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Dissecting the Current Merger Wave in China and the Implications for EU, Li Xiaoyang

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Xiaoyang Li, Assistant Professor of Finance, Cheung Kong Graduate School of Business speaks at Asia Matters' Sixth EU Asia Top Economist Round Table in Beijing on 17 November 2014.

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Dissecting the Current Merger Wave in China and the Implications for EU, Li Xiaoyang

  1. 1. Dissecting the Current Merger Wave in China and the Implications for EU Xiaoyang Li Assistant Professor of Finance Cheung Kong Graduate School of Business Sixth EU Asia Top Economist Round Table EU China Economic and Finance Forum Beijing, 17 November 2014
  2. 2. 2 Booming Domestic M&As
  3. 3. Burgeoning Cross Border Acquisitions 3
  4. 4. Regional Decomposition (2000-2014) 4
  5. 5. 5 Mega Mergers by Chinese Firms
  6. 6. 6 New Features of Current Merger Wave 1) BAT’s (Baidu, Alibaba, and Tencent) expansion through acquisitions 2) Hybrid ownership reforms offer private enterprises with golden opportunities 3) More acquirers are private rather than state-owned enterprises 4) More and more firms seek targets overseas 5) Most targets are in different industries from acquirers 6) Acquisition becomes public-listed companies’ key value enhancing tool and becomes the main exit channel for VC/PE 7) Many buyout funds are assisting ▪ Investment banks/Financial advisors ▪ PE ▪ PE+Listed Companies - Combining primary and secondary markets
  7. 7. 7 Forces behind Recent Merger Waves National Industrial and Financial Policies Merger & Acquisition RMB and Capital Market Globalization Technology and Consumption Upgrading MBO and Hybrid Ownership Reforms Banks, PE, and Buyout Funds
  8. 8. 8 Macro Policies • In 2008, the State Council’s Nine Measures: #5: Create new financing channels through M&A loans, REITs, Private Equity, and regulated informal lending • In December 2008, CBRC’s Guidelines on Commercial Banks’ M&A Loans • In September 2010, the State Council’s Opinions on Promoting Enterprise’s M&As • CSRC promulgates “Provisions on the Material Asset Reorganization and Ancillary Financing of Listed Companies” • In January 2013, 12 ministries promulgated “Guidelines on Promoting Important Sectors’ M&As” set priorities on Steel, Cement, Auto, Ship, Aluminum, Rare Earth, Information, Pharmaceutical, and Agriculture sectors • 07/14,People’s Bank of China loosens restrictions on individual/firm investing abroad National Industrial and Financial Policies
  9. 9. 9 Reviving State-Owned Sector • Capital-output efficiency Year 2003 2004 2005 2006 2007 2008 2009 2010 Capital % 50.1% 48.8% 48.9% 48.5% 52.0% 53.3% 51.6% 41.9% Output % 37.5% 35.2% 33.3% 31.2% 29.5% 28.4% 26.7% 26.6% • Over capacity in some sectors 21% 21% 28% 35% 93% 95% Steel Automobile Cement Electrolyti Aluminum Glass Solar Battery
  10. 10. 10 SinoPec’s Ownership Reform MBO and Hybrid Ownership Reforms • Who are behind the curtain? 1. 三洲隆微实业 2. BoHai industrial private equity 3. Pacific Insurance 4. CICC 5. HOPU (厚朴投资) 6. Haier 7. ICBC 8. Huaxia mutual fund 9. Huaxia mutual fund 10. Harvest mutual fund 11. Harvest mutual fund 12. RRJ Capital 13.国家开发投资公司 14. Fosun (复星) 15. A PE 16. CICC 17. Tencent 18. A life insurance company 19. CICC 20. 新奥控股 21. Cinda AMC (信达资产管理) 22. Huiyuan 23. China Life 24. China Tobacco 25. China Postal Insurance
  11. 11. 11 VC/PE Investments vs. IPO Banks, PE, and Buyout Funds
  12. 12. 12 VC/PE Investments vs. IPO Banks, PE, and Buyout Funds
  13. 13. 13 Hony Capital Eats Pizza Banks, PE, and Buyout Funds
  14. 14. 14 Deal Synopsis Banks, PE, and Buyout Funds • July, Hony Capital (investment arm of Lenovo) announced to buy Pizza Express, for £900 million (¥9.55 billion) – Largest acquisition in Europe in restaurant industry – Highly levered buyout (LBO) with about £200 million rated below investment grade (by Moody’s) • Pizza Express was founded in London in 1965, famous for Italian Pizzas • 22 stores in Greater China (1 in Beijing, 9 in Shanghai, 12 in Hong Kong) • Hony capital is also very active in SOE privatization
  15. 15. 15 Bright Food Acquires Weetabix • Bright Food group, a state-owned conglomerate of food/liquor/supermarkets, one of Shanghai’s chosen champion • Has failed to acquire United Biscuits, Yoplait before • Acquired Weetabix in 2012 from Lion capital – £ 1.2 billion using bank loans, bridge loans, bonds
  16. 16. 16 Another PE Deal Banks, PE, and Buyout Funds • April, 2012, Wuhan WuTong GuiGuTianTang used €32.45 million (~¥284 million) acquire Steyr Motors in Austria • November 5, 2012, Boying investment (博盈投资000760.SZ) announced to conduct a private-placement of 314 million shares to 6 institutions at ¥4.77 per share to raise ¥1.5 billion – ¥ 500 million to buy WuTong GuiGuTianTang’s 100% shares; ¥ 300 million to invest more in Steyr Motors; ¥ 300 million for R&D; rest for liquid capital ▪ 5 PEs participated, including GuiGuTianTang
  17. 17. 17 Common Traits • Chinese companies seek brand and technology to upgrade consumer discretionary goods and machinery manufacturing • EU targets tend to exhibit stagnant growth and high leverage • China buyers offer capital and market growth prospect • State champions, private equities, and private enterprises are all active
  18. 18. 18 Smile Curve Consolidation Resources & Technology Branding & Channels Upstrea1m8 Downstream Value Manufacture China Market
  19. 19. 19 Conclusions • Forces driving China’s merger waves are brewing ▪ Government deregulation ▪ Technology disruption ▪ Financial innovation ▪ Economy globalization ▪ State Privatization ▪ PE/Buyout funds • Mergers and acquisitions are invigorating the Chinese economy! • Two-way street for China-EU M&As!
  20. 20. Thank you! xyli@ckgsb.edu.cn

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