Foreign divestments drive China deal flow - M&A Forum

"Companies look at their portfolios around the world and ask where they are getting the best return on their money. On China, for a long time the view was ‘I must invest in this market to get ahead.' Now they ask whether they should be there," Frank Jin, an executive director for Asia Pacific M&A at Morgan Stanley, told the China M&A Forum in Shanghai.

German wholesaler Metro answered this question last week with an agreement to sell a majority stake in its China operation to local rival Wumart for an enterprise valuation of EUR1.9 billion ($2.1 billion). It will retain a 20% interest in the business and channel the proceeds into other global opportunities. This follows Carrefour's move in June to divest control of its 210 hypermarkets and 24 convenience stores in China to domestic retailer Suning for EUR1.4 billion.

"Large companies constantly review their portfolios," said Barry Chen, a partner at InterChina Partners. "If [a China business] is very small and consumes too much time, and there is no way to move it up, they will make the decision to divest." One of the five deals InterChina has advised on this year saw a global leader in a niche industry sell its profitable China operation because the business was subscale. Another involved a foreign company with 17 joint ventures in China. It no longer wanted to deal with the complexity, so streamlined the legal structure and sold out.

For the right business, there are plenty of private equity suitors. Raghu Narain, head of investment banking for Asia Pacific at Natixis, noted that 19 financial sponsors were in the hunt for APM Monaco, a European jewelry brand with more than half of its 200 stores in China. TPG won out, securing a 30% stake in the business. It was earlier reported that APM was looking for a buyer in a deal potentially worth close to $1 billion.

"These are examples of private equity really trying to deploy capital but not having that many opportunities to do so," Narain said, adding that he's also seeing considerable interest from infrastructure funds in data center assets. "It creates a great opportunity if you want to take some chips off the table."

CITIC Capital is among the most active players in the market, completing a string of carve-outs from foreign multinationals over the past two years that have seen divisions of McDonald's, Pearson, Ansell, Euromoney Institutional Investor and Ajinomoto all come under its control. Derek Wang, a managing director with the firm, said that sellers are less willing to deal with the complexities of managing local teams now that returns are being squeezed by the rise of strong domestic rivals.

At the same time, plenty of international players remain committed to the country, typically those with strong China operations or where the country is strategically significant to the global portfolio. Morgan Stanley's Jin identified financial services, pharmaceuticals and automobiles – "You want to have a global car that you can sell in China" – as industries with opportunities for further expansion.

Others conclude that even a China characterized by more modest growth cannot be ignored. "We have multinational clients in France looking to China and saying this is a market where we need to invest so we can tell our shareholders where growing is going to come from," said Narain of Natixis.

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• Topics
• Greater China
• Buyouts
• M&A
• China
• Morgan Stanley
• Natixis
• CITIC Capital
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