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M&A: Asia goes on European bargain hunt

China leads the pack; Apac firms seek expertise, R&D

The rate at which Asian companies are snapping up European assets is rising sharply, as bargain-basement prices – caused by the crisis in the eurozone – tempt firms to expand their presence in the west.

This buying spree comes in spite of fears in some quarters about the growing Asian influence on the ailing economies of Europe.

In 2009, Asia-Pacific (Apac) companies targeted 292 European firms. That number rose to 393 in 2010 and 474 last year. This year, Apac firms have already invested $11.7 billion in 123 European companies and the trend looks set to continue.

"China, Japan and Australia, in particular, are taking advantage of the opportunity," says Jamie Spence, principal of Asian Link, a Hong Kong-based company focused on strategic partnership opportunities in north Asia. "The urgent need for European businesses to consolidate, low valuations relative to book value, greater buying power in Asia – underpinned by stronger currencies such as the yen and the Australian dollar – and cash-rich economies have impacted timing."

Going abroad

China is leading the charge for Apac M&A in Europe, according to CY Huang, chairman of the Taiwan Mergers & Acquisitions and Private Equity Council, based in Taipei. Chinese investment in European companies totalled $13 billion in 2010, rising to $17 billion in 2011. "One of China’s main policies focuses on going abroad," says Huang. "M&A in Europe is in line with overall policy. Other Asian countries are not as aggressive as China."

However, Chinese companies will not necessarily have it all their own way in Europe and some might face problems because of a lack of international experience. "China may run into some difficulties because it lacks global management know-how," says Huang. "Corporates in China may find it difficult to handle international outlets."

Fosun Group, China’s largest privately owned company, has been particularly active recently, with several high-profile deals. In 2011, Fosun signed an agreement with the Greek retailer Folli Follie to buy a 9.5% stake in the company. Fosun plans to open more than 250 Folli Follie outlets in China during the next three years.

In 2010, Fosun bought a 7.1% stake in Club Méditerranée, the France-based resort company, increasing that stake to 10% in 2011. Club Méditerranée now boasts resorts in popular tourist destinations Guilin and Yabuli.

Other deals have included Sany Heavy Industry, the Chinese construction equipment manufacturer, purchasing 90% of Putzmeister, the German concrete pump maker, for $426 million, and China State Grid’s deal to buy a 25% stake in Portugal’s national electricity grid. Late last year, China Three Gorges Corporation, the state-owned Chinese power company, outbid several others to buy 21% of Energias de Portugal, the country’s dominant power utility.

Michel Driessen, lead partner in the operational transaction services team at Ernst & Young 
Michel Driessen, lead partner in the operational transaction services team at Ernst & Young

While opportunities in Europe abound, investors will also continue to tap into the liquid markets of China and other emerging markets because of their rapid expansion and lower-cost production facilities. But Apac companies also want to expand expertise and build up research and development capabilities. This might take years to do at home and increases the attractiveness of European targets, says Michel Driessen, lead partner in the operational transaction services team at Ernst & Young. "In effect, they are buying certain types of capabilities from European companies which have already successfully developed them," says Driessen.

Pricing and exchange rates, he says, are working to the benefit of Asian investors, making it the right time to acquire for growth in Europe.

Varying rationale

With such a diverse group of countries comprising Apac, at different stages in their development, the rationale for acquisitions varies greatly from country to country.

"Japanese companies are largely looking for brands and market share, whereas Chinese companies are looking for these things but also to build a trading platform outside of the home country," says Driessen.

With a growing middle-class population and one of the fastest-growing luxury goods markets, targeting companies such as Folli Follie makes sense for firms in China. Investment is not just about cost and finding a bargain – due diligence is becoming more important. "It’s about buying the right company at the right price at the right time," says Driessen.

Asian buying of distressed European assets has attracted lots of negative publicity. Many in the west are wary of the growing influence of Asia in the corporate and financial world, viewing with suspicion its attempts to increase ownership beyond the continent – particularly by preying on cash-strapped institutions in Europe.

However, Chinese premier Wen Jiabao tried to assuage fears by saying the country was not out to purchase Europe but is willing to cooperate with it to combat the crisis. He stressed that China’s investments in Europe remained at a fledgling stage and created benefits for both sides. Jiabao added that China has neither the means nor the intention of ‘buying Europe’ and was ready to work with Europe to combat the financial crisis and debt woes.