The East Is Red

China Takeover Tycoons' Cash Wall

If financiers turn off the spigots, money could dry up.
Photographer: Natalie Behring/Bloomberg

To understand China's crackdown on the financing of acquisitive giants HNA Group Co., Fosun International Ltd., Dalian Wanda Group Co. and Anbang Insurance Group Co., take a look at Apple Inc.

Shares in companies associated with the first three plunged in Hong Kong and China Thursday. The China Banking Regulatory Commission has asked some banks to provide information on overseas loans to the firms, people familiar with the matter told Bloomberg News. That raises fears of a political attack on the businesses, and the tycoons who run them.

What would happen if Tim Cook's bankers suddenly turned off his access to Apple's finance capital? The iPhone maker would barely miss a beat. Barring a few wrinkles around tax and liquidity, Cook could pay off Apple's $99 billion of debts with bank deposits and marketable securities tomorrow and still have $158 billion of cash left over to fund driverless cars and tweaks to the next mobile update.

The Bank of Apple

Apple has had more financing cash leave the company than come in of late

Source: Bloomberg

Even after Apple broke a four-decade tradition in 2013 by starting to take on significant debts to pay off its shareholders, financing cash outflows over the past five fiscal years have come to almost $94 billion -- mostly money leaving Cupertino in the form of dividends and stock buybacks.

Apple's aversion to leverage is perhaps an outlying case -- but the Chinese giants' love of borrowing is equally exceptional, if at the opposite extreme. A look at the cash flows of the past year's most acquisitive Western companies illustrates why.

Qualcomm Inc., Blackstone Group LP and Johnson & Johnson have undertaken the most cash takeovers in the U.S. over the past 12 months, with a collective $123 billion of deals announced, pending or completed. Have a look at those firms' finances and you notice a common theme: Free cash flows are almost always in the black.

Paying for Freedom

Free cash flows at the most cash-acquisitive U.S.companies are all consistently positive

Source: Bloomberg

Note: Fiscal years have been aligned to the nearest calendar year. So, for instance, J&J's year ending January 2017 is shown as 2016.

That's the standard and sensible way to run a company. If you're going to be laying out large amounts of money on takeovers, you want to ensure that underlying operating and capital costs are covered by normal revenue to avoid digging yourself into an ever deeper debt hole.

Now take a look at the big three Chinese companies (excluding Anbang, which doesn't publish financial statements):

Money Pit

Free cash flows at China's acquisitive giants have rarely broken into positive territory

Source: Bloomberg

Free cash has been consistently negative, and often by enormous sums. The number doesn't even include the cash spent paying for M&A itself, so if anything, it flatters the trio's performance.

That should be concerning to anyone lending to these businesses, including the growing number of non-Chinese institutions joining the club.

The real engine of these firms isn't the drudge-work of making profits from selling goods and services, but the art of persuading financiers to fund their investment ambitions. The show will go on for as long as bankers -- and particularly the key Chinese state lenders -- keep the cash spigots open.

Once that dries up, China's takeover tycoons will be left with a lot of plates in the air. If they fail to keep them all spinning, watch out for a crash.

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

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    David Fickling in Sydney at

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    Katrina Nicholas at

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