Chinese Companies’ Overseas Acquisition Spree Picks up Pace, Part 1

All industry analysts will no doubt be aware of Chinese companies’ ongoing overseas shopping spree, with the latest story being Sanpower’s proposed acquisition of the British-based House of Fraser department store. While Chinese consumers appear to be the global growth drivers of luxury goods, Chinese companies and private investors are eyeing up foreign targets and buying their assets. Like it or loathe it, the hungry and thirsty Chinese dragon is coming.

These Chinese acquirers take various forms, for example sovereign wealth fund corporations, state-owned conglomerates, wealthy private entrepreneurs and publicly-listed companies. All are armed with substantial foreign reserves which have been accumulated during three decades of strong domestic economic development and they are eager to strengthen their domestic positions as well as expand internationally. In 2014, China’s gross national savings will be close to US$5 trillion, while US savings will be only US$3 trillion. The industries in which they are interested include natural resources, automobiles, real estate, banking, retail and agribusiness. Today’s list is long but tomorrow’s could be even longer.

Financially, China is the US’ largest creditor, with the majority of investment in one single currency generally being seen as a risk. Understandingly, China and Chinese companies are keen to spread the known financial risks and balance their assets in a basket of currencies and geographies. They just need to find the right targets in the right continents.

Different Motives, Similar Principle

Although it may be slightly tedious to discuss the impact of China’s 1.3 billion population and how it can shape corporate movements, housing and feeding this massive population and satisfying its increasing aspirations for a better quality of life is indeed a challenge. That said, simply providing basic housing, transport and sufficient food and drink already means plenty of potential business. Acquirers are chasing complementary resources or advanced technology for their existing business lines. For acquirees, they may be able to capture Chinese demand, leveraging new parents’ contacts and expanding into the booming consumer market so as to mitigate their own domestic slowdown.

Different investors have different motives but the principle behind acquisitions is similar. China is assembling an estimated two billion square metres of new buildings, meaning demand for cement mixing machinery is strong. In January 2014, China’s Zoomlion, a construction equipment manufacturer, acquired German dry-mixed mortar equipment manufacturer M-Tec, the world’s leader in the field of concrete machinery, following the acquisition of leading Italian concrete machinery manufacturer CIFA in 2008. In this case, Zoomlion acquired M-Tec and its unique technology mainly for use at home.

Food security is a national issue in China. In recent weeks, China National Cereals, Oils & Foodstuffs Corp (COFCO) has announced that it plans to take a controlling stake in Singapore-listed commodity trading house Noble, with this proposal coming just weeks after COFCO bought a majority stake in Nidera, a Dutch-based agricultural trader. The COFCO-Noble deal will allow COFCO to source directly from farmers and help it build a global supply chain. This deal reflects a shift in priorities in China, which is seeing rising incomes and richer diets at the same time as a shortage of arable land and clean water. China has had to recognise the fact that it has to look overseas for feed grain and make this happen through state-owned conglomerates. These conglomerates tend to take orders from central government and sometimes may not strictly follow normal market-driven and textbook-style dosage. From a soft drinks perspective, COFCO is also The Coca-Cola Co’s largest bottling partner in China. COFCO Coca-Cola Beverages Limited (CBL) is one of The Coca-Cola Co’s three existing bottling partners.

An increasing Chinese appetite for meat products is also prompting other agribusiness deals. Shuanghui International Holdings Ltd, China’s largest meat processor, has struck a US$4.7 billion deal to acquire US pork giant Smithfield Foods Inc. Shuanghui hopes that Smithfield can help it to improve its production capacity, packing and food safety technology. The technology from Smithfield will be used back in China, while Shuanghui can also open up the booming Chinese meat market to Smithfield.

Buying into Heritage

Some Chinese conglomerates are chasing European heritage and the history of long-established brands, and it is the “soft bit” of the business in which they are most interested. In this digital world and with growing foreign visits, many Chinese consumers are aware of established European brands and their operators.

House of Fraser, which was founded in 1849, is a prestigious brand name in the retailing world. With total assets believed to be worth nearly £5 billion, Sanpower is also a major store-based retailer, ranking 12th in the channel in China. However, Sanpower has no presence in luxury retailing. It is thought that Sanpower may invest £70-80 million in House of Fraser, financing a wide-ranging store revamp and website improvements. In the medium term, Sanpower could take the department store into China by opening new outlets or converting its existing retailing sites to the House of Fraser banner. Thus, Sanpower is looking to acquire a well-known British brand to improve its standing and diversify its portfolio.

Bright Food, one of China’s major food and drinks manufacturers, acquired a majority stake in the British breakfast cereal company Weetabix for £1.2 billion, including debt. In Western Europe, Weetabix is a major breakfast cereal player, behind Kellogg and Cereal Partners Worldwide SA. The company was founded in 1932 and has a presence in many European countries. Weetabix’s brands can now be found in supermarkets in China. The company is planning to manufacture in China but not at the expense of its UK operations. As Bright Food is a major dairy player in China, it makes perfect sense for the company to market and promote its dairy products alongside Weetabix if it is able to convince Chinese consumers to opt for cereals with cold milk for breakfast.

Moreover, some Chinese companies, such as Bright Food and Shanghai Pengxin Group Co Ltd, are also involved in dairy farm acquisitions in Australasia. They seem very interested in securing high-quality dairy materials for their domestic brands back home. These acquirers can then claim to use reliable raw materials in their own brands as Chinese consumers tend to have a deep mistrust of domestic dairy brands. Nevertheless, some home-grown labels are doing very well, including various soft drinks and beauty and personal care brands.

From a soft drinks and hot drinks perspective, no major acquisitions have been made abroad, and so far the key players seem fairly content with their domestic businesses. However, their long-term aspirations for overseas expansion cannot be ignored. Suntory, for example, did not start to look beyond its domestic market until 2008/2009, when the Japanese market started to stagnate. It remains to be seen if Chinese soft drinks companies will follow a similar path to Japanese players.

Patience Needed

Of course, most of these acquisitions have involved Chinese companies also inheriting huge debts. The commercial value of an acquired company may not be realised over the short term or even the longer term. The situation is similar to when Western multinationals went to China to start their businesses. They needed to understand the local business environment and wait for consumer incomes to reach a certain level before their goods would be purchased. Chinese CEOs now require that same level of patience and amount of time to get used to the much slower growth in developed markets if they wish to establish a foothold. Objectives are not impossible to achieve but do take time.

In part two, we will be discussing the risks and challenges of these acquisitions from the perspective of both parties.