Can China outbound M&A bounce back?

Geopolitical and trade tensions have undoubtedly negatively affected global M&A activity, with Chinese deals in particular taking a hit, but the outlook remains buoyant elsewhere

China outbound M&A will continue its woes in 2019. That's according to a recent comment by Fitch Ratings that cites regulatory scrutiny from Western jurisdictions such as Europe and the United States over potential Chinese buyers. Already several deals in 2018 have been delayed or prevented this year, with the most notable block being China's Ant Financial attempt to acquire US-based money transfer company MoneyGram.

The rating agency also suggests that tightened funding conditions within China will make it difficult for privately-owned enterprises (POE) in particular to fund any potential international M&A deals in the future.

In the first half of 2018 the value of Chinese POE outbound M&A dropped by 30% compared to the same period last year. "POEs tend to have weaker access to bank funding compared to state-owned enterprises, and so have been more affected by tighter credit conditions, especially those with weak credit profiles," states the comment from Fitch Ratings.

This situation represents a sudden shift from a few years ago when Chinese companies were actively searching for deals across the globe from the United States to Finland, with the most daring being ChemChina's record US$43 billion deal for Syngenta. Since that historical deal, most Chinese outbound M&A has focused on oil & gas and power & public utilities, accounting for around 37% of outbound M&A value in the first half of 2018 in lockstep with the wishes of Chinese financial regulators.

In an effort to control "irrational" overseas investments, during August 2017 China's National Reform Commission, the Ministry of Commerce, the People's Bank of China and the Ministry of Foreign Affairs jointly issued guidelines stating that they would pay more attention to the strategic value of some Chinese overseas activities.

Despite the negative sentiment around Chinese outbound activity, some outbound M&A deals were still able to be completed over the last few months, such as CITIC Metal's US$557 million acquisition of Ivanhoe Mines and Kumho Tire's US$599 million stake sale to Qingdao Doublestar.

Outside of Chinese outbound M&A deals optimism remains high, according to a poll of M&A professionals undertaken by technology company Merrill Corporation, which revealed that 86% of its participants believed that the overall M&A market was headed towards a positive-to-neutral direction in 2019. In fact, in areas such as Vietnam M&A activity is on the rise, with South Korean companies looking at investment opportunities in local champions such as Masan Group and Vingroup.

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Date

8 Feb 2019

Channel

Capital Markets

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