China's M&A mis­sion to reach for stars

The Pak Banker - - COMPANIES/BOSS -

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.

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