Dissecting the Current Merger Wave in

China and the Implications for EU

Assistant Professor of Finance

Cheung Kong Graduate School of Business

Xiaoyang Li

Sixth EU Asia Top Economist Round Table

EU China Economic and Finance Forum

Beijing, 17 November 2014

2

Booming Domestic M&As

3

Burgeoning Cross Border Acquisitions

4

Regional Decomposition (2000-2014)

5

Mega Mergers by Chinese Firms

6

New Features of Current Merger Wave

1) BAT’s (Baidu, Alibaba, and Tencent) expansion through acquisitions

2) Hybrid ownership reforms offer private enterprises with golden

opportunities

3) More acquirers are private rather than state-owned enterprises

4) More and more firms seek targets overseas

5) Most targets are in different industries from acquirers

6) Acquisition becomes public-listed companies’ key value enhancing tool and

becomes the main exit channel for VC/PE

7) Many buyout funds are assisting

▪ Investment banks/Financial advisors

▪ PE

▪ PE+Listed Companies

- Combining primary and secondary markets

7

Forces behind Recent Merger Waves

Merger & Acquisition

National Industrial

and Financial Policies

RMB and Capital Market

Globalization

Technology and

Consumption Upgrading

Banks, PE, and Buyout

Funds

MBO and Hybrid

Ownership Reforms

8

Macro Policies

• In 2008, the State Council’s Nine Measures: #5: Create new financing channels

through M&A loans, REITs, Private Equity, and regulated informal lending

• In December 2008, CBRC’s Guidelines on Commercial Banks’ M&A Loans

• In September 2010, the State Council’s Opinions on Promoting Enterprise’s M&As

• CSRC promulgates “Provisions on the Material Asset Reorganization and Ancillary

Financing of Listed Companies”

• In January 2013, 12 ministries promulgated “Guidelines on Promoting Important

Sectors’ M&As” set priorities on Steel, Cement, Auto, Ship, Aluminum, Rare Earth,

Information, Pharmaceutical, and Agriculture sectors

• 07/14，People’s Bank of China loosens restrictions on individual/firm investing

abroad

National Industrial and

Financial Policies

9

Reviving State-Owned Sector

Year 2003 2004 2005 2006 2007 2008 2009 2010

Capital

%50.1% 48.8% 48.9% 48.5% 52.0% 53.3% 51.6% 41.9%

Output

%37.5% 35.2% 33.3% 31.2% 29.5% 28.4% 26.7% 26.6%

21% 21%28%

35%

93% 95%

Steel Automobile Cement Electrolyti Aluminum Glass Solar Battery

• Capital-output efficiency

• Over capacity in some sectors

10

SinoPec’s Ownership Reform

MBO and Hybrid

Ownership Reforms

• Who are behind the curtain?

1. 三洲隆微实业

2. BoHai industrial private equity

3. Pacific Insurance

4. CICC

5. HOPU (厚朴投资)

6. Haier

7. ICBC

8. Huaxia mutual fund

9. Huaxia mutual fund

10. Harvest mutual fund

11. Harvest mutual fund

12. RRJ Capital

13.国家开发投资公司

14. Fosun (复星)

15. A PE

16. CICC

17. Tencent

18. A life insurance company

19. CICC

20. 新奥控股

21. Cinda AMC (信达资产管理)

22. Huiyuan

23. China Life

24. China Tobacco

25. China Postal Insurance

11

VC/PE Investments vs. IPOBanks, PE, and Buyout

Funds

12

VC/PE Investments vs. IPOBanks, PE, and Buyout

Funds

13

Hony Capital Eats PizzaBanks, PE, and Buyout

Funds

14

Deal SynopsisBanks, PE, and Buyout

Funds

• July, Hony Capital (investment arm of Lenovo) announced to

buy Pizza Express, for £900 million (¥9.55 billion)

– Largest acquisition in Europe in restaurant industry

– Highly levered buyout (LBO) with about £200 million rated below

investment grade (by Moody’s)

• Pizza Express was founded in London in 1965, famous for

Italian Pizzas

• 22 stores in Greater China (1 in Beijing, 9 in Shanghai, 12 in

Hong Kong)

• Hony capital is also very active in SOE privatization

15

Bright Food Acquires Weetabix

• Bright Food group, a state-owned conglomerate of

food/liquor/supermarkets, one of Shanghai’s chosen champion

• Has failed to acquire United Biscuits, Yoplait before

• Acquired Weetabix in 2012 from Lion capital

– £ 1.2 billion using bank loans, bridge loans, bonds

16

Another PE DealBanks, PE, and Buyout

Funds

• April, 2012, Wuhan WuTong GuiGuTianTang used €32.45 million (~¥284 million) acquire Steyr Motors in Austria

• November 5, 2012, Boying investment (博盈投资 000760.SZ) announced to conduct a private-placement of 314 million shares to 6 institutions at ¥4.77 per share to raise ¥1.5 billion – ¥ 500 million to buy WuTong GuiGuTianTang’s 100% shares; ¥ 300

million to invest more in Steyr Motors; ¥ 300 million for R&D; rest for liquid capital

▪ 5 PEs participated, including GuiGuTianTang

17

Common Traits

• Chinese companies seek brand and technology to upgrade

consumer discretionary goods and machinery manufacturing

• EU targets tend to exhibit stagnant growth and high leverage

• China buyers offer capital and market growth prospect

• State champions, private equities, and private enterprises are all

active

18

Smile Curve

18 DownstreamUpstream

Value

Manufacture

China Market

Resources &

Technology

Branding &

Channels

Consolidation

19

Conclusions

• Forces driving China’s merger waves are brewing

▪ Government deregulation

▪ Technology disruption

▪ Financial innovation

▪ Economy globalization

▪ State Privatization

▪ PE/Buyout funds

• Mergers and acquisitions are invigorating the Chinese economy!

• Two-way street for China-EU M&As!

Thank you!

xyli@ckgsb.edu.cn