Diversification and inorganic growth are the two key words for most Chinese State-owned corporations. In fact, lately analysts compare this surge of outbound acquisitions of China’s companies to the wave that involved the Japanese in the 80’s. China’s slowing domestic economy is the reason for these outward-bound transactions. In 2015 the country broke its record with an amount of acquisitions worth $112bn.
2016 has begun with one of the biggest deals so far with ChemChina as bidder for the target company Syngenta. The first one is the largest chemical company in the country and it is managed by the State-owned Assets Supervision and Administration Comission (Sasac). This company is a sprawling giant pursuing a strategy based on synergy-correlated diversification supported by issuance of debt. Inasmuch as Syngenta is a Swiss agrichemical leader and a great target for corporations in the chemical industry, this is what brought ChemChina to propose an all-cash bid of $43.8bn.
Two of China’s six biggest deals were closed in 2015. The most significant of the two was in March when the same ChemChina bought Italy’s tyre manufacturer Pirelli for $7.3 bn.
At the beginning of 2016 Haier bought General Electric’s appliance unit for $5.4bn and Dalian Wanda, the property and media group controlled by the Wang family, acquired a controlling stake in Legendary Entertainment, the Hollywood studio of Jurassic World, paying $3.5bn.
This panorama might seem bright and shiny but after thorough analysis it turns out that most of the latest takeover deals are backed by loans and bond issuance, and that bidders are financially weaker than the target companies. As a matter of fact, according to S&P Global Market Intelligence, the median debt multiple of Chinese companies which were involved in outbound M&As last year, was of 5.4 in comparison to the maximum of 5 on the scale, which states the highly leveraged status.
Some prime examples are:
A question that will spontaneously arise is:
Are these deals feasible in the long term?
The main concern centers on the possibility of these parent companies to be able to successfully manage the subsidies without affecting them because of their fragile financial position. What happen sometimes is the intent of covering up their debt loads causing pressure for the dividends.
The Chinese State is supporting the positive conclusion of the deals and the premier Li Keqiang has affirmed his intention to make China the second top global investor, after the U.S. At the moment the country is in fourth position.
Vittoria Roà
2016 has begun with one of the biggest deals so far with ChemChina as bidder for the target company Syngenta. The first one is the largest chemical company in the country and it is managed by the State-owned Assets Supervision and Administration Comission (Sasac). This company is a sprawling giant pursuing a strategy based on synergy-correlated diversification supported by issuance of debt. Inasmuch as Syngenta is a Swiss agrichemical leader and a great target for corporations in the chemical industry, this is what brought ChemChina to propose an all-cash bid of $43.8bn.
Two of China’s six biggest deals were closed in 2015. The most significant of the two was in March when the same ChemChina bought Italy’s tyre manufacturer Pirelli for $7.3 bn.
At the beginning of 2016 Haier bought General Electric’s appliance unit for $5.4bn and Dalian Wanda, the property and media group controlled by the Wang family, acquired a controlling stake in Legendary Entertainment, the Hollywood studio of Jurassic World, paying $3.5bn.
This panorama might seem bright and shiny but after thorough analysis it turns out that most of the latest takeover deals are backed by loans and bond issuance, and that bidders are financially weaker than the target companies. As a matter of fact, according to S&P Global Market Intelligence, the median debt multiple of Chinese companies which were involved in outbound M&As last year, was of 5.4 in comparison to the maximum of 5 on the scale, which states the highly leveraged status.
Some prime examples are:
- Zoomlion, a machinery company partially owned by the State with a debt EBITDA ratio of 83.4 versus 3.6 debt multiple of its target Terex, a US competitor;
- Fosun International Limited, a Chinese private “premium investment group” which has heavily invested in 18 overseas companies just in 2015 spending $6.5bn, dealing with a 55.7 ratio;
- Cofco Corporation has a debt EBITDA ratio of 52.3 and it is going to acquire a stake in Noble Agri;
- Cosco Holding Co., a state-owned shipping company, which bought Piraeus Port Authority in Greece, is seven times more indebted than the latter, with a ratio of 41.5 debt EBITDA;
A question that will spontaneously arise is:
Are these deals feasible in the long term?
The main concern centers on the possibility of these parent companies to be able to successfully manage the subsidies without affecting them because of their fragile financial position. What happen sometimes is the intent of covering up their debt loads causing pressure for the dividends.
The Chinese State is supporting the positive conclusion of the deals and the premier Li Keqiang has affirmed his intention to make China the second top global investor, after the U.S. At the moment the country is in fourth position.
Vittoria Roà