China's reputation for being the cash-rich, go-to acquirer of everything from hotels to Hollywood studios could be in danger, if a deal to buy Italy's AC Milan soccer club falls through.
The rules of M&A (somewhat like buying a house) are: Find a target, check out its financials confidentially, then come up with funding that meets a specified payment schedule agreed on by both sides. If the asset is strong or well-enough known, banks in the target's home market will help with leveraged financing, while the acquirer comes up with the equity portion. Chinese buyers can always count on support from their own banks, too.
That's why the Chinese firms' struggle to come up with the funding for AC Milan is so potentially worrying. The obscure consortium behind the bid, Sino-Europe Sports, is seeking partners to make good on its pledge to pay 740 million euros ($830 million). It's promising co-investors the chance of a major profit if the club, owned by former Italian prime minister Silvio Berlusconi, eventually goes public in China. That's a dubious pitch given that there's a long queue of companies waiting to list and few if any that hold purely foreign assets.
What's curious -- and troubling -- about the case is that Sino-Europe Sports hasn't already been flooded with offers. The development of Chinese football has been declared a national objective by President Xi Jinping, so the deal has no reason to give rise to official objections. AC Milan would be the biggest purchase of a football club by a Chinese entity, after a series of deals in the U.K., Italy and Spain.
The hunt for investors also sits oddly amid a record-breaking run of Chinese overseas purchases. It took Chinese companies barely four months of 2016 to surpass the all-time high $119 billion of overseas deals announced in 2015, and the rush continues.
Until now, the main roadblocks to Chinese ambitions have been either political and regulatory opposition, or difficulties in transferring yuan funding abroad at a time when mainland regulators have been trying to limit capital outflows.
China Resources' $2.5 billion bid for Fairchild Semiconductor and Tsinghua Unisplendour's attempt to invest $3.8 billion in disk-drive maker Western Digital collapsed amid U.S. national-security concerns. Anbang Insurance Group pulled out of a $14 billion takeover offer for Starwood Hotels after the Caixin financial news website reported that China's insurance regulator would reject the transaction.
None of these buyers lacked funding. Anbang got a multi-billion dollar check from China Construction Bank within days of agreeing to buy Starwood. ChemChina is funding its $43 billion bid for Syngenta with $10 billion of preferred shares, along with loans from HSBC and Citic Bank. Not surprisingly, HSBC and Citic have both managed to syndicate that debt to other lenders keen to get in on a deal that has Beijing's blessing and is China's biggest-ever overseas acquisition.
The purchase of AC Milan draws in a new kind of Chinese buyer -- one without a balance sheet that targets can scrutinize, and no clear sign of where the cash is coming from.
AC Milan is a storied name. It may have struggled recently, reporting a 93.5 million euro loss last year, but the club is a seven-time winner of Europe's most prestigious cup competition -- second only to Spain's Real Madrid. There's little doubt that the former Italian champion could draw banks in Europe to help with the debt portion if lenders felt the buyer was safe enough. And where are the Chinese banks?
Considering how many Chinese buyers have been snapping up assets recently, it may be surprising that funding hasn't emerged as an issue until now. Wary about deals getting rejected, more bankers are asking acquirers from the country to show them the money or at least provide assurances that it will be available.
If the AC Milan bidders fail to come to the party, China's glow may fade. European and American sellers will ask for bigger break fees and could even exclude potential Chinese buyers from sales processes.
As all seasoned soccer players know, there's nothing more sapping to a team's momentum than scoring an own goal.
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