China's S$347b foreign acquisition spree crumbling as sellers baulk, capital controls tighten

The US$1 billion (S$1.4 billion) purchase of Dick Clark Productions by billionaire Wang Jianlin's (above) Dalian Wanda Group was called off in March.
The US$1 billion (S$1.4 billion) purchase of Dick Clark Productions by billionaire Wang Jianlin's (above) Dalian Wanda Group was called off in March.PHOTO: BLOOMBERG

LONDON/HONG KONG (BLOOMBERG) - China's biggest-ever foreign acquisition frenzy is ending almost as dramatically as it began.

After stunning the world with a record US$246 billion (S$347 billion) of announced outbound takeovers in 2016, Chinese dealmakers are now struggling to cope with tighter capital controls and increasingly wary counter-parties.

Cross-border purchases plunged 67 per cent during the first four months of this year, the biggest drop for a comparable period since the depths of the global financial crisis in 2009, according to data compiled by Bloomberg.

Analysts see few signs of a rebound as Chinese regulators make it difficult for acquirers to move money overseas. Foreign sellers have also thrown up new hurdles after getting spooked by a string of cancelled deals. Some are forcing suitors to pay unusually large penalties if offers fall through, while others are shunning Chinese bids in favour of lower-priced offers from elsewhere.

"China's outbound M&A activity will likely remain slow for the rest of this year," said Ms Bee-chun Boo, a Beijing-based partner at the mergers and acquisitions practice of law firm Baker & McKenzie.

The drop-off in deals should help stem capital flight and stabilise China's battered currency. But it could also undermine a big pillar of support for corporate valuations around the world. Last year's 137 per cent surge in Chinese takeovers vaulted the country to No. 2 behind the US on the ranking of global acquirers.

Cooling off the buying frenzy has become a policy priority in Beijing. Through the end of September, the authorities plan to curb offshore acquisitions of US$1 billion or more in industries outside a buyer's core business, people with knowledge of the matter said in November. They will also ban most investments of US$10 billion or more and restrict foreign property purchases exceeding US$1 billion by state-owned enterprises, the people said.

Even previously announced deals are vulnerable. Chinese developer Shandong Tyan Home in April blamed capital controls for backing out of talks to acquire Barrick Gold Corp's stake in an Australian mine for US$1.3 billion. The US$1-billion purchase of Dick Clark Productions by billionaire Wang Jianlin's Dalian Wanda Group was called off in March, after people with knowledge of the matter said the conglomerate was having difficulty moving money out of China.

That same month, Beijing-based property firm Macrolink Group ended discussions to buy a £600 million (S$1.1 billion) plot of land in London from St Modwen Properties for a similar reason, according to people familiar with the matter.

"Capital controls have clearly had a dampening effect on China's outbound M&A activity," Mr Joseph Gallagher, head of mergers and acquisitions for Asia Pacific at Credit Suisse Group, said in an interview in Hong Kong.

There are exceptions, of course. HNA Group, a Chinese aviation-to-hotels conglomerate, has embarked on a flurry of overseas purchases this year - ranging from a nearly 10 per cent stake in Deutsche Bank to the US$1-billion takeover of Singapore logistics provider CWT. Deals seen as important for Chinese economic development have also won official approval, including the country's biggest-ever overseas purchase, the US$43-billion acquisition of Switzerland-based seed maker Syngenta by China National Chemical Corp.

To get around capital controls, some acquirers have tried to secure financing from the overseas branches of Chinese lenders by pledging their onshore assets as collateral, according to law firm Clifford Chance. Other strategies include pursuing smaller deals and teaming up with offshore private-equity firms, said Baker & McKenzie's Ms Boo.

Still, many sellers are growing wary. To protect against the risk of an offer falling through, they are now asking Chinese acquirers to agree to break fees as high as 10 per cent of the deal's value, up from around 2 per cent previously, according to Ms Violet Ho, senior managing director for greater China at Kroll, a New York-based risk consultancy that provides M&A due diligence.

In one recent example, a consortium led by Zhengzhou Coal Mining Machinery Group,  agreed to a 10 per cent break fee as part of their €545 million (S$835.5 million) offer to buy Robert Bosch GmbH's starter and generators business this month.

Chinese developer C C Land Holdings agreed to a £287.5 million deposit for its £1.15 billion offer to buy London's Cheesegrater tower from British Land and Oxford Properties Group in March.

While bankers say most overseas sellers still want Chinese bidders involved in their auctions, that has not stopped target companies from turning down high-priced offers from China on concern the deals might be delayed or fall through. Capital & Counties Properties, a UK property developer, spurned a higher offer from HNA when it sold the Olympia exhibition centre in west London to a group of German buyers in April, people familiar with the matter said at the time.

Given the headwinds facing Chinese acquirers, deal volume is likely to end the year 40 per cent to 50 per cent below the 2016 level, according to Mr Fang Jian, managing partner for China at law firm Linklaters.

"We're expecting fewer mega-sized deals and the volume of Chinese outbound acquisitions may drop significantly," said Mr Terence Foo, who advises companies on cross-border M&A as a co-managing partner for China at Clifford Chance. "Foreign sellers have become more sceptical."