China Inc. Is In a Hurry
ChemChina's blockbuster Syngenta deal marks the high point in a rush of recent outbound Chinese M&A that begs a question: why are Chinese companies buying overseas when their country's own financial markets and economy look so troubled?
First, the deals. In addition to $43-billion Syngenta -- the biggest ever Chinese deal overseas -- ChemChina also bought Germany's KraussMaffei last month for $1 billion.
Other transactions in the first few weeks of 2016 include Haier Group's acquisition of GE's white goods business for $5.4 billion and Dalian Wanda's $3.5 billion purchase of Hollywood studio Legendary Entertainment. Machinery maker Zoomlion has bid $3.3 billion for U.S. crane maker Terex.
Chinese activity has been building apace. Outbound M&A increased for the fourth year in a row in 2015, according to Bloomberg data.
But the quick start to 2016 still jars slightly when considering the markets and economic backdrop. China's economic growth slowed to its weakest rate in a quarter of a century last year. Chinese equities are slumping too -- the Shanghai Composite Index is down about 23 percent this year. The renminbi has weakened steadily since Beijing devalued the currency in August.
Yet it's exactly this domestic weakness that's driving the hunt abroad. China's turmoil reflects the end of an investment-led economic boom and a government-enforced shift toward a consumption-driven economy. Its companies have to adapt, and that means looking overseas to make up for slackening at home. Buying overseas assets hedges against domestic decline and provides access to new technologies and brands.
With Beijing's backing of global champions, it shouldn't be a surprise if even heavily indebted buyers -- such as ChemChina -- can whip up an all-cash offer, backed by state funds and policy banks.
So where else will they spend? Barclays analysts note that Europe accounted for close to one-third of Chinese outbound deals in 2015 -- the biggest proportion of any region. That trend could continue this year. Regulators present a big hurdle in the U.S. Indeed, the Syngenta deal still needs to get past the dreaded Committee on Foreign Investment in the United States, which killed a recent Chinese attempt to buy a lighting business from Philips.
Regulators aren't as tough in Europe. Also European equities look relatively cheap, especially given the recent slide in the markets. The Europe Stoxx 600 Index has fallen about 9.2 percent so far this year and trades on 14.4 times estimated earnings for 2016, according to Bloomberg data. The S&P 500 is down 6.9 percent and trades on 15.7 times estimated 2016 earnings.
The weakening renminbi could be another factor for buyers hurrying deals through. The slide in the Chinese currency is making overseas purchases more expensive (though the dollar's relative strength against the euro is another reason to favor deals in Europe).
While many economists expect the renminbi weakness to flatten out in 2016, plenty of hedge funds are betting it will slide. There must also be a concern that Beijing's efforts to end capital flight -- $1 trillion left China last year -- will at some point clash with the policy of building global corporate giants.
The prospect of an even weaker renminbi to come, or restrictions on spending abroad, could well persuade Chinese buyers to get their deals done soon. Sellers in Europe might want to tap that glut of cash-rich buyers before it dries up.
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