Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

There's a reason Chinese buyers are offering so much cash to hijack takeovers of American targets, and it's not because things are going swimmingly at home.

Zoomlion Heavy Industry, the Chinese construction-equipment maker that's trying to wrest crane maker Terex away from its  Finnish merger partner Konecranes, delivered the starkest reminder of this dynamic yet when it reported earnings on Wednesday. Net income plummeted 85 percent last year, while revenue dropped 20 percent to the lowest level since at least 2009. There's little reason to expect a significant improvement in 2016.

The ugly earnings report comes a week after Zoomlion raised its offer for Terex to $31 a share, or about $4.7 billion including debt. That's about 62 percent higher than the current value of Konecranes' stock-and-cash proposal -- a staggering and enticing proposition for Terex but one that seemingly makes less sense for an already stretched Zoomlion. Terex has now agreed to hold talks with the Chinese suitor. These poor results don't exactly strengthen Zoomlion's bargaining position -- it's clearer than ever why it's desperate for a foothold in the U.S. and Europe.

Chinese Takeout
Acquisitive Chinese companies have put forth a record $91 billion in takeover bids for U.S. and Western European companies so far this year. But many of the situations are still in flux.
Source: Bloomberg

Chinese construction companies loaded up on machinery in 2009 and 2010 on the backs of a massive government stimulus package, but now the economy is slowing down, the backlog of unsold homes is growing and property developers are sitting on mountains of debt, according to Bloomberg Intelligence's Steve Man. Companies aren't getting the maximum use out of the equipment they already have, reducing the need for replacements, and they certainly aren't motivated to load up on new purchases. Working through that overcapacity will take time, meaning new efforts to prop up the real estate market won't necessarily turn things around. A more diverse revenue base would help Zoomlion blunt some of the blowback.

From Hot to Not
Sales growth has fizzled at Zoomlion.
Source: Bloomberg

But is that the best option for Terex? Cash is still king in M&A, but it's not the only thing to consider when dealing with Chinese buyers. DNA-testing company Affymetrix this week rebuffed a higher offer from Origin Technologies after deciding the risks to a deal getting done in a timely matter were too great. Starwood Hotels hasn't yet recommended shareholders back a higher (non-binding) counteroffer from Chinese insurer Anbang over a deal with Marriott, signaling there are still questions about the interloper.

In the case of Terex, Konecranes understandably doesn't think Zoomlion is a good partner, with vice chairman Stig Gustavson saying last week: ``I don't think that Terex really wants to become Chinese. I have a hard time believing that their new CEO would have applied for the job if he’d known that they would become a subsidiary to a Chinese company.”  Putting aside the somewhat offensive elements of that statement, there is something to it.  

The rout in Chinese construction-equipment sales will eventually moderate, but there are many other reasons to be cautious about opening the door for Zoomlion. Like many Chinese companies, it has struggled with ballooning accounts receivable as years of loose credit standards come back to bite. A Bloomberg News analysis recently found that China's almost $600 billion pile of unpaid bills is now bigger than at any time since 1999. It takes about 83 days for the typical Chinese firm to collect cash for completed purchases, almost twice as long as emerging-market peers. Industrial firms take the longest to get customers to pay up.

Because Zoomlion isn't offering stock, those aren't issues that are necessarily going to deter shareholders eager to cash out at a much higher price than Terex is probably going to get on its own, or with Konecranes, any time soon. But there's also the matter of whether Zoomlion can actually get a deal done at $31 a share. The bid is not yet binding, which is part of the reason why Terex shares continue to trade at a wide discount.

Deal Doubts
Terex jumped when Zoomlion emerged as a counterbidder, but it's still trading at a discount to the $31 a share offer price.
Source: Bloomberg

Zoomlion in February said it has letters of support from ``relevant banks" regarding its plan to finance 60 percent of the purchase price with debt. But it's still not totally clear where the money is coming from and how secure it is, or whether these bad results will have an impact on its ability to tap credit markets. Zoomlion's state backing will likely help it get the necessary loans, but those same government ties complicate the chances of a deal getting approval from the Committee on Foreign Investment in the U.S., which has the power to block deals it considers detrimental to national security.

Plus, Zoomlion's proposal is conditioned on the approval of its shareholders -- the same investors that sent the stock tumbling by the most in more than eight months after it raised the Terex bid.

It does feel like China wants to buy everything; it won't necessarily succeed.   

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net