China Inc. Seen Ready to Revive Deals on Leadership Shift

China Overseas Deals Ready to Revive on Leadership Change
Staff at the Great Hall of the People prepare a Chinese flag. Photographer: Nelson Ching/Bloomberg

China’s once-a-decade leadership change later this year sets the stage for a rebound in overseas takeovers by companies armed with record amounts of cash.

Acquisitions abroad by Chinese companies slumped to a five-year low of $15.2 billion in the first half, according to data compiled by Bloomberg. With commodity prices falling and Western businesses weakened by Europe’s credit crisis, conditions may be ripe for cross-border takeovers, investment bankers said.

“Once China’s new leaders are in place, I expect activity to pick up significantly next year,” said Richard Campbell-Breeden, head of mergers advisory for the Asia-Pacific region outside Japan at Goldman Sachs Group Inc. “China’s outbound M&A is driven more by politics than the domestic economy.”

Executives of Chinese state-controlled companies refrained from making deals that could have jeopardized their political aspirations before the leadership transition, said five investment bankers who asked not to be identified because the matter is sensitive. China has a tradition of promoting leaders of state-owned companies to government posts.

Meanwhile, Chinese non-financial firms traded in China and Hong Kong more than doubled their cash holdings to $676 billion in the three years through Dec. 31, the data show.

“There’s a very strong backlog” of deals, said Farhan Faruqui, Citigroup Inc.’s head of investment and corporate banking for the Asia-Pacific region.

Hawker Deal

Some companies are starting to make deals. On July 9 Superior Aviation Beijing Co., a company controlled by Beijing’s municipal government, entered exclusive talks with Goldman Sachs Group Inc. and Onex Corp. to pay $1.79 billion for U.S. business-jet maker Hawker Beechcraft Inc.

China Petrochemical Corp., Asia’s biggest refiner, and China National Chemical Corp. are among state-owned firms that may seek acquisitions abroad, according to investment bankers who asked not to be identified. PetroChina Co., Zijin Mining Group Co. and Bright Food Group Co. might also be active, the bankers said.

Chen Chun Shan, a spokesman for Bright Food, said any overseas deals “will depend on timing and price,” declining to be more specific. Officials at China Petrochemical, China National and PetroChina couldn’t be reached.

“We are always studying opportunities for overseas investment,” said Li Zhilin, head of Zijin Mining’s international business, in an interview.

Growth Model

Potential targets include assets of Chesapeake Energy Corp., the second-biggest U.S. natural-gas explorer, along with companies such as Calgary-based oil producer Nexen Inc., according to investment bankers. Michael Kehs, spokesman for Chesapeake, declined to comment, as did Davis Sheremata, a Nexen spokesman.

Since the current generation of political leaders took over almost 10 years ago, China’s economy has expanded fourfold to overtake Japan and the country has emerged as the world’s largest user of energy and raw materials. With the government shifting from an export-led growth model to one driven by domestic consumption, Chinese companies may also be encouraged to buy foreign brands and technology, Campbell-Breeden said.

China’s government hasn’t said when the new leaders -- including the successors to President Hu Jintao and Premier Wen Jiabao -- will be formally announced, though appointments to senior Communist Party positions may start in September when the party meets. Vice President Xi Jinping and Vice Premier Li Keqiang are expected to assume Hu’s and Wen’s positions, respectively, in March.

Biggest Spender

“The leadership of these companies are worrying about where they’ll be in six months’ time with the reshuffling of positions following the political transition,” said David Cogman, a Shanghai-based partner at McKinsey & Co. who focuses on mergers.

Valuations may support deal making. Companies in the oil, gas and mining industries are trading at close to the lowest valuations in three years, according to data compiled by Bloomberg. Commodity prices have fallen 12 percent in the past year, as measured by the Standard & Poor’s GSCI gauge of 24 commodities.

Resource acquisitions are likely to be the least affected by the leadership transition because there is “a clear political mandate” for such deals, Cogman said.

PetroChina, the nation’s biggest oil and gas company, will pursue overseas assets “wherever and whenever they become available,” Chief Financial Officer Zhou Mingchun said in May.

Sinopec Spending

China Petrochemical, known as Sinopec Group, together with its listed unit has spent more on overseas acquisitions than any other Chinese company over the past decade, with $26 billion of deals, data compiled by Bloomberg show. In November, Sinopec Group agreed to invest $4.8 billion for a 30 percent stake in Galp Energia SGPS SA’s Brazilian unit.

Still, Chinese companies may have to contend with political opposition in Western countries. Sinochem Group, China’s largest fertilizer trader, failed to acquire Potash Corp. of Saskatchewan Inc. in 2010 as the Canadian province of Saskatchewan raised concerns about the deal.

This year’s biggest overseas acquisition was made by a private company. Dalian Wanda Group Corp. in May agreed to buy U.S. cinema owner AMC Entertainment Holdings Inc. for $2.6 billion including debt. That was one of four deals valued at more than $1 billion, down from six in the year-earlier period, data compiled by Bloomberg show.

‘Be Bold’

Before 2012, state-owned companies accounted for the biggest purchase abroad every year since 2003, according to the data. The biggest deal was Aluminum Corp. of China’s $14 billion purchase of a stake in Rio Tinto Group Ltd. together with Alcoa Inc. in 2008. The 10 biggest Chinese companies by market value are state-controlled, data compiled by Bloomberg show.

“It is the right time and a great opportunity for Chinese companies to be making acquisitions overseas,” said Patrick Loftus-Hills, a managing director at Moelis & Co., a New York-based investment bank. “Chinese companies can purchase undervalued assets for a fraction of their inherent value. My advice to Chinese companies is, ’be bold’ and spend time to look at these assets.”

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