Inbound China M&A takes flight on consumer promise

KGI Financial Holding

19/02/2017 23:00

* Inbound M&A in 2017 already twice same period last year 
    * Consumer/retail account for nearly half early deals 
    * Beijing relaxed foreign deal approval regime in October 
    * High valuations remain an obstacle to foreign capital 
 
    By Elzio Barreto 
    HONG KONG, Feb 20 (Reuters) - Overseas acquisitions by 
Chinese buyers are cooling after two record years as Beijing 
reins in capital outflows, but deals into China are on the rise, 
and new rules will make it easier for foreign buyers to tap 
China's giant consumer potential. 
    Inbound M&A deals have already reached $7.1 billion so far 
in 2017, almost double the amount in the same period last year 
and are well on track to beat the 2016 total of $46 billion, 
while outbound deals tumbled more than 40 percent to $8.4 
billion, Thomson Reuters data showed. 
    Deals in retail and consumer staples accounted for nearly 
half those early transactions, far outpacing real estate and 
financial deals, which usually dominate inbound M&A. 
    Belgian investment firm Verlinvest is ahead of the trend.  
    It set up a $300 million venture last year with Chinese 
state-owned conglomerate China Resources and has already 
deployed more than half of the funds. 
    Verlinvest, which manages funds for the founding families of 
Anheuser-Busch InBev  ABI.BR , is investing in minority and 
majority stakes in leading western brands so it can push them 
through China Resources' distribution channels in China, said 
Nicholas Cator, who is responsible for the Asia business. 
    "We're going to be focusing on those high-growth sectors 
that are based on consumer trends, like health-related food and 
beverage products, healthcare, education, cinema or 
entertainment, or anything linked to kind of cultural production 
and content," he said. 
    Verlinvest's joint venture in December bought an undisclosed 
stake in Oatly, a Swedish maker of dairy-free products, and 
plans to expand it into China, and in November it bought a 
majority stake in Red Sun Enterprise, which owns senior care 
homes in Shanghai and Nanjing. 
     
    LOOSER APPROVALS REGIME 
    The leadership in Beijing has long been trying to rebalance 
the economy away from infrastructure, heavy industry and 
export-led growth and towards domestic consumption, so in theory 
such investment should be welcome, but in practice foreign 
capital has fallen foul of barriers to entry. 
    That appears to be changing. After a trial in a few of its 
free-trade zones, China in October expanded to the entire 
country a new liberalisation programme. 
    Apart from a "negative list" of industries deemed too 
sensitive, foreign investments no longer need to go through a 
cumbersome approval system, and there has even been some 
loosening in the off-limits list.  urn:newsml:reuters.com:*:nNRA2l7k0r 
    "The direction China is going is that for most sectors, 
provided it's not in the so-called negative list, where there 
would be additional scrutiny, the process for corporate 
establishment and changes including share transfers should be 
simpler," said Tracy Wut, M&A partner at law firm Baker McKenzie 
in Hong Kong. 
    "From the recently amended negative list, there are further 
relaxations in certain sectors to which the government is trying 
to encourage foreign investments." 
    CDIB Capital International Corp, part of Taiwanese financial 
group China Development Financial Holding (CDF)  2883.TW , is 
also seizing the opportunities. 
    Last August it invested 200 million yuan ($29.2 million) for 
a stake in outdoor sports retailer Tutwo (Xiamen) Outdoor Co 
Ltd, betting on a jump in demand for hiking, skiing and camping 
gear in China. 
    "Clearly there's going to be more of a focus on domestic 
growth and consumption is one of the themes," said Lionel de 
Saint-Exupery, president and CEO of CDIB. "Consumption is still 
relatively robust, but we're not just seeking average growth, 
we're seeking hyper growth and that you can see in new 
categories." 
    The biggest fly in the ointment, according to David Cogman, 
a principal focusing on China at consulting firm McKinsey & Co, 
is the lofty valuations for Chinese assets. 
    Consumption and services companies listed in Shenzhen and 
Shanghai trade at about 30 times their earnings, compared with a 
multiple of 17 for similar companies trading in Hong Kong and 
about 20 for U.S.-listed companies, Thomson Reuters data shows. 
    "At the end of the day, particularly if you're a fund 
looking across multiple markets, your investment committees 
still have to think where to put the capital and that's hard to 
do with the current numbers you see in China," he said. 
 ($1 = 6.8583 Chinese yuan renminbi) 
 
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Graphic on China's inbound/oubound M&A since 2000    http://tmsnrt.rs/2m0lwE3 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
 (Reporting by Elzio Barreto; Editing by Will Waterman) 
 ((elzio.barreto@thomsonreuters.com;)(852)(2843-1608; Reuters 
Messaging: elzio.barreto.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA M&A/INBOUND