When the wind changes, some build walls, others build windmills
Backed by their government, China's private investment firms are actively seeking investment opportunities in Australia. Will they adopt the same 'friendly' investment approach of China's state-owned enterprises or forge a bolder path?
Cathay Fortune's hostile bid for Discovery Metals is remarkable. Not since Sinosteel's 2008 takeover of Midwest have we seen a Chinese investor snub an Australian company's board and go directly to shareholders with an offer. Chinese investors are usually at pains to make acquisitions friendly affairs, reflecting a preference for harmony in their business dealings.
The offer is also noteworthy because Cathay Fortune is a private equity firm and not a state-owned enterprise (SOE). SOEs have traditionally dominated China's outbound investment program largely because PRC government policy provided them access to capital at preferential interest rates. In Australia, SOEs outweigh investment by Chinese private firms, accounting for 92 of the 116 deals in the six years to June 2012 1.
However, change is afoot. Private investment firms are making up a larger share of China's global outbound investment (more than 40% in 2011) and the Chinese government is clearly taking steps to support private firms to invest offshore.
In June this year, China's National Development and Reform Commission (NDRC) and several Government Departments jointly announced a raft of policy initiatives to support private investors, including a policy to encourage State Policy Banks to provide investment finance to private enterprises.
This announcement was promptly followed by the launch of a trial program and draft rules aimed at streamlining approvals of outbound investment activities by private firms. Under the trial, Chinese private firms located in certain cities are not required to apply to the NDRC for investment in resource companies involving less than $300 million and investment in non-resource projects of below $100 million.
Cathay Fortune's hostile bid for Discovery Metals is a clear example of the policy at work and may be the beginning of what some are calling the "second wave" under China's "go out" policy.
Cathay's bid vehicle is a 75:25 partnership between private firm, Cathay Fortune Corporation, and Chinese sovereign wealth fund, China and Africa Development Fund (CADFund).
CADFund is directly funded by the China Development Bank (a State Policy Bank) and is China's first sovereign wealth fund focused on investment in Africa. Earlier this year, CADFund was involved in the complex M&A transaction with China Guangdong Nuclear Power Group (an SOE) which involved the downstream acquisition of Extract Resources Limited as part of the acquisition for Kalahari Limited. In this case CADFund held a 40% stake in the bid vehicle.
The Cathay Fortune bid is the first hostile bid by a mainland Chinese company since Sinosteel's bid for Midwest and appears to indicate a growing awareness by Chinese investors of how the takeover game is played. In addition to going hostile, the bid's 51% minimum acceptance condition is a shift from the usual 100% acquisition model preferred by China's SOEs.
The question arises whether the coupling of private equity with ordinarily risk adverse SOEs signals a change in investment approach. Could China's private investors bring a boldness to China's outbound investment program not seen before?
The assertiveness of Chinese private enterprises was highlighted this week when Chengdu Tianqi Industry (Group) Co., Ltd (a private company) announced it had submitted a formal proposal to the board of Talison Lithium Limited to acquire its shares under a scheme of arrangement. While a scheme of arrangement is by nature 'friendly', the bear hug by Chengdu is asserted by it to be a "superior proposal" to the proposed scheme of arrangement between Talison Lithium Limited and Rockwood Holdings Inc.
The fact that Chengdu has already obtained PRC regulatory approvals for the transaction shows it has an astute appreciation of the competitiveness of the M&A game.
History has taught us that foreign investors are adept at adapting. Reminiscent of Japanese investors in the 1980s, Chinese investors have evolved their investment model in Australia to suit local conditions, moving from 100% acquisitions to models which include retaining key management (China Minmetals acquisition of key OZ Minerals resources), to joint ventures (PetroChina's joint venture with Shell to acquire Arrow), to more sophisticated consortia (Shandong Ruyi and Lempiere).
China's private investment firms are now emerging as a global investment force and they offer Australia's businesses a new wave of capital injection opportunities. No doubt, in the light of the Asian Century White Paper, the Australian government is already considering how this second wave will shape China's investment profile in Australia and the implications for our foreign investment policy.
Australia is not the only attractive destination for Chinese capital. Reshaping our thinking about Chinese investment and understanding the increasingly sophisticated forms of Chinese investment vehicles is vital to Australia realising the opportunities of engagement with China. Those that build walls of assumptions about Chinese investment will lose out to those already building windmills in anticipation.
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