CHINESE TAKEOVERS Back With a Vengeance

Chinese capital controls and European suspicion have not stopped Chinese acquisitions in Europe – especially in Germany.
Chinese investors are as interested as ever in German businesses, despite political attempts to slow down the shopping spree.

Chinese companies are still on the prowl for German businesses, despite rising protectionism and hostility in Europe toward foreign buyers, data from Dealogic shows.

By the end of April, Chinese companies had bought into 14 German companies, investing  a total of $3.5 billion. This was just $200 million less than the same period in 2016, a year in which $10.8 billion of Chinese money was invested in German business.

The figures contradict forecasts that acquisitions would slow in the wake of changing attitudes in China and Europe. Late last year, Chinese president Xi Jinping announced measures to limit foreign takeovers that top $10 billion, as well as acquisitions that go beyond Chinese companies’ core business. He had hoped the measures would slow down accelerating capital flight.

Around the same time, a wave of controversial deals led to growing resistance in Berlin and Brussels. The acquisition of German robot-maker Kuka by the Chinese Midea group has particularly raised concerns among German politicians and trade unions, as well as business groups concerned at the lack of reciprocal investment opportunities. Measures were proposed at both a national and European level to restrict foreign purchases, supported by then-economics minister Sigmar Gabriel and the European commissioner Günther Oettinger.

Capital controls make overseas acquisitions more difficult for Chinese investors, but they don't prevent them. Hermann Meller, China expert, global law firm Dentons

But now Chinese companies are back with a vengeance – in recent weeks, China’s HNA Group increased its holding in Deutsche Bank, becoming that company’s largest shareholder. The company is also looking at a takeover of the loss-making airport of Frankfurt-Hahn. The $1.3 billion acquisition of biotech company Biotest by Creat was a surprise, as was Bosch’s sale of its starters and generators business to Zhengzhou Coal Mining Machinery Group for almost $600 million.

Measures like capital controls “make international purchases more difficult for Chinese investors, because the buyers need special permissions, but they do not prevent them,” said Hermann Meller, China expert at the global law firm Dentons.

So the Chinese spending spree continues, although all parties have become more cautious. Beijing’s aim is to make China the number one industrial power in the world by the year 2025: everything else is subordinate. For Dirk Albersmeier, co-head of M&A for JP Morgan in Europe, it is clear that “strategic deals are still allowed and desired.”

However, a number of failed investments in recent years have Chinese buyers more wary at offers from Germany. Troubled companies in need of restructuring need not apply. There are five big deals drawing the interest of Chinese companies, according to Yi Sun, a China specialist at consultancy firm EY. She won’t say what they are, but acknowledges that Chinese firms focus on high-tech firms, including machine manufacturers, big data companies, smart home service providers and auto industry suppliers.

This leaves Chinese and German companies acting pragmatically on takeovers. Last year, the Chinese firm San’an Optoelectronic expressed a serious interest in buying light-technology maker Osram when Siemens put its stake up for sale. Local trade unions, led by the head of the powerful IG Metall union, strongly condemned the proposed deal: union spokesperson Jürgen Wechsler warned that the union “would strongly resist any takeover attempt.” The bid was eventually abandoned. Osram’s troubled lighting division, Ledvance, which makes light bulbs and neon lights, was subsequently sold to another Chinese company, the MLS Group, with IG Metall’s approval and German government permission.

More recently, the HNA Group – now Deutsche Bank’s largest investor, with almost 5 percent – and Chinese insurance group Anbang have shown an interest in taking over HSH Nordbank, a publicly-owned German bank on sale because of European competition laws. “Banks are always interesting for the Chinese, because asset management is increasingly important for them, with high levels of saving among the new middle class,” said Ms. Sun. German banks can help form the broader infrastructure for more efficient Chinese capital management.

Some observers discern a broader strategy at work. Kai Lucks, chair of the Federation for Mergers & Acquisitions, said: “HNA could use its HSH Nordbank holding to set itself up for further European takeovers. Deutsche Bank could help the Chinese to acquire loan capital.” Last year, the Shanghai-based investment company Fosun bought the private bank Hauck & Aufhäuser.

Anbang, HNA’s co-bidder for HSH Nordbank, has rapidly risen to become China’s third largest insurance company and is often mentioned in connection with overseas investments. Its founder and president Wu Xiaohui was widely seen as benefiting from excellent contacts in the Chinese political world, although recent penalties imposed on his companies have called this into question.

Investment bankers believe German companies will remain high on the list of desirable acquisitions. “It is realistic to assume that around a quarter of all German mergers and acquisition volume will go to China in the coming years,” said Rainer Langel, the head of the German subsidiary of Australian bank Macquarie. Deals over a billion euros would not be a problem, he added.

Chinese investors pay somewhat higher prices for acquisitions. Otherwise they won’t get in the game Huanping Zhang, Eurasian Consulting

But China experts all agree that purely speculative investments are a thing of the past. Beijing has firmly ruled out any further expensive acquisitions of luxury brands, favoring instead the purchase of future-oriented technologies. The days of extraordinary Chinese domestic growth now seem to be at an end, so it makes sense to acquire overseas revenues and customers.

“Chinese companies are hitting the limits of growth at home, even in infrastructure development. So internationalization stands out as a possible expansion strategy,” said Martin Reitz, head of Rothschild Germany. German companies are even more attractive given increased scrutiny from US authorities.

However, the Chinese spending spree will not be cheap. “Chinese investors will continue to pay somewhat higher prices for acquisitions. Otherwise they won’t get in the game,” said Huanping Zhang of Eurasian Consulting.

 

Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is Handelsblatt's chief correspondent for the financial markets. Stephan Scheuer is Handelsblatt's China correspondent, based in Beijing.To contact the authors: [email protected], [email protected], [email protected]