China's acquisitive conglomerates: Tables turned

Where once private equity sought to sell assets to HNA Group – a Chinese provincial airline that turned itself into a conglomerate with interests spanning airlines, airports, real estate, and financial services – now investors are looking to buy businesses from it on the cheap. 

AVCJ Research has records of about half a dozen exits to HNA in the past seven years. Four of them, totaling more than $10 billion, were announced in 2015 and 2016, a period in which outbound investment by Chinese corporates reached new highs, with HNA, Anbang Insurance, Wanda Group, and Fosun Group to the fore. The Blackstone Group was responsible for three of those four.

Now the private equity firm has agreed to buy back one of those assets. It will take a controlling interest in Hong Kong International Construction Investment Management Group, formerly known as Tysan Holdings, for HK$7.02 billion ($894 million). 

This was soon followed by an announcement that RRJ Capital would take full ownership of airline catering provider Gategroup. Last year, RRJ and Temasek Holdings subscribed to a bond that entitled them to up to 49% of the company, but HNA’s need is such that it was willing to sacrifice control. Much like the Blackstone deal, it is a transaction born of a close relationship. Having previously invested in HNA-owned businesses, RRJ is reportedly positioning itself as a buyer of choice for the conglomerate.

HNA is said to have sold businesses worth over $40 billion over the past two years as part of efforts to lighten its debt load. The group wanted to retain its core airline holdings, but with asset sales now directed by China Development Bank, the largest creditor, that strategy has been reversed. Last week it was announced that Cathay Pacific would buy budget carrier HK Express.

The fall from grace – following acquisitions of more than $60 billion between 2015 and 2017 – can be traced back to a government crackdown on Chinese outbound investment in 2017 due to concerns about capital flight and wanton spending that posed a systemic risk. It went after high-profile deals and dealmakers, which prompted investigations of HNA, Anbang, Fosun, and Wanda. The government subsequently seized control of Anbang, while HNA and Wanda are actively looking to shed assets.

These companies were previously obvious targets for trade sale processes launched by private equity investors. In addition to the HNA exits, there are half a dozen records of GPs selling portfolio companies to Wanda over the same seven-year period and a handful more that went to Wanda-owned entities. Fosun was responsible for another handful, while Anbang picked up three. Almost all were transacted offshore.

This activity reflected a wider trend. In 2007, financial sponsors sold 45 assets – within and outside of China – to Chinese buyers for about $3 billion, according to AVCJ Research. By 2011, the total had risen to more than $8 billion across 101 transactions, before hitting $55.3 million and $52.9 billion in 2016 and 2017, respectively. The deal count for those years was 140 and 175. 

In 2018, the number of transactions was the lowest since 2010 but the cumulative value of $41 billion is still the third-largest on record. However, 14 of the 20 largest transactions – which accounted for just over half of the total proceeds – were in renminbi. In 2017, eight of the top 20 deals were in local currency and they made up just 11% of the total value. 

Even phantom Chinese buyers – introduced into overseas auction processes by bankers looking to drive up prices – are no longer a specter at the feast. Fears that a mysterious Chinese corporate or fund could snatch a deal away have been replaced by skepticism as to whether any such entity could get the money offshore.

Companies are still acquisitive, but success varies markedly by sector and the nature of the buyer; in short, the government is paying closer attention to whether a deal fits in with national strategic objectives and the prospective acquirer’s core competencies. Private equity firms mapping out potential exit scenarios must therefore be realistic in their expectations – although on the flip side, they might see new investment opportunities from Chinese buyers turned sellers.

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• Topics
• Greater China
• Trade sale
• Buyouts
• China
• HNA Group
• Dalian Wanda Group
• Fosun Group
• RRJ Capital
• The Blackstone Group