China's M&A mission to reach for stars
In 2010, Metro-Goldwyn-Mayer, the storied Hollywood studio behind classics from The Wizard of Oz and James Bond to The Hobbit, filed for Chapter 11 bankruptcy protection. It was the classic victim of a leveraged buyout from a group including Providence Equity Partners and TPG Capital, alongside Sony and Comcast.
Now it is rumoured to be the target of another group of investors with a lot of capital in their pockets - this time the Chinese. Mainland companies such as Dalian Wanda and Fosun, a conglomerate, are both flush with cash. Dalian Wanda just went public in Hong Kong raising almost $4bn in the process and Fosun has access to the coffers of its Portuguese insurer among other sources of money.
Both are interested in movies: indeed they seem to be interested in acquiring almost anything, regardless of the lack of apparent synergy. Today, they control a dizzying variety of businesses, making their purchases at an ever accelerating speed. Moreover, they are merely two out of numerous Chinese firms on outbound buying sprees.
Whatever the object of a possible sale, the Chinese have surfaced as potential buyers. Indeed, they are becoming what private equity used to be - the buyers of first resort.
It is a dramatic turnround. In 2014, mainland firms spent almost $70bn making offshore acquisitions, according to data from Dealogic, as of December 29. By contrast, foreigners spent just $25.5bn on acquisitions going into China, down significantly from the $41.6bn peak reached in 2010. Soon brokerage firms will obligingly put out lists of potential targets for the Chinese just as they used to put out lists of potential take private candidates. That way everyone else could front-run the buyout firms, purchasing shares and selling debt of target companies which would inevitably be downgraded the reports proved correct.
Meanwhile today, the private equity firms themselves sit on the sidelines, as the prices of companies in their sights soar way higher than those their spreadsheets tell them is reasonable and corporate buyers with expensive shares and stagnant revenues swoop in and clinch the deals instead. In any case, it seems safe to assume that 2015 will be a big year for cross-border deals generally, whether growth picks up globally or (as seems more likely) falls short of New Year hopes.
"One adviser in China recalls pointing out that if his financial client had nobody who speaks Russian, acquiring a Russian bank might prove challenging" There are lots of reasons to expect the Chinese to be even bigger participants in the future, especially in the US. Movies say a lot about where China is today - increasingly urban, increasingly hungry for entertainment, and increasingly able
if to pay for it. More and more acquisitions will be driven by the needs of this huge class of ever-more sophisticated consumers, rather than just the needs of the voracious state-owned enterprises, with their focus on natural resource extraction in emerging markets from Africa to Latin America.
Future transactions are more likely to be driven by a new batch of players that are either private sector or less state-ish in their goals, though. That means more investment and acquisitions in Europe and the US, both for bargains and the most upmarket brands. China will also be helped by the relative strength of its currency, which makes acquisitions abroad cheaper in Chinese terms.
Of course, the path is not entirely free of obstacles. For one thing, especially in the US, politicians and regulators have had a chilling effect on Chinese buyers ever since Cnooc withdrew from its planned $18.5bn purchase of Unocal in 2005 in the face of huge political opposition. The Committee on Foreign Investment in the US, which reviews transactions with potential national security issues, has vetted deals that lawyers say have little security implications, such as a Hong Kong-based bank's sale of a handful of US branches to a Chinese bank. It has also vetoed the Chinese sovereign wealth fund's purchase of a 7 per cent indirect stake in a US telecoms towers company.
Moreover, the ambitions of Chinese managements often can exceed their ability to oversee their new toys. One adviser based in China recalls pointing out that if his financial client had nobody who speaks Russian, acquiring a Russian bank might prove challenging. The Chinese may not buy MGM or Lions Gate Entertainment or anything else in which they have expressed an interest. And if they do, and the investment goes wrong - well it will not be the first time. We have seen this movie before.