China Put

The Chinese Squeeze on Banker Fees

Lumileds value is far below a failed China bid.
At Closing, April 23rd
52.05 CNY

China's thirst for foreign acquisitions has been a godsend for western investment bankers, as it's made organizing a competitive sale process a piece of cake.

The slightest hint that a Chinese buyer might be interested in an asset might be enough to elicit a higher offer from a reticent bidder. But that strategy's now in doubt.

On Monday, we got an idea of just how much China's "M&A put" -- a term my Gadfly colleague Chris Hughes used to describe this valuation support --  is worth. Royal Philips NV said it would sell an 80 percent stake in its LED component and automotive lighting business to an American buyer, Apollo Global Management LLC, in a deal that values the unit, called Lumileds, at $2 billion including debt.

That's about 40 percent less than Lumileds' implied enterprise value when China's Go-Scale Capital Ltd tried to buy it in 2015. Go-Scale's ambitions were thwarted when the Committee on Foreign Investment in the United States blocked the deal, forcing Philips to restart the sale process.

Of course there are a host of reasons that might explain the shrinking value: Lumiled's financial performance in recent quarters hasn't been terribly impressive and a prolonged sale creates uncertainty for customers. Even so, narrowing the pool of potential bidders is never helpful if your aim is to extract full value, and particularly not if China is excluded.

Lights Dim for Lumileds

Lighting components unit's ebita fell 54 percent in 2015

Source: Philips Quarterly Reports

Chinese buyers have been willing to pay very rich prices for western assets, especially when the target has attractive technology or intellectual property. Midea Group Co Ltd.'s 4 billion euro ($4.2 billion) bid for German robot-maker Kuka AG represented an astonishing 60 percent premium to the undisturbed share price.

China Goes Shopping

The value of Chinese M&A deals involving western European targets has surged this year

Source: Bloomberg

Yet Philips probably won't be the last western company whose bankers are forced to proceed with a sale without Chinese interest. Cfius remains an obstacle. Last month, it objected to the 680 million euro acquisition of German chip technology company Aixtron SE by Grand Chip Investment Gmbh on national security grounds, a decision upheld by president Barack Obama.

President-elect Donald Trump's saber-rattling on China, plus his willingness to use Twitter to publicly castigate companies, threaten to make life even harder. And amid concerns about capital flight, China is also poised to put new restrictions on big outbound M&A, according to a report last month from Bloomberg News.

China's desire to acquire western tech hasn't disappeared, but organizing a cross-border sale has gotten harder. M&A advisers have had it easy. They're going to have to sweat a little for those fees.

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

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