Turning point for China M&A
Shuanghui International’s ground-breaking acquisition of US pork producer Smithfield Foods may trigger a wave of sophisticated overseas purchases from China’s private sector.
The US$7.1bn deal, including US$2.4bn of existing Smithfield debt, could be confirmed as early next month, when the committee on foreign investment into the US is expected to approve the acquisition. The acquisition will be the largest takeover of a US company by a Chinese entity.
Henry Tillman, chairman and chief executive of independent investment bank Grisons Peak, said the deal’s industrial logic was obvious: the world’s largest pork-consuming country is acquiring operations in a nation that produces the meat more efficiently than anywhere else.
For Tillman, however, the significance of the deal goes far beyond its sheer size.
“While the commercial logic was not difficult, this actual transaction was complex,” he said. “The Chinese use of globally accepted M&A tactics in large public transactions, as well as the financing involved, marks a step change in China’s M&A sophistication.”
After a promising start in 2004, when Lenovo acquired IBM’s PC business for US$1.75bn, sizable Chinese US acquisitions, outside the energy sector, had dwindled to a trickle last November, when Xi Jinping was unveiled as China’s new president.
The leadership change, which is also likely to see a new generation of executives take control of state-owned enterprises in the near future, may also lead others to copy the techniques Shuanghui used to execute the Smithfield deal.
Shuanghui’s bid suggests that Chinese acquirers are becoming more willing to pay up for assets: the offer for Smithfield was at a 31% premium to the US company’s undisturbed share price.
That kind of determination marks a departure from previous practices, where a number of potential purchasers were outbid at competitive auctions after tabling tentative offers.
There is a lot of pent-up demand after the lull of the last two years that some attribute to a reluctance among incumbent leaders of state businesses to carry out transformative deals during a transition period for Chinese politics.
“As the change in leadership delayed deals in the first half, we could see more towards the end of the year now that things are more settled,” said Gary Lock, a Hong Kong-based partner at law firm Herbert Smith Freehills.
Chinese companies, however, may still be forced to pay higher prices in such situations. “It can take some time to get approval to get money out of the country. That approach can delay the process in an auction and so the final price paid is often higher,” said Lock.
Bank of China’s willingness to commit US$4bn of acquisition financing to Shuanghui – a private entity with backers that include Goldman Sachs, two domestic private-equity investors and Singapore’s Temasek – also marks a fresh approach. Morgan Stanley is arranging the other US$3bn.
Such state bank backing for competitive bids has long been more explicit in the energy sector, for example in CNOOC’s US$15bn purchase of Nexen Energy last year. In that deal, five Chinese lenders each provided US$375m towards a US$6bn acquisition loan.
Bank of China’s commitment to Shuanghui, however, stands out as a rare sole mandate on a jumbo acquisition loan in the PRC’s private sector.
Some see agriculture as simply another strategic sector for the state to support in order to meet demand for food, but China’s changing economic picture, with growth rates decelerating, is also forcing companies to think more carefully about their strategies.
“In a sense, this is still a natural resources deal,” said one Hong Kong-based financial adviser. It also shows that China is not always the cheapest place to produce goods and will need to import materials to support its maturing economy.
China’s policymakers are shifting their focus to domestic consumption from domestic investment, and that economic rebalancing is opening doors for an entirely different kind of acquisition as companies, such as Shuanghui, look to gain an edge over competitors.
“Previously, companies thought they could just grow market share in China on the back of the rapidly expanding economy, but, now, some sectors are oversupplied. So companies are looking to buy better-quality products from overseas,” said James Tam, managing director in M&A at Morgan Stanley.