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Page 1
China’s Global Investment Map from 2005-2014
Source: American Enterprise Institute and Heritage Foundation, China Global Investment Tracker
Currency: in billions US$
• China’s “Going Global” strategy was implemented over 10 years ago
Page 2
China’s outbound M&A activity continues to be active in 2014, reaching a total of completed cross
border deals worth US$56.9 billion with M&A activity from privately owned enterprises leading the
way.
The number of deals also surged by more than a third compared to 2013, reaching the highest level
(272 deals) since 2008.
China outbound M&A nears US$57 billion in 2014
Page 3
China Outbound M&A Deal Trends
• The trend of M&A activity in China has changed in 2014, shifting from investments in resources (energy
& power, and raw materials) to a greater appetite for technology, brands, financial services, and real
estate. There was a drop in total spending on natural resource asset buying with energy and material
deals used to being a major factor driving outbound Chinese M&A growth over the years from 2008-2013.
Page 4
Some Notable Outbound Deals 2014
Acquirer Target
Country Target Description of transaction
Chinese insurer Anbang has acquired a
controlling stake of 57.5% in South Korean
insurer Tong Yang Life Insurance Co., Ltd.
Lenovo Group Limited has acquired US TMT
company Motorola Mobility Holdings, Inc. from
Google Inc. to boost its smartphone business.
Fosun International and its partners acquired
a stake of 92.8% in French resorts company
Club Méditerranée (Club Med) .
Deal Value (US$)
$1bn
$1bn
$5.85bn
$2.91bn
Glencore Xstrata has agreed to sell its entire
interest in its Las Bambas copper mine in
Peru to a consortium led by MMG Ltd., a unit
of state-controlled China Minmetals Corp.
China National Cereals, Oils and Foodstuffs
Corporation (COFCO), one of China’s largest
state-owned food processing holding
companies, has acquired a 51% stake in Dutch
grain trader Nidera B.V.
$2.84bn
Glencore Xstrata
Las Bambas
Page 5
Acquirer Target
Country Target Description of transaction
Deal Value (US$)
Some Notable Outbound Deals 2014
$745m
$1.54bn
$1.2bn
$2.3bn
$2.81bn
Dalian Wanda Group Co, China’s largest
property developer, acquired a 68.2% stake
in Swiss sports marketing firm Infront Sports
& Media AG as it plans to push into the
sports and entertainment industry.
Lenovo Group Limited has acquired IBM’s
x86 server business from IBM Corporation,
adding to their already owned personal
computers division acquired from IBM in 2005.
Chinese conglomerate Sanpower Group has
acquired a 89% stake in 165-year-old British
department store chain House of Fraser.
Chinese private equity group Hony Capital
agreed to buy UK restaurant chain group
PizzaExpress Ltd.
State Grid Corporation of China, the largest
state-owned electric utilities company,
acquired a 35% stake in Italy based electric
utility company CDP Reti Srl from Italian
state-owned Cassa Depositi & Prestiti SpA.
Page 6
Drivers of Outbound M&A
• An excess surplus of foreign exchange
• Growth of Chinese population and their standard of living
• Chinese market becoming very competitive and saturated
• Domestic firms moving up the value chain
• Growing demand for safer and more reliable consumer products
• Global downturn has created cheaper valuations of overseas targets
Page 7
Drivers of Outbound M&A
• Government backing via easing of regulations and availability of funding
• China’s 12th Five Year Plan focuses on seven priority industries including
green energy, advanced IT, and high-end manufacturing
• Chinese companies internationalize their operations and strategies to
become competitive on a global scale, and especially to:
1) Obtain access to natural resources
2) Obtain access to more advanced technology and know-how
3) Improve brand awareness in domestic market
4) Entry into new markets and expand distribution
network
Page 8
• China became the world’s largest energy consumer and exceeded the world’s
energy use per capita in 2010
1) Obtain Access to Natural Resources
Energy Use Per Capita • Increasing resource requirements stems from
higher domestic demand, substantial
investments in infrastructure, transportation,
and energy sectors etc.
• The resources sector of outbound M&A
continues to be strong in 2014 after
dominating in 2013 with 7 of the 10 highest
value deals coming from this sector
Page 9
• Chinese firms investing overseas to acquire technology and know-how, as well as to
enhance R&D capability
• Target higher value (margin) products / moving up the value chain
• Especially interested in companies with advanced technology in developed
economies located in the US and Western Europe
• The TMT sector constituted 10% of outbound M&A transactions in 2013 and 20% in
2014 based on data from Mergermarket and PwC
2) Obtain Access to Technology & Know-How
Page 10
• Chinese companies acquiring international brands to enhance image and
competitiveness mainly in the domestic market
• Shifting from manufacturing OEM products to providing own branded products (higher
margins)
• Growth of China’s middle class has increased demand for safe and high quality
supply of food resources, leading to an increased number of outbound acquisitions in
the food & beverage sector
• Consumer sector represented approximately 15% of China’s outbound M&As in 2013
and 2014
3) Improve Brand Awareness in Domestic Market
Page 11
• Although most Chinese companies are still very much focused on the domestic
market, some are looking to acquire overseas to seek relief from domestic
competition (overcapacity) and saturation.
• Entry into new markets represents opportunity to obtain new customers
• Acquiring overseas to expand distribution network and secure supplies of
commodities
4) Entry into New Markets & Expand Distribution Network
Page 12
• China’s policy response to an overheated domestic real estate market has been a
mix of restrictive measures designed to cool the market. Chinese developers have
started to look abroad for opportunities.
• One key emerging institutional player - Chinese insurance companies. Reforms in
the regulatory framework governing China’s insurance companies have opened the
door to outbound investments into real estate with the UK and the US topping the
favourite’s list.
Hot Sector #1: Real Estate Investment Abroad
China’s Ping An Insurance Group has made its second
acquisition of a major London real estate asset by
acquiring Tower Place for US$490 million.
China’s Anbang Insurance has acquired New York’s
historic Waldorf Astoria hotel for US$1.95 billion and an
office building in New York’s Fifth avenue for between
US$400-500 million.
China Life Insurance has acquired 70% of an office
building along London’s Canary Wharf in a deal worth
US$1.35 billion.
Notable Real Estate Outbound Deals 2014
Page 13
Hot Sector #2: Private Equity Deals
• New investments from Private Equity funds and financial-buyers recorded
unprecedented volumes and values, up 51% and 101% respectively in 2014.
• This trend is likely to keep seeing a strong growth in the future.
Page 14
Conclusions
• Outbound M&A could remain at a strong level
• Foreign inbound activity, though increased, remains at a modest level compared with
outbound activity
• Natural Resources, Brands, Technology, and Real Estate remain key focus areas of
Chinese companies acquiring overseas
• More private and medium size enterprises are
expected to acquire target overseas as
opposed to previous domination by large
corporations and state-owned enterprises
• Mid-market deals are relatively less vulnerable
to political interference, but completion is a key
area to improve
• President Xi Jinping foresees China’s
outbound investment to reach US$1.25 trillion
in the next decade
Strictly private & confidential
0, 0, 128
51, 102, 255
204, 229, 255
128, 100, 162
0, 117, 119
217, 217, 217
IFLR ASIA M&A FORUM
PANEL DISCUSSION MATERIALS
MARCH 10TH
0, 0, 128
51, 102, 255
204, 229, 255
128, 100, 162
0, 117, 119
217, 217, 217
Strictly Confidential 2
Overview of Chinese Outbound M&A Market in 2014
Breakdown of outbound M&A by Chinese listcos, by market cap Breakdown of outbound M&A by midsize listcos for the past 3 years, by region
28.6% 19.4%
44.3% 53.2%
27.1% 27.4%
0%
20%
40%
60%
80%
100%
2013 2014
$500 Mn and below $500 Mn - $5,000 Mn $5,000 Mn and above
32.5%
22.5%
21.2%
21.2%
2.6% Asia / Pacific
Europe
United States and Canada
Latin America andCaribbean
Africa / Middle East
57 78
$691.2
$357.7
$0.0
$100.0
$200.0
$300.0
$400.0
$500.0
$600.0
$700.0
$800.0
0
10
20
30
40
50
60
70
80
90
2013 2014
Outbound M&A activities by Chinese SOEs
# of Deals Average Deal Size
# of Deals Mn US$
Source: Capital IQ Source: Capital IQ
31
16
12
13
3
6 $92.8
$108.7
$60.0
$70.0
$80.0
$90.0
$100.0
$110.0
$120.0
0
10
20
30
40
50
2013 2014
Outbound M&A activities, by listing board
Main Board SME Board ChiNext Average Deal Size
# of Deals Mn US$
Source: Capital IQ. 2014 average deal size: Mainboard: US$152.7mn; SME: US$102.4mn; ChiNext: US$4.8mn
*Chinese companies are defined as companies with headquarters in Mainland China. Outbound transactions do not include investments in Hong Kong and Macau
Source: PwC report.
Outbound M&A activities by listcos, by listing board Outbound M&A Activities by SOEs
By # of Deals By # of Deals
0, 0, 128
51, 102, 255
204, 229, 255
128, 100, 162
0, 117, 119
217, 217, 217
Strictly Confidential 3
Growing Interest in Outbound M&A
More unsolicited approaches
by Chinese A-share listcos
Across geographies and
industries
Both PE-owned and public
companies
Good offers often trigger early
auctions
Mid-size deals up to a quarter of
market cap of the listcos
Outbound activities are
motivated by
Good value targets are rare in
China
Domestic targets usually don’t
bring new competitive
advantages
Global deals often offer access to
markets, profitability, technology,
brand
Proven and steady profits are
important for listcos
Challenges remain
Financing limitations even by A-
share listcos
Credibility of Chinese buyers is
still building
Keeping up with fast auction
processes
Post-acquisition management
0, 0, 128
51, 102, 255
204, 229, 255
128, 100, 162
0, 117, 119
217, 217, 217
Strictly Confidential 4
Observations on Recent Trends
Successful deals usually are
Mature acquirers, at least
domestic M&A experience
Buyer is a well-respected
business in China
Engage advisors early
Owner/chairman’s focus
SOE buyers becoming more
conservative
“Lifetime” responsibility of
decision makers
Almost zero tolerance to risk
Bid down valuations
Greater language/cultural issues
than private buyers
Entrepreneurs are becoming
more active
Unsolicited offers for PE-owned
companies
Like deals with “China angle”
Aggressive valuations but within
trading ranges
More PEs/investment funds are
looking at cross-border deals
Paul, Weiss, Rifkind, Wharton & Garrison LLP
China Outbound Investment – Regulatory Regime
March 2015
ASIA1: 3883195.1
Paul, Weiss, Rifkind, Wharton & Garrison LLP
Since December 2013, the PRC State Council, the PRC National Development and Reform Commission (“NDRC”), the PRC Ministry of Commerce (“MOFCOM”) and the PRC State Administration of Foreign Exchange (“SAFE”) issued various rules in respect of outbound investments.
These legislations superseded the previous regime for outbound investments that had been in place since 2004. They significantly reduced the scope of outbound investments that required approvals of State Council, NDRC and MOFCOM.
2
Overview
Paul, Weiss, Rifkind, Wharton & Garrison LLP
Latest Regime
3
PRC Investors
Sensitive Country / Region or Sensitive Industry
Involved?
Investment by PRC
Investors
State Council Requirement
NDRC Requirement
MOFCOM Requirement
Central Enterprises YES >=US$2
billion State Council
Approval NDRC
Endorsement MOFCOM Approval
YES <US$2 billion N/A NDRC
Approval MOFCOM Approval
NO All N/A NDRC Filing MOFCOM Filing
Other Investors YES >=US$2
billion State Council
Approval NDRC
Endorsement MOFCOM Approval
YES <US$2 billion
N/A
NDRC Approval
MOFCOM Approval
No
>=US$300 million N/A NDRC Filing
Provincial MOFCOM
Filing
<US$300 N/A Provincial DRC Filing
Provincial MOFCOM
Filing
Paul, Weiss, Rifkind, Wharton & Garrison LLP
“sensitive country / region” and “sensitive industry” are stipulated differently under the latest rules issued by NDRC and MOFCOM:
Sensitivity Test
4
Sensitive Country / Region Sensitive Industry
NDRC a country/region that (i) has not established diplomatic relations with China; (ii) is subject to international sanctions; or (iii) is at war or in a state of civil unrest
including: basic telecommunications operations; cross-border water resources development and utilization; large-scale land development; main power transmission lines and power grids; and news media
MOFCOM a country/region that (i) has not established diplomatic relations with China; (ii) is subject to United Nations sanctions; or (iii) is otherwise specified by MOFCOM
an industry: (i) that involves export of products or technologies subject to China’s export restrictions; or (ii) that affects the interests of more than one country / region
Paul, Weiss, Rifkind, Wharton & Garrison LLP
Previous Regime v.s. Current Regime
5
Previous Current
State Council Approval
-- resource developments projects, if the investment by PRC investors reached or exceeded US$200 million; or -- other projects that would use a substantial amount of foreign exchange funds, if such funds reached or exceeded US$50 million
projects that involve a sensitive country/region or a sensitive industry; and the investment by PRC investors reaches or exceeds US$2 billion
NDRC (or its local counterparts) Approval
all projects other than those subject to State Council approval
all other projects that involve a sensitive country/region or a sensitive industry
NDRC (or its local counterparts) Filing
N/A all projects that are not subject to State Council or NDRC approval
MOFCOM (or its local counterparts) Approval
projects that involved: -- a sensitive country/region; -- a sensitive industry; -- SPVs; -- an investment by PRC investors higher than US$10 million; or -- marketing to other domestic investors
projects that involve: -- a sensitive country/region; or -- a sensitive industry
MOFCOM (or its local counterparts) Filing
N/A All projects that are not subject to MOFCOM approval
SAFE Registration all projects From June 1, 2015: -- no SAFE registration will be required; and -- such registration will be replaced by registration with local banks.