China financial firms seek control deals in outbound M&A

An employee counts yuan banknotes at a bank in Huaibei, Anhui province June 22, 2010.[Photo/Agencies]

Chinese financial firms are targeting purchases of distressed banking assets coming on the market in Europe to expand their reach beyond emerging markets.

The first Chinese purchase of a European investment bank was announced last week, with Haitong Securities agreeing to pay 379 million euros ($470 million) for an investment bank in austerity hit Portugal.

Banco Espirito Santo de Investimento SA (BESI) is being sold by Novo Banco, the bank carved out of Banco Espirito Santo after it was rescued in August.

For China's second largest brokerage it's a modest-sized deal, equivalent to just 1.5 percent of Haitong's market value. But it demonstrates the changing character of acquisitions by Chinese financial firms.

These days they mostly seek controlling stakes, and now they are scouting Europe for opportunities, avoiding anything too big.

"Increasingly, Chinese financial firms are seeking control deals as a way to expand their global footprint," Mayooran Elalingam, head of Deutsche Bank's Asia-Pacific M&A said.

"Several distressed opportunities are available in euro zone economies and we expect the Chinese financial services sector to be active in these situations," he added.

Encouraged by Beijing

Such deals can help Chinese banks gain treasured European banking licenses as well as expertise, notably in debt markets, that can be transferred back home, whereas growth through opening overseas bank branches can be a slow process.

This year, the government began encouraging Chinese stock brokers and financial firms to acquire greater international reach, according to investment bankers.

"The government is encouraging the outbound M&A push," a Hong Kong based M&A banker said.

The drive for geographic spread reflects China's efforts to build up overseas bank outlets as the yuan currency gains a greater share of global trade.

Haitong's purchase of BESI, Portugal's biggest debt underwriting firm, will give it control of a business that earned 247 million euros in revenues in 2013, according to analysts at Daiwa Capital Markets, and a ready-made investment banking network in Europe.

"As regulators liberalize the financial industry in China, banks, insurers and securities firms would be on the lookout for asset managers, private banks and wealth managers," said Bernard Teo, head of financial institutions group investment banking in China with Goldman Sachs.

Some M&A bankers do not rule out the possible acquisition of a European commercial bank.

Struggling Italian lender Monte dei Paschi di Siena, the worst-performing European bank in a recent asset quality review by the European Central Bank, could attract Chinese bids, according to Hong Kong-based M&A bankers.

Chinese buyers could also be interested in Novo Banco, which Portugal's authorities hope to sell in the first half of next year, they added.

Lesson learnt

Until now Chinese financial firms' strategy has been based on organic growth and sporadic purchases of minority stakes in foreign firms, mostly in the emerging market sphere.

So far this year, they have announced $3.2 billion worth of overseas deals, three-quarters of which were majority stake purchases, according to Thomson Reuters data.

The total spend on overseas deals is way below the record $17.9 billion posted in 2007, but back then only 4.3 percent of the deals were for majority stakes.

In 2007, just before the global financial crisis erupted, Chinese financial firms and sovereign wealth fund bought stakes in publicly listed global financial companies, including a $5 billion investment in Morgan Stanley.

The stock market losses from the ill-timed deals created a headache for executives back home.

"Chinese financial institutions are likely to shy away from large transformational deals as they have learnt valuable lessons from the investments made during the financial crisis," Goldman Sachs' Teo said. Their main goal now, Teo said, is to serve Chinese corporations expanding globally.