China-Australia: Communication breakdown

Ningbo Dairy Group’s plans to acquire five farms in Gippsland, Victoria were shot down by the county council in 2015 after it received 400 submissions from the local community and other interested parties opposing the move. The company didn’t help matters with a string of media interviews in which executives said they could reduce costs and improve labor efficiency by bringing in Chinese workers and achieve higher milk production per cow by using Chinese methods.

In failing to understand Australian politics – it assumed that federal and state level approvals were sufficient to proceed with the deal – and local sensitivities, Ningbo Dairy is a case study in how not to position a Chinese investment in Australia. It was repeatedly cited by respondents in a survey conducted over the past 12 months by Powell Tate Australia and Weber Shandwick China regarding local concerns about Chinese participation in Australia’s agriculture sector.

“Chinese investors, like many other foreign investors still have some way to go in terms of local stakeholder management,” says Chris Carr, a partner at MinterEllison. “If your investment impacts a local community, you have to make sure that community buys in to what you are doing. It’s not just a matter of sponsoring the local football team, it must be deeper than that.”

The Powell Tate survey also uncovered some success stories. Shandong RuYi, for example, overcame an initial negative local response to its purchase of cotton farm Cubbie Station by investing in the property, prioritizing environmental issues, and committing to use local suppliers and workers. But the importance of paying attention to local issues that encompass more than purely economic considerations is clear.

Distorted reality

Two high-profile Chinese deals have been blocked since the start of 2016: Shanghai Pengxin Group’s acquisition of cattle ranch Kidman & Co; and separate bids from State Grid Corp. of China and Cheung Kong Infrastructure for electricity provider Ausgrid. The first preceded a general election (although even if it had not, there are doubts as to whether it would have been approved, given the significance of the asset) and the second was nixed due to national security concerns.

Both situations could have been averted with proper planning, according to M&A advisors. And neither is truly reflective of attitudes towards Chinese investment in Australia. Deal flow is lumpy – there were about 20 transactions in each of 2014, 2015 and 2016, with total investment ranging from $2.2 billion to $6.7 billion, according to Mergermarket – and it has tapered off over the past 12 months. But the vast majority of applications that come before the regulator are approved.

“There is a perception that Chinese investors have a more difficult time than investors from other countries, but I don’t think the statistics bear out that there should be any particular concern,” says Deborah Johns, a partner at Gilbert & Tobin. “The Foreign Investment Review Board (FIRB) will look more closely when there is government money somewhere up the chain, and our definition of what constitutes a foreign government investor is very broad, but that is the case regardless of country.”

This misperception often results in a reluctance to engage with the regulator. Application fees, which were first introduced in 2015, are another demotivating factor. FIRB charges A$25,300 to consider an acquisition of A$10 million to A$1 billion that involves not only corporate assets or securities but also commercial or agricultural land. This rises to A$101,500 for deals of A$1 billion or more.

It’s good to talk

The irony is that FIRB is generally regarded as approachable and reaching out to it can be beneficial. Several advisors recommend that prospective Chinese acquirers make themselves known to FIRB, explain their investment thesis, and respond to any questions about deal substance and structure. For example, if an asset is close to a military site, there could be ways to address security concerns. Similarly, the regulator might be more comfortable with a healthcare deal if steps are taken to ensure that servers containig patient records are kept onshore or the majority of the board are Australian nationals.

After receiving criticism over the Ausgrid process, the government created a critical infrastructure center that is intended to streamline the FIRB review by involving other regulatory agencies earlier on and creating a preemptive register of national security risks relating to infrastructure assets. Johns of Gilbert & Tobin says the most noticeable difference is that route applications are being processed much faster – usually within the 30-day notification period – and decisions on more sensitive applications are taking longer.

“There is a lot of preparatory work, particularly for state-owned enterprises where there might be a need for lobbying,” adds Lee Horan, a partner at King & Wood Mallesons. “They must be on the front foot, with a message for the regulator and for the market. We’ve seen deals signed early on but the battle has been lost because there were no lobbyists or PR people involved. What happens then is the politicians start to get lobbied themselves and they put pressure on the Treasurer.”

Carr of MinterEllison expects that FIRB and other regulators will continue to look more closely at whether the conditions on past investment approvals are being complied with and take action if they are not. As such, he is advising clients to confirm they were within the law as it stood at the time of investment, that all the appropriate filings were made, and any conditions complied with. This might cause headaches for some groups, but for now the main challenge facing Chinese investors comes from China.

“The bigger issues around Chinese investment in Australia are actually in China, and the ability for parties to complete,” says Carr. “When we have been dealing with Chinese parties of late, FIRB is seen as something that needs to be dealt with properly and carefully but in most instances it is not really exorcising the minds of parties, particularly those who are pro-active about these things.” 

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• Topics
• Greater China
• Australasia
• Buyouts
• Regulation
• China
• Australia
• M&A
• Outbound investment