In recent years, Chinese companies have become increasingly bold in the search for new deals, looking beyond the country’s borders for transformational takeovers. This year already, we have seen the largest ever outbound deal attempted by a Chinese company, with ChemChina’s $43billon bid for Swiss agribusiness Syngenta. As China becomes more relaxed about international deals, private equity firms looking to exit their portfolio companies should take note.
Chinese buyers have bought several private equity-backed assets this year. In March, KKR sold French luxury retailer SMCP to the Chinese textile maker Shangdong Ruyi. A month later, 3i sold baby products maker Mayborn to one of China’s biggest insurance companies, Ping An. Chinese buyers have been willing to pay high multiples for European assets, in the hope of importing products to their domestic market. Consumer and technology assets are of particular interest.
Directives from the Chinese state have emboldened both state-owned enterprises (SOEs) and privately owned enterprises. In April, China’s National Development and Reform Commission (NDRC) proposed loosening the rules on outbound takeovers. Under the proposals, companies will no longer need approval from China’s State Council to pursue a large takeover, or one in a sensitive industry. Companies will also be able to register their work on an outbound takeover with the NDRC more quickly, enabling companies to act faster in auctions.
We believe more Chinese companies will bid for overseas assets if the proposals are adopted. We expect to see more cases where multiple Chinese bidders are present in a bidding process. Buyout firms and their advisers should therefore consider the recent changes when launching a sale. Despite China’s growing acceptance of outbound deals, potential difficulties still remain. Politically sensitive industries are still likely to face scrutiny from the NDRC, which has the power to block transactions even late on in a process.
International regulators will also continue to scrutinize Chinese takeovers. The Committee on Foreign Investment in the United States (CFIUS), has already blocked several deals over security concerns, even those outside of the US. Elsewhere, a recent decision from the European Commission (EC) held that for Chinese SOE related transactions, the EC will include in its merger control assessment the EU turnover (and market presence in relevant European markets) of other Chinese SOEs in circumstances where there is common control. This will place extra scrutiny on Chinese SOE investments in the continent.
Although there are still reasons to be cautious, Private Equity firms can expect more interest from China for their assets. China has taken a more daring approach to deal making, and private equity should benefit as a result.