billion – with the bulk of to the fact that the wider Chinese economy these (some 241 transactions worth US$75.3 remained somewhat insulated to the fall out from billion) having taken place over the past the financial crisis, perhaps due to the massive two-and-three-quarter years. government capital injection that followed the collapse of Lehman Brothers in September 2008. More recently, Lawrence Chia, Head of Deloitte China M&A Services & Global Chinese Services At the same time, Chia points out that factors Group Co-Chairman, notes that outbound Chinese other than opportunistic bottom-fishing have M&A deal flow has risen rapidly over the first also driven outbound cross-border deal-making. three quarters of the year, with Chinese purchases State-sanctioned acquisitions are one such driver, overseas having numbered 61 deals worth US$21.2 with Chinese state-owned enterprises (SOEs) billion, the majority of them coming to market in being offered large loans or credit agreements Q3 2009. Some 26 deals worth US$8.9 billion were at preferential rates in order to purchase foreign announced over this period, with the numbers assets (China Development Bank’s [CDB] recent significantly boosted by the US$2.6 billion debt- US$30 billion loan to China National Petroleum inclusive buy of Felix Resources, the Australian Corp to enhance its acquisition war-chest is just one miner, by Yanzhou Coal, its Chinese counterpart. example). Such support, Chia believes, comes as the authorities look to diversify the country’s US$2.13 While the global credit crisis resulted in a large trillion of foreign exchange reserves, around 65 decline in the number of M&A transactions percent of which is currently invested in low-yielding The emergence of China: New frontiers in outbound M&A 7
  9. 9. Deal size split by volume dollar-denominated securities according to UBS. 90 9 6 At the same time, Chia also notes that Chinese 80 11 9 SOEs are conducting outbound M&A acquisitions 70 as they look to grow their business in order to 9 13 4 14 prevent takeover bids from larger domestic rivals. 60 7 7 “Buying assets overseas is a sign of strength”, he 4 Deal volume 4 50 4 6 says. “In addition, such businesses do not have to 40 4 2 8 25 36 35 return cash to any stakeholders and are therefore 6 30 23 in a position to finance such acquisitions”. 18 2 21 20 3 11 9 13 9 It is interesting to note that over the whole period, 12 11 10 4 16 16 Hong Kong accounted for the largest proportion 4 9 12 0 4 8 8 of outbound acquisitions by bidder country, 2003 2004 2005 2006 2007 2008 Q1-Q3 2009 brokering 217 deals compared to 174 outbound Not disclosed <US$15m US$15m - US$100m US$101m - US$250m US$251m - US$500m >US$500m purchases by Chinese businesses and 37 by Source: mergermarket Taiwanese companies. However, in terms of deal valuations, Chinese acquirers have spent US$85.1 Sector split of cross-border M&A activity billion buying overseas, in contrast to the US$28 from China 2003-Q3 2009: volume billion and US$3.7 billion invested by Hong Kong 2% 2% 1% 1% and Taiwanese firms respectively. 2% 3% 6% Energy, Mining & Utilities The Q2 2009 US$8.8 billion acquisition of Addax 29% Industrials TMT by Sinopec highlights the prominence of the 7% Consumer large-cap deal in the China outbound space. Financial Services Business Services Despite the austere economic climate, over Transportation the first three quarters of 2009, 11 percent of Pharma, Medical & Biotech Agriculture acquisitions were valued at more than US$500 12% Leisure Construction million, a four-percentage point rise over FY2008 Real Estate figures. However, at the other end of the scale, 19% small-cap deal flow – those transactions valued at less than US$15 million – also jumped five 16% percentage points over the same time period. Source: mergermarket However, while Chia acknowledges that recent Sector split of cross-border M&A activity outbound transactions have increasingly fallen from China 2003-Q3 2009: value into the large-cap space, he does not believe that 1% 1% <1% 1% 1% 0% <1% mega-cap (US$1 billion+) transactions will really 4% take off, explaining that Chinese bidders now 6% Energy, Mining & Utilities realize that such deals are simply too unwieldy and Financial Services difficult to manage effectively – especially when TMT 7% Industrials looking at acquisitions in the Energy, Mining & Consumer Business Services Utilities space. Construction Pharma, Medical & Biotech 13% Real Estate Sector splits Transportation Energy, Mining & Utilities transactions Leisure 66% Agriculture unsurprisingly dominated Chinese acquisitions over the 2003-Q3 2009 period, accounting for 29 percent of all outbound transactions by volume and 66 percent by value. Other industries Source: mergermarket which attracted notable investment include the 8
  10. 10. Industrials sector, which had a 19 percent share in Sector split of cross-border M&A activity terms of volume, but just 6 percent by value, while from China Q1-Q3 2009: volume the TMT space witnessed 16 percent of overall 2% 2% deal volumes and 7 percent of values. 6% 8% Energy, Mining & Utilities Looking at outbound M&A activity over 2009 Industrials TMT alone, it is clear just how much importance China Consumer 41% ascribes to securing raw materials in order to fuel Financial Services Business Services 10% its booming manufacturing base. The proportion Leisure Agriculture of Energy, Mining & Utilities-focused acquisitions abroad over the three quarters of 2009 alone makes up some 41 percent of the total number of deals – a rise of 12 percentage points compared 15% to similar figures for the past six-and-three- quarter-year period. Furthermore, the country 16% spent some US$19.5 billion acquiring such foreign Source: mergermarket assets, accounting for a massive 93 percent of the total spent overseas in the first three quarters of Sector split of cross-border M&A activity the year. from China Q1-Q3 2009: value 1% <1% 1% 2% <1% Looking forward, Chia suggests that the 2% <1% dominance of Energy, Mining & Utilities transactions is likely to continue into 2010. Energy, Mining & Utilities Financial Services However, he does not believe that such TMT Industrials transactions are going to get easier with time, Business Services saying that, “Large Chinese bids for foreign assets Consumer Leisure in this space are likely to meet with increasing Agriculture resistance. Chinese bidders will progressively need to learn how to divorce any political undertones from their offers if they want their bids to succeed”. 93% At the same time, Chia feels that Chinese bidders Source: mergermarket will start returning to bid for assets in the Financial Services sector. “While some market commentators believe that entities such as the state sovereign wealth fund China Investment Corporation (CIC) burnt their fingers last time Large Chinese bids for foreign assets in they invested in western financial institutions, the imminent swathe of reforms that are about to the Energy, Mining & Utilities space are impact European and North American banks will no doubt create lucrative investment opportunities likely to meet with increasing resistance and they are making these investments for the in the future strategic long-term”. Lawrence Chia Head of Deloitte China M&A Services & Global Chinese Services Group Co-Chairman Another potential driver of outbound Financial Services transactions derives from the fact that state-owned Chinese banks are increasingly creating partnerships abroad in order to support future deal financings between prospective The emergence of China: New frontiers in outbound M&A 9
  11. 11. Geographic split of outbound cross-border M&A activity Chinese acquirers and local sellers. Chia cites from China 2003-Q3 2009: volume Industrial and Commercial Bank of China’s (ICBC) <1% <1% 20 percent stake buy in South Africa’s Standard 2% 2% 2% <1% North America Bank for US$5.4 billion in early 2007 as a good 2% 2% South East Asia Australasia example of such a practice, with future Chinese 3% 24% South Asia buyers looking to make purchases in Africa being 3% UK & Ireland 3% Germanic able to secure local deal financing terms off the 3% Central & South America back of this relationship. Japan Africa 4% Central & Eastern Europe North Asia Other sectors that Chia believes will see a rise in Central Asia outbound deal flow over 2010 and beyond include 5% 16% Benelux Nordic the Agriculture and Renewable Energy, both of France which are likely to witness increased activity as 6% Italy Middle East Chinese firms search for suitable businesses to 8% Iberia sate their rising appetite for both clean energy and South Eastern Europe Source: mergermarket 14% agricultural produce. Geographic split of outbound cross-border M&A activity Country splits from China 2003-Q3 2009: value North America-based businesses have been 1% 1% <1% <1% <1% the preferred target of Chinese acquirers over 1% <1% the 2003-Q3 2009 period, with some 106 2%1% North America 2% 2% UK & Ireland acquisitions, accounting for 24 percent of the 4% 28% South East Asia Australasia total, being announced. Meanwhile, South East 4% Africa Asian and Australasian businesses have also Central & Eastern Europe Nordic found favor with the Chinese buyers, accounting 8% Central Asia South Asia for 16 percent and 14 percent of outbound France acquisitions by volume respectively. Central & South America Middle East 8% North Asia Germanic Chia remarked that acquisitions of Australian Italy Energy, Mining & Utilities assets are likely to Japan 20% Benelux continue unabated in the near future. This is 8% South Eastern Europe Iberia chiefly because Australian commodities, such as 9% coal, are of superior quality while transportation Source: mergermarket costs involved with shipping aggregates from Geographic split of outbound cross-border M&A activity Australia to China are lower than from Canada from China Q1-Q3 2009: volume and South America. 2% 1% 2% 2% 3% 2% Chia further claims that the country’s love affair 3% North America with US businesses will continue over the next 3% 33% Australasia 12 months with buyers eyeing assets in a bid South East Asia 3% Japan to boost their technological prowess. At the Central & South America UK & Ireland same time, Chinese buys in the US may also be 5% Nordic encouraged by the state as it looks to diversify Benelux Africa its massive US dollar reserves away from currency 10% South Asia Central Asia holdings into less volatile assets. North Asia Central & Eastern Europe North America also ranks as the top recipient of outbound M&A investments from China by 31% value, with Chinese bidders spending some Source: mergermarket US$32.2 billion (28 percent of the total) over the 10
  12. 12. 2003-Q3 2009 period. Acquirers also splashed Geographic split of outbound cross-border M&A activity out a further US$23.5 billion and US$10.5 billion from China Q1-Q3 2009: value <1% buying UK & Ireland as well as South East Asian 1% <1% <1% <1% assets respectively. 4% <1% 4% While Chinese acquisitions of African assets have North America Australasia received many column inches in the world’s Central Asia financial press of late, Chia doesn’t expect this to 20% UK & Ireland South East Asia translate into a sustained trend over the longer North Asia Japan term. “There are profitable M&A opportunities Central & Eastern Europe in Africa but doing a deal there is difficult due South Asia Africa to the lack of infrastructure”, he explained. Following the failure of CNPC’s US$460 million 70% bid for the Verenex Energy, the Canadian-listed Oil & Gas Exploration company with interests in Libya, in September 2009, Chia also points out Source: mergermarket that political intransigence plays an important role. CNPC walked away from the deal after Private equity M&A trends of outbound cross-border Libya’s National Oil Company – who had the M&A activity from China right of first refusal – purchased the business 1,000 7 itself and is currently negotiating a lower 900 valuation for the business. 6 800 5 700 Private equity Deal value (US$m) 600 China Outbound private equity acquisitions Deal volume 4 have numbered some 59 transactions worth 500 US$5.2 billion over the 2003-Q3 2009 period, 3 400 accounting for 13 percent of overall outbound 2 300 transactions and 4.4 percent of total valuations. 200 The vast majority of these private equity bids 1 100 originated from Hong Kong-based private 0 0 equity firms, indicating that despite its massive Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 Q2 Q3 economic clout, Chinese private equity firms Deal volume Deal value (US$m) Source: mergermarket have yet to actively target companies in overseas markets. Sector split of cross-border private equity M&A activity from China 2003-Q3 2009: volume Buyouts of foreign businesses by Chinese private 4% 2% 2% equity houses have fallen off over the course of 4% 2009, with just three such deals having taken 5% Industrials 29% place in the first three quarters of this year. Technology, Media & Telecommunications (TMT) 5% Financial Services Quarterly deal flow was at its highest point in Q1 Business Services 2008 when seven transactions were undertaken – Consumer however, in terms of quarterly valuations, activity 7% Pharma, Medical & Biotech Construction peaked in Q1 2006 following the US$887 million Energy, Mining & Utilities MBO of Waco International, the South African Leisure Agriculture company engaged in commercial and industrial 12% Transportation service businesses, backed by CCMP Capital Asia, 16% the Hong Kong-based private equity firm. 14% Chinese financial investors have most targeted Source: mergermarket The emergence of China: New frontiers in outbound M&A 11
  13. 13. Sector split of cross-border private equity M&A activity companies in the Industrials sector, with from China 2003-Q3 2009: value acquisitions in this particular space accounting 1% 1% for more than one-quarter (29 percent) of all 2% 4% outbound private equity activity in terms of both 8% deal volume and deal value. Industrials 29% Construction Consumer Looking at geographic breakdowns, South 10% Financial Services Asian assets attracted the lion’s share (37 Business Services Technology, Media & Telecommunications (TMT) percent) of private equity investment in terms Transportation of deal volumes over the period while North Pharma, Medical & Biotech America and South East Asia were also notable Energy, Mining & Utilities 12% Leisure destinations for Chinese cross-border private equity activity, together accounting for 28 20% percent of the market. Meanwhile, in contrast 13% outbound private equity valuations have been Source: mergermarket centered in Australasia, Africa and South East Asia, with a total of US$2.7 billion having been Geographic split of cross-border private equity M&A activity invested in them collectively. from China 2003-Q3 2009: volume 2% 2% 2% 2% Despite the rather subdued level of deal making 4% from Chinese financial investors, Chia remains 4% South Asia optimistic that home-grown – especially 5% North America South East Asia mainland-Chinese – private equity groups will 37% Australasia mature over the next 12 months, pointing North Asia UK & Ireland towards the massive amounts of capital that is Japan Central & Eastern Europe rapidly becoming available to fund deals. “The 14% Africa propensity to save in China is of the world’s Benelux Italy highest, meaning that vast amounts of capital are increasingly being made available for the country’s alternative investment community”, 14% explains Chia. “Such capital pools are only 14% going to get bigger, particularly since a lower Source: mergermarket proportion of China’s population has access to a bank account vis-à-vis other economies of Geographic split of cross-border private equity M&A activity the same size. As a result, many state-owned from China 2003-Q3 2009: value financial institutions, such as CDB, are creating 3% 3% 1% private equity funds to invest abroad, such as its 8% 19% China-Africa Fund, which will aim to raise US$5 Australasia billion to invest and support Chinese enterprises in Africa South East Asia Africa”. However, Chia concedes it is questionable North America 8% South Asia whether domestic financial investors will initially UK & Ireland want to cut their teeth on complex cross-border Italy North Asia acquisitions. 18% Benelux 10% Central & Eastern Europe 14% 16% Source: mergermarket 12
  14. 14. Top 20 China outbound deals Ranking Announced Status Target company Target Target country Bidder company Bidder Seller company Seller Deal date sector location country value (US$m) 1 Feb-08 C Rio Tinto Plc (12.00 Mining United Kingdom Alcoa Inc; Aluminum China 14,000 percent stake) Corporation of China (Chinalco) 2 Jun-09 C Addax Petroleum Energy Canada Sinopec International China 8,800 Corporation Petroleum Exploration and Production Corporation 3 Oct-07 C Standard Bank Group Financial South Africa Industrial and Commercial China 5,413 Limited (20.00 percent Services Bank of China Limited stake) 4 Jul-06 C Rosneft Oil Company OAO Energy Russia BP Plc; China National China Rosneftegaz Russia 5,345 (7.58 percent stake) Petroleum Corporation; Petroliam Nasional Berhad 5 Aug-05 C PetroKazakhstan Inc Energy Canada CNPC International Limited China 3,932 6 Jul-08 C Awilco Offshore ASA Energy Norway China Oilfield Services Limited China 3,777 7 Jun-06 C OAO Udmurtneft Energy Russia China Petroleum & Chemical China TNK-BP Holding Russia 3,500 Corporation OAO 8 Mar-08 C Tuas Power Limited Energy Singapore SinoSing Power Pte Ltd China Temasek Holdings Singapore 3,103 Pte Ltd 9 May-07 C Blackstone Group Financial USA China Investment Corporation China 3,000 Holdings LLC (Minority Services Stake) 10 Jul-07 C Barclays Plc (3.10 percent Financial United Kingdom China Development Bank China 2,980 stake) Services 11 Aug-09 P Felix Resources Limited Mining Australia Yanzhou Coal Mining China 2,564 (formerly AuIron Energy Company Ltd Limited ACN) 12 Aug-04 C National Grid Transco Utilities United Kingdom Cheung Kong Infrastructure Hong Kong National Grid Plc United 2,494 plc (North England (other) Holdings Limited; Li Ka Shing Kingdom distribution network) (Overseas) Foundation; United Utilities Plc 13 Jan-06 C South Atlantic Petroleum Energy Nigeria China National Offshore Oil Hong Kong South Atlantic Nigeria 2,268 (OML 130) (45.00 percent Corporation Ltd Petroleum Ltd. stake) 14 Oct-06 C Argymak Trans Service Energy Kazakhstan CITIC Group China CITIC Canada Canada 1,910 LLP; Karazhanbasmunai, Petroleum Limited JSC; Tulpar Munai Services (formerly Nations LLP Energy Company Limited) 15 Sep-08 C Tanganyika Oil Company Energy Canada China Petroleum & Chemical China 1,813 Ltd. Corporation 16 Dec-04 C IBM Corporation (Personal Computer: USA Lenovo Group Limited Hong Kong IBM Corporation USA 1,750 Computing Division) Hardware 17 Aug-09 P ASOC (Mackay River and Energy Canada PetroChina Company Limited China Athabasca Oil Canada 1,740 Dover oil sands projects) Sands Corp (60.00 percent stake) 18 Jul-09 P Teck Resources Limited Mining Canada Fullbloom Investment China 1,508 (17.20 percent stake) Corporation 19 Apr-09 C OZ Minerals (certain assets Mining Australia China Minmetals Non-Ferrous China OZ Minerals Australia 1,386 excluding Prominent Hill Metals Co Ltd Limited (formerly and Martabe) known as Oxiana Limited) 20 Jan-05 C Marionnaud Parfumeries Consumer: France A.S.Watson & Co Ltd Hong Kong 1,181 SA Other P= pending, C= completed Source: mergermarket Top 20 China outbound deals and outlook exploration and production company, by Sinopec, China's largest The largest Chinese outbound acquisition to take place since the producer and supplier of oil products and major petrochemical beginning of 2003 saw a consortium consisting of Alcoa and products. The bid was offered at a 47 percent premium to Addax’s Chinalco, the US and Chinese aluminum producers respectively, share price one month prior to the announcement – one of the acquire a 12 percent stake in Rio Tinto, the UK-listed miner, reasons why 92.67 percent of the target’s shareholders ultimately for US$14 billion. The deal was completed in early 2008 and tendered their shares to the bid. The bid premium – considered to was conducted primarily to protect the two bidders from rising be on the high side by market commentators – also kept potential aluminum prices if rival BHP Billiton’s bid to acquire Rio Tinto rivals away from Addax as it was rumored that the Korean was successful. National Oil Company was also lining up Addax in its crosshairs. Second on the list was the US$8.8 billion inclusive of net-debt The third-largest outbound transaction emanating from China acquisition of Addax Petroleum, the Canadian oil and gas saw ICBC, the Chinese bank, snap up a 20 percent stake in South The emergence of China: New frontiers in outbound M&A 13
  15. 15. Africa’s Standard Bank, a deal – as mentioned the US and Europe as the Chinese regulatory earlier – which Chia believes could have been regime was not considered up to par. The recent motivated by the Chinese government’s desire to shake-ups are a response to this and now I believe help future acquirers looking to invest in Africa that the Chinese regulatory framework is now very secure better deal financing terms from friendly much in line with international best practices”. local lenders. Chia pours cold water on the idea that China’s The largest foreign buy conducted by a Hong rejection of Coca-Cola’s bid for Huiyuan Juice, as Kong bidder saw a consortium of Cheung well as the recent trade spat between China and Kong Infrastructure Holdings, the Hong Kong the US could lead to increased protectionism. infrastructure company, United Utilities, the UK “Local drivers influencing Chinese acquisitions water, electricity, and natural gas utility, and abroad are, in themselves, compelling reasons the Li Ka Shing Foundation, acquire the North for Chinese firms to buy foreign assets, England gas distribution network, from National regardless of the strict regulatory regimes in Grid Transco, the UK natural gas transmission and place overseas”. Delving further, he says, “I think distribution company, for US$2.5 billion back in a sense of perspective is required here. It must 2005. The consortium fought off competition be remembered that just prior to their bid for from private equity firm Terra Firma, strategic Huiyuan, Coca-Cola attempted to buy a similar- player Scottish and Southern Energy, as well as sized Australian soft drinks manufacturer in a Macquarie Bank and A billion Amro. deal which was ultimately rejected by Australian antitrust authorities due to concerns over the new Looking forward, Chia remains positive on entity’s market share. As a result, I do not think the outbound M&A market, especially when there is any basis for reciprocity to occur and the discussing recent revisions to China’s antitrust regimes in Washington, Ottawa and Brussels, I regime and its impact on outbound deal believe, are aware of this”. opportunities. On this particular topic, he notes that comprehensive revisions, implemented in the Chia does however admit that China’s post summer of 2008 and 2009, signal that Chinese merger integration track record is developing. business policies are now comparable to the EU or “Chinese bidders should learn how to implement North America. “Previous high-profile outbound a cross-border M&A acquisition”, he said, “they acquisitions by Chinese bidders were, more often have recognized that it is a key success factor for than not, sniffed at by regulatory agencies in cross-border M&A transactions and this applies to handling both regulatory agencies as well as target stakeholders”. Local drivers influencing Chinese acquisitions abroad are, in themselves, compelling reasons for Chinese firms to buy foreign assets, regardless of the strict regulatory regimes in place overseas Lawrence Chia Head of Deloitte China M&A Services & Global Chinese Services Group Co-Chairman 14
  16. 16. China outbound M&A activity into Australia Keith Jones, Managing Partner of Deloitte's Western Australia Region & Australia Chinese Services Group Leader, highlights China’s appetite for Australian commodities as a continued driver of outbound M&A acquisitions into the country – yet warns that Australian regulatory bodies will begin to monitor such transactions closely The emergence of China: New frontiers in outbound M&A 15
  17. 17. M&A trends of outbound cross-border M&A activity from China into Australia 3,500 6 3,000 5 2,500 4 Deal value (US$m) 2,000 Deal volume 3 1,500 2 1,000 1 500 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 Deal volume Deal value (US$m) Source: mergermarket Australia’s vast amount of natural resources private equity buying into Australia. Nonetheless, has underpinned a flurry of M&A transactions SOEs still dominate inbound investment activity”. undertaken by Chinese firms in a bid to The average size of acquisitions in the Australian meet the raw material demands of a rapidly market (US$195 million over the period) is just expanding economy. As a result, M&A activity over half the US$321 million mean value of all has steadily climbed from just five acquisitions, Chinese outbound M&A transactions since 2003, collectively valued at US$1.4 billion, in 2003, to However, a few large-cap Australian Mining 12 transactions, worth US$1.8 billion, in 2008. transactions conducted in the first three quarters And 2009 is shaping up to witness even greater of 2009 bolstered this figure to US$390 million, levels of deal flow with 16 transactions, worth more than 90 percent the US$433 million average a combined US$5.5 billion, having already been deal value for all Chinese outbound acquisitions announced over the first three quarters, making over the same timeframe. Australia the top foreign market by country for Chinese firms sourcing assets abroad over the On a broader level, cross-border acquirers are also period. paying comparatively more for Australian assets in recent months due to the strong recovery of Cross-border M&A from China has overwhelmingly the Australian dollar, which has risen by around targeted Australian Energy, Mining & Utilities a quarter against the Chinese Yuan since early assets, for which Chinese acquirers have a March 2009. Concurrently, unit prices for subsoil seemingly undiminished appetite. “Typically, commodities have rebounded strongly over the transactions are strategic deals carried out by same period, further heightening valuations for Chinese SOEs with an agreement for the output Australian Energy, Mining & Utilities assets. or resource being produced”, says Keith Jones, Managing Partner of Deloitte's Western Australia On this issue Jones comments, “Chinese Region & Australia Chinese Services Group Leader. acquisition activity is also being encouraged He adds, “However, of late, we have seen more by businesses’ desire to diversify their foreign 16
  18. 18. exchange holdings away from US dollars and Deal size split by volume into buying into real assets in other markets. This 16 strategy also supports the state’s longer-term aims 2 of securing resources for the future growth of the 14 economy”. Moreover, rising global prices for hard 2 12 commodities and energy make assets in these 2 3 niches comparatively more attractive. 10 Deal volume 1 8 1 Looking at deal sizes, since the beginning of 2003, 4 6 6 Chinese acquisitions worth more than US$500 3 5 million have accounted for just 9 percent of all 4 1 2 1 3 buys in Australia, with fully 86 percent of deal flow 1 2 2 2 2 2 falling into the mid-market (US$5 million-US$500 1 2 3 2 1 1 1 1 million) space. 5 percent of deal valuations were 0 2003 2004 2005 2006 2007 2008 2009 YTD not disclosed. Not disclosed <US$15m US$15m - US$100m US$101m - US$250m US$251m - US$500m >US$500m Source: mergermarket Sector splits Chinese acquisitions of Australian businesses have focused almost exclusively on buys in the Energy, Mining & Utilities sector. Such purchases account for more than two-thirds of the overall market by deal volume and a massive 89 percent of deal value – equating to some 39 transactions worth Chinese acquisition activity is being US$9.3 billion. This focus becomes clearer even when looking at 2009 figures alone. 82 percent encouraged by businesses’ desire to of overall Chinese purchases into Australia were diversify their foreign exchange holdings purchases of Energy, Mining & Utilities assets, accounting for 99 percent of total deal values into away from US dollars and into buying the country. into real assets in other markets However, while M&A drivers in traditional Keith Jones investment hubs in Australia may sustain deal Managing Partner of Deloitte's WA Region & Australia CSG Leader flow looking ahead, Jones comments that investor rationale may be shifting. “We anticipate Chinese acquirers to be driven by the profit imperative as well as the need for resources”, he said, adding that “we also foresee growth in a different type of investor driven by more traditional investment/ growth strategies”. Accordingly, China may increasingly deploy capital towards other national industries going forward, with Jones suggesting the Foods niche, some soft commodities such as beef and timber and, in the longer term, Real Estate, to be likely targets. The emergence of China: New frontiers in outbound M&A 17

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