Europe target of most Chinese non-resources M&A deals in Q2

Europe was the location of the greatest number of merger and acquisition deals that Chinese investors made in non-resource industries in the second quarter of 2012, according to a report published on Tuesday by the equity investment firm A Capital.

The report said that Chinese companies made merger and acquisition deals worth $5 billion in Europe in the quarter, accounting for 48 percent of the total money that the companies put into such deals in the world during that period.

Moreover, 95 percent of Chinese companies' non-resources deals were related to the European market.

"Europe's economy is structurally complementary to the Chinese one," said Andre Loesekrug-Pietri, chairman of A Capital. "And, in our view, this should increase even more with the Chinese rebalancing toward more consumption and sustainable development."

Loesekrug-Pietri said many prominent companies and industrial clusters in Europe specialize in environmental technology, automobiles, consumer brands, new materials and similar businesses.

These are also businesses in which Chinese firms need to move up the value chain.

"The stunning proportion of all non-resources deals, i.e., in the industrial or services sectors, that flowed into Europe in the second quarter is probably a direct consequence of this strategic focus," said Loesekrug-Pietri.

The report said Chinese investors put about twice as much money into Europe in the second quarter as they had in the same period a year before, making large investments in Portugal, Germany and France.

Europe has remained the leading destination for such spending quarter after quarter, evidence that European companies remain attractive to Chinese investors.

Loesekrug-Pietri said such spending is likely to continue, especially since the European market remains open to Chinese investment.

The report also said that recent investments in European companies show that Chinese investors are looking to put their money into stable assets. As examples, it cited China Three Gorges Co, a State-owned clean-energy conglomerate that specializes in hydropower development and operation, which invested in the Portuguese utility company EDP Energias de Portugal SA; and the Chinese sovereign wealth fund China Investment Corp, which invested in the utility company Thames Water Utilities Ltd.

The report said more and more investors are finding that the best way to acquire high-quality assets that normally would not be for sale is to go for a minority stake in them. Doing so also greatly lowers the risk of running into public-relations difficulties.

Of the total value of the merger and acquisition deals Chinese companies made in the world this year, 70 percent came from deals in which a minority stake was acquired.

Loesekrug-Pietri said mergers and acquisitions are risky in themselves and even more so when they are made across borders.

Many Chinese companies are now conducting these sorts of transactions for the first time.

To hedge against these risks, he suggested that Chinese companies team up with a local partner like A Capital that has a local understanding of the opportunities, or taking minority stake as a first step to avoid disrupting the current management and being left without proper international management resources.

caixiao@chinadaily.com.cn

(China Daily 09/12/2012 page14)