Commentary: China: A Ticket To M&A Paradise?

Bankers hope the fight for Harbin Brewery will open up the mainland. Not likely

The way the financial world has been hyperventilating, you'd think that the battle for control of Harbin Brewery Group Ltd. is the biggest development in corporate finance since China first opened its stock market. True, as Anheuser-Busch Cos. (BUD ) and SABMiller PLC (SBMRY ) go toe-to-toe, it looks to be shaping up as a championship bout. On May 2, Anheuser announced plans to buy a 29% stake in the brewer. Just two days later, SAB offered shareholders a total of $553 million for the 75.6% of Harbin's Hong Kong listed shares it doesn't already own.

What really has investment bankers' adrenaline pumping is what the SAB offer might portend. It marks the first time a foreign company has launched a hostile takeover bid for a mainland company. And if the takeover is successful, some say it could pave the way for more mergers and acquisitions -- with hefty fees for bankers -- especially in China's fast-growing consumer products market. "We are entering uncharted territory," enthuses one Hong Kong banker. Adds Winston Zhao, a lawyer at Jones Day in Shanghai: "We will see more and more complicated battles over listed companies among foreign investors."

Does that mean China will become the newest takeover playground for the likes of CLSA, Lazard Frères, and Goldman Sachs (GS )? Not likely. Even if SAB were to swallow up Harbin Brewery -- and bankers involved say it's not a done deal, not by a long shot -- it could be a long time before we see another hostile foreign acquisition of a Chinese company. For one thing, Harbin's situation is unusual: It's one of the few listed mainland companies with a shareholder base diverse enough to make a takeover possible. Some 40% of its shares trade on the Hong Kong Stock Exchange, and an additional 58.5% are now or soon will be in the hands of the two international suitors.

That's a rarity on the mainland. Most overseas-listed Chinese companies are controlled by the state via untradeable blocks of shares, making a takeover virtually impossible. Only 30% of the shares of New York-listed China National Offshore Oil Corp. (CEO ) trade, for instance, while the rest remain in the hands of various state bodies. Insurer China Life Insurance Co. (LFC ), meanwhile, is 72% state-owned. Things are even more complicated for companies with listings both at home and abroad. Domestically traded stock -- called A-shares -- can only be bought by Chinese nationals and a handful of foreign investors approved by Beijing. And mainlanders are prohibited from trading foreign-listed shares of Chinese companies. So foreigners would have a tough time acquiring a controlling interest.

There are other restrictions, too. Although Beijing is gradually lifting the limits on direct foreign investment, the brewing industry remains one of the few sectors where China has allowed 100% foreign ownership. Potentially attractive businesses such as automobile manufacturing, media, and banking still limit foreign stakes to less than 50%, so it makes more sense for foreigners to create joint ventures in the restricted sectors to ensure playing a direct management role.

That's not to say the eager investment bankers will be entirely disappointed. The restrictions on investment will ease as China fulfills its obligations under its membership in the World Trade Organization. And the state's stake in Chinese companies is held at dozens of different levels of government. Like officials in the northern city of Harbin, some of those may well want to unload their stakes to fill a gap in the local budget or inject a bit of foreign knowhow into a troubled enterprise. "Cash-strapped local governments will want to get rid of loss-making companies if they can," says Carl Walter, chief operating officer of J.P. Morgan Chase & Co. (JPM ) in China.

In fact, the State Council -- China's powerful Cabinet -- last year ordered ministries and local governments to speed up sales of state-owned assets. But it probably had in mind dud companies such as decrepit cement factories or foundries, not the country's crown jewels. For now, at least, the hostile takeover appears to be one foreign import China is happy to live without.

By Frederik Balfour

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