Chinese outbound strategies bet on home’s appeal

The tables have turned. While multinationals have been coming to China for decades to expand their global presence, Chinese companies are starting to take control of the game by acquiring international assets. Notably, Dalian Wanda Group just completed what could be the largest ever Chinese takeover of a US company last month, paying $2.6 billion for cinema chain AMC Entertainment.

There is no doubt that many Chinese corporations now have the deep pockets to go overseas. A more pertinent question for private equity players, however, is how to identify the best strategy to facilitate such ambitions.

Chinese outbound M&A activity has been sharply rising since 2004, with deal volume growing by 24.4% annually and deal value rising nearly 10-fold. Private equity firms have played a role in a few transactions so far. Chinese construction equipment manufacturer Zoomlion, a portfolio company of Hony Capital, acquired Italy's Compagnia Italiana Forme Acciaio (CIFA) in 2008, with Mandarin Capital Partners and Goldman Sachs also participating. In January, CITIC Private Equity partnered with Sany Heavy Industry to buy Germany's Putzmeister.

The sales of CIFA and Putzmeister indicate that Chinese companies and their private equity peers are no longer just buying up bankrupt or second-class companies. "Recent economic pressures have led to many European companies, mostly in manufacturing, actively approaching Chinese buyers," says Derek Sulger, founding partner of Lunar Capital. "Most of the projects we've seen come through offer little value to us, as we think that acquisitions should be about brands or specific technologies."

The China appeal

However, when dealing with less distressed acquisitions, Chinese companies lack relevant experience in bargaining. In certain cases, high valuations make getting strong returns very difficult. According to a person with knowledge of the Putzmeister transaction, its valuation could be as high as 16x P/E. It is questionable how much CITIC PE will be able to earn from this deal.

Additionally, since the economic downturn hit the US and Europe, there has only been a limited number of high growth companies left on the shelves. In order to outbid their European and US competitors - which have local expertise and networks - Chinese investors need to prove they have the edge by bringing more to the table.

"Since capital is plentiful, it becomes crucial for PE funds to offer strategic added value to their targets in order to remain attractive and justify the required rates of returns," says André Loesekrug-Pietri, chairman of A Capital, a private equity firm focused on cross-border transactions.

When Chinese companies talk about offering strategic value, they often refer to China's growth story. In the past decade, some Chinese firms went abroad to localize technology and resources with the aim of boosting their companies' growth in China. Some might have also wanted to sell their products to overseas customers. However, this type of activity has started to loose its importance in recent years: the game now is more about Chinese consumption. For example, Fosun Group ties its outbound investments to the tastes of the rising middle- and upper class, which have a huge appetite for the luxury goods located in Europe. In 2010, when vacation resorts Club Méditerranée was trying to promote its global services in China, Fosun partnered with A Capital to help it develop its brand locally.

"When we invest, it is important to find a favorable valuation, say 8-10x P/E or 1-2x P/B. Then, one should look for those who want to partner with a Chinese investor and have a growth vision in this second-largest economy," Xinjun Liang, CEO of Fosun, tells AVCJ.

Step-by-step

However, as of last year, Fosun only held 9.71% in the resort. Liang and A Capital's André Loesekrug-Pietri both agree that while Chinese investors are keener to manage local growth rather than that in Europe or the US, it is better for them to be less ambitious in the initial stages.

"With 27 countries, Europe is a complex environment, even for Europeans," says Loesekrug-Pietri. "The best approach is to build their trust in foreign countries patiently by first getting minority stakes in the beginning, and co-invest with local investors. This minimizes their risks."

While some companies are more acquisitive than others, the majority of Chinese corporations still focus on the domestic market. It's not that they don't have the cash to go abroad, but that they understand the need to have middle management to run overseas assets and in many cases they would prefer to have an investment partner.
"Fundamentally, I don't know of any Chinese company that is really capable of executing sizable international acquisitions," Yichen Zhang, CEO of CITIC Capital, tells AVCJ. "The majority are not up to global standards, while you also have cultural and language barriers."

To bridge the gap, CITIC Capital - one of China's pioneers in executing cross-border transactions - has launched five cross-border private equity funds, including two for Japan, two for the US and one for global markets. Instead of backing Chinese companies wanting to go abroad, it has partnered with top-tier overseas GPs to buy controlling stakes in foreign companies with brands and technologies that appeal to the Chinese market. The GP can then exit through a trade sale while Chinese companies may secure a smoother passage for M&A.

"The more ideal model is that the PE player makes the acquisition first - by itself or or by teaming up with a foreign GP," says CITIC Capital's Zhang. "One can help clean the asset up and try to develop a China angle and then bring in a Chinese strategic investor in a step-by-step process."

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• Topics
• Greater China
• China
• Outbound investment
• A Capital Asia
• CITIC Capital
• Lunar Capital Management
• Fosun Group