Growing trust helps flurry of Sino-German deals

Beijing Enterprises Holdings

12/02/2016 07:00

* Series of German and Swiss deals with China in past month 
    * Chinese "more active and professional" - investment banker 
    * Lack of trust still a serious issue - boutique adviser 
    * Graphic on Chinese acquisitions http://reut.rs/1KdZt8f 
 
    By Arno Schuetze and Ludwig Burger 
    FRANKFURT, Feb 12 (Reuters) - A flurry of sales of German 
and Swiss companies to Chinese buyers in the past month is 
testament to increasing Chinese expertise in European bidding 
processes and growing trust, German bankers and advisers say. 
    Those involved in the deals, which include ChemChina's $43 
billion agreement to buy Swiss seeds and pesticides group 
Syngenta  SYNN.VX  and the two biggest-ever Chinese acquisitions 
of German companies, say the two sides are making strides in 
mutual understanding.   
    China has for years sought to buy in key technology rather 
than develop it at home more slowly, but attempts to reach deals 
have often failed. 
    "The cultural dimension is very important," said 
Frank-Christian Raffel, Munich-based partner in boutique 
advisory firm MelchersRaffel, which specialises in M&A deals 
between German-speaking and Asian countries.  
    "One serious issue is a lack of trust on both sides. 
Whatever one side says is seen by the other as a tactic or a 
ruse, or is overinterpreted." 
    One Chinese investor became so suspicious on learning that 
not all of the German target company's top and second-tier 
managers had yet been informed of the talks that the would-be 
investor walked out, seeing it as a sign that key personnel 
might not stay on after a takeover. 
    "For them, the transaction was dead. It took three or four 
meetings to get the investors back to the table," Raffel said.  
    He added that when a Chinese firm was the target of a 
Western buyer, it was not unusual for as many as 10 top 
executives of the Chinese company to be present at M&A 
negotiations.  
    Negotiations in the "walkout" case got back on track, Raffel 
said. He declined to name the firms involved because the talks 
are still ongoing but said the target was a family-owned 
automotive supplier with about 120 million euros ($136 million) 
in sales. 
    The traditional nervousness, however, seems to be ebbing. 
These days an auction process is barely considered complete 
without at least one Chinese bidder, German bankers say. That 
can help to keep bids high, as Chinese buyers are often 
well-funded and have their own particular valuation criteria. 
    "In the last 24-48 months, the Chinese have become markedly 
more active and professional in foreign acquisitions. So 
investment banks now approach the Chinese in virtually every 
auction," said Jan Masek, co-head of mergers and acquisitions at 
HSBC  HSBA.l  in Frankfurt, who advised ChemChina on the 
Syngenta takeover, alongside China CITIC Bank. 
    Syngenta's advisers were Dyalco - the one-man business of 
former Goldman Sachs  GS.N  M&A head Gordon Dyal, alongside JP 
Morgan  JPM.N , Goldman Sachs and UBS  UBSG.VX . 
     
    WAVE OF CAPITAL 
    Outbound Chinese M&A topped $100 billion for the first time 
last year, with Europe the biggest target region outside Asia. 
And Germany is seen as especially attractive for its technology, 
encouragement of foreign investment and business environment. 
    "There are several factors which tilt things towards 
Germany," said Mikko Huotari, head of the foreign relations 
programme at MERICS, a Berlin-based think tank focused on China. 
    "We are seeing a new wave of Chinese capital entering 
Europe, and in particular Germany."      
    In the past month, ChemChina has agreed to buy German 
industrial machinery maker KraussMaffei for $1 billion, Beijing 
Enterprises Holdings  0392.HK  to buy Germany's Energy from 
Waste for 1.44 billion euros ($1.62 billion) and Chengdu 
Techcent Environment Co  300362.SZ  to buy Bilfinger's  GBFG.DE  
water treatment unit for 200 million euros. 
 urn:newsml:reuters.com:*:nL8N14V2EM urn:newsml:reuters.com:*:nASM0001U8 urn:newsml:reuters.com:*:nL8N15L05S 
    Those deals will be dwarfed by ChemChina's planned 
acquisition of Syngenta, which will be its biggest buy so far in 
the German-speaking world provided a U.S. review finds no threat 
to national security.  
    "In the U.S. it is getting increasingly difficult to obtain 
the necessary permissions," says Christian Kames, Citi's Germany 
investment banking head.  
    The United States last month blocked Philips's  PHG.AS  plan 
to offload a part of its lighting businesses to Asian 
buyers. urn:newsml:reuters.com:*:nL8N1560FK 
    Citi is advising private equity firm KKR  KKR.N  on the sale 
of German tableware and coffee machine maker WMF - whose 
consumer tableware brand is increasingly popular with China's 
growing middle class. The sale may draw Asian bidders. 
    All these takeovers have in common the acquisition of 
technology that China needs to shift its economy from lower to 
higher-value production - something Germany has in plenty. 
 urn:newsml:reuters.com:*:nL3N15I366 
    "With technology gaps in areas such as next-generation 
lighting, automation/robotics, environmental technologies and 
aerospace, we expect to see a continued move to acquire know-how 
in these areas," Barclays analysts wrote in a recent note. 
    Chinese appliances maker Midea Group  000333.SZ  has rapidly 
built a stake of above 10 percent in German industrial robot 
maker Kuka  KU2G.DE , while the auction for German lighting 
group Osram's  OSRn.DE  Lamps unit is widely expected to be a 
contest between Chinese bidders.  urn:newsml:reuters.com:*:nL8N15J4MB urn:newsml:reuters.com:*:nL8N14S320  
     
    PITFALLS 
    There are still pitfalls for Chinese companies buying German 
firms, with language and culture named as the biggest challenges 
in a survey of German companies and Chinese investors published 
by consultancy PwC last year. 
    "Germans favour a direct communication style with a steady 
flow of information. Chinese managers, on the other hand, expect 
large parts of the information to be understood from the context 
of the conversation," PwC wrote in a publication aimed at 
Chinese investors in Germany. 
    Against that background, people like Yi Sun - who was born 
in Shanghai, studied German from the age of 12 and has lived in 
Germany for 18 years - are in high demand. 
    She is now head of Ernst & Young's China Competence Center 
for Germany, Switzerland and Austria. 
    "The rising number of Chinese takeovers in Europe is also 
feeding through to the labour market," she said. 
    "All M&A advisory firms are tearing their hair out to find 
well-educated staff who speak Chinese, German and English - who 
unfortunately, given the high requirements, are still a rarity." 
      
($1 = 0.8883 euros) 
 
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Graphic on Chinese cross-border acquisitions    http://reut.rs/1KdZt8f 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
 (Additional reporting by Noah Barkin, Andreas Kroener and 
Alexander Huebner; Writing by Georgina Prodhan; Editing by 
Andrew Roche) 
 ((georgina.prodhan@thomsonreuters.com; +49 69 7565 1279; 
Reuters Messaging: 
georgina.prodhan.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA GERMANY/M&A