MUMBAI, Oct. 12 – Chris Devonshire-Ellis, the managing partner of Dezan Shira & Associates in India and publisher of 2point6billion.com, gave the opening presentation to a packed audience of global M&A specialists, firms and government officials at the Atlas Global M&A Awards annual conference held today in Mumbai.
In his speech, Devonshire-Ellis identified the key areas of China M&A activity this year, as well as his annual “China Crystal Ball” summary.
In terms of China M&A, he noted that M&A activity in China was picking up from a Q1 low, when just 616 deals had been carried out. In Q2 this year, deal flow had increased to 811, mainly due in part to the Chinese government intervention with their economic stimulus plan. However, foreign participation in China M&A deals had dropped to just 14 percent of the total, down from 21 percent in the past twelve months.
“Overseas investors had faced a decline he said due to the global economic crisis and a lack of liquidity in the markets during the year,” Devonshire-Ellis said. “Of the largest domestic deals, Ping An’s US$3.2 billion acquisition of 30 percent of the Shenzhen Development Bank was the largest domestic deal of 2009 to date, in comparison, the largest inbound investment was the US$670 million acquisition by Asahi of 19.98 percent of Anheuser-Busch-Inbev’s stake in Tsingtao.”
In terms of the China players, Devonshire-Ellis noted that an increase in China M&A activity was also down to the launch of 14 new China private equity funds, denominated in RMB. These had raised capital and rushed to market to secure their deals. Of these, two stood out, the Bohai Fund acquisition of 20 percent of Chery Auto and the Zhonghai Trust acquisition of 5 percent of Panzhihua Steel. Both deals were valued at about US$250 million. Such funds were increasingly being set up by local and provincial governments he said. “The overall trend in China is to fund expansion via growth rather than commit to leveraged buyouts.”
However, Devonshire-Ellis cautioned that the China M&A market was “becoming increasingly government institutionalized,” pointing out that on China’s much-quoted stock exchanges, no foreign companies are yet permitted to list, and that the Chinese government directly or indirectly owned 90 percent of all companies trading on them. He observed that attention to due diligence was paramount in a market where the same government also controlled the judiciary, investment regulator and the banks.
Looking forward, Devonshire-Ellis predicted that the Chinese economy would slow over the next three to five years as the fiscal economy was “in a period of transition.” He noted that the government was taking active steps to change from an export driven economy to a more balanced, part consumer based economy but that in a country the size of China, that transition was bound to take time.
“A slowdown in growth is inevitable while these changes are being implemented,” Devonshire-Ellis said. He did identify strong Chinese domestic brands, particularly those well known in China’s inland regions, as being potential targets for M&A, and cited supply chain management in China also as both a market for investment and one for caution in terms of due diligence when acquiring brands. Ensuring control or having a full understanding of the pertinent supply chain factors were in place was often left out of China investments.
Dezan Shira & Associates handles foreign direct investment business advisory, tax and operational due diligence for M&As in China and India, to learn more, please contact info@dezshira.com.
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China Briefing’s Guide to China M&A
New China M&A Tax Regulations Released
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