There is a whole new vocabulary arriving in M&A, and its author is Chinese outbound acquisition. By far the most significant trend in Asia Pacific investment banking of the last 12 months, and a force so potent it represents a quarter of global M&A volume this year, Chinese overseas ambition is creating some interesting new approaches.
M&A has always had break fees; now there are reverse break fees. It started off with targets demanding them of bidders, but increasingly, Chinese buyers are actively suggesting these break fees themselves as a sign of sincerity and commitment. Deposits are becoming commonplace, and have steadily risen from 2% to 5% and even 10%. It’s only a matter of time before we see a series of rival reverse break fees competing with one another in a baffling new form of auction.
Why would such a thing be volunteered? Because Chinese bidders are trying to overturn a public perception that they are maverick, trigger happy and hasty, offering sources of funds that might not be viable. Anbang, the Chinese insurance group, has a lot to answer for here, turning Marriott’s pitch for Starwood Hotels into an unexpected bidding war which Anbang then walked away from after offering $14 billion.
Then there’s fear of CFIUS (the Committee on Foreign Investment in the United States), the US agency that has the right to intervene on international acquisitions of US assets. It rarely axes deals – one notable exception was its blocking of Philips’ $3.3 billion sale of its Lumileds lighting business to Asian buyers – but the fear that it might do so has an impact on target companies considering bids from China.
In fact, investment banks report a whole new advisory line in predicting what CFIUS might object to, a far from straightforward process when an objection might be, for example, the proximity of a factory to some defence installation or other. It is said that a bid for a meat production company failed because it supplied pork to the US military, raising the concern that any buyer who looked at the company’s books would therefore be able to take a stab at the scale of US troop deployment in various parts of the world.
On top of that, there’s the issue of funding. For several years now there have been mounting concerns about the amount of debt being assumed in China, and the levels of leverage that are becoming commonplace. Each steadily more audacious deal increases the sense of alarm. China National Chemical Corp (ChemChina)’s $43 billion deal to buy Syngenta involves the company borrowing $50 billion – and this is a company whose debt already stood at 9.5 times Ebitda in 2014 and which had a debt-to-equity ratio of 260% in September 2015. M&A deals are being financed almost entirely domestically, some bridging facilities notwithstanding, because levels of domestic liquidity make it far cheaper to do so than to go overseas.
Rumours abound of a Chinese bank agreeing a line of more than $30 billion over the course of a single weekend day. Even if these exposures are then being syndicated, there is a sense that these levels of borrowing and leverage can’t be sustained for much longer.
For the moment, international investment banks are not complaining: it’s possibly prudent to be shut out of the funding and they are getting great and lucrative advisory mandates along the way, which is a good outcome given the dearth of equity capital markets activity over the last year. But if any of these deals are followed by a collapse of an over-leveraged company, some of those advisory opinions will come into question.