Australia: China - When the winds of change blow, some people build walls and others build windmills

M&A Year in Review

In 2015 China's total outbound M&A volume increased for the sixth consecutive year to a record high of $111.9 billion in 2015, exceeding the $100 billion mark for the first time ever.

2016 is the Year of Monkey – perhaps appropriately, a year which is said to be characterised by volatility. Despite overplayed concerns about the Chinese economy, Chinese outbound M&A in 2016 is likely to continue to focus on acquisitions of mature businesses in developed countries with advanced technology and management best practices.

Chinese stock market and RMB devaluation – in crisis lies opportunity

In a move surprising the market, China's currency fell 3.3% in three days in August 2015. In December 2015, the People's Bank of China (PBoC) signalled it would measure the level of yuan against a basket of currencies rather than just the US dollar. Many have suggested that adopting such a basket would make it easier for the PBoC to guide the RMB lower against the dollar – supported by events of early 2016.

A weakening yuan (which some analysts suggest will fall of 5-7% in 2016), coupled with the slowdown in the Chinese domestic market, is likely to see money leaving China.

The drive to seek returns offshore was supported by the relaxation of controls on outbound capital flows in June 2015 when the State Administration of Foreign Exchange (SAFE) issued a circular Further Simplifying and Improving Policies for Foreign Exchange Administration for Direct Investment, under which most direct investment related transactions can be handled through banks without obtaining prior approvals from SAFE. The impact on outbound M&A of the recent imposition of currency controls is yet to be fully felt.

It looks as though 2016 will be no less turbulent for China's stock market than 2015.

However this volatility and its impact on outbound M&A need to be put in perspective. The Chinese stock market plays a relatively insignificant role in terms of both corporate financing and investment, accounting for only around 5% of total corporate financing and less than 10% of urban consumers' savings.

Going out and bringing in – the new normal

In 2015, Chinese bidders continued to target a more diverse and mature mix of assets. Consistent with China's strategy to "go out and bring in" technology and expertise in healthcare, Jangho Group Company Limited acquired Vision Eye Institute Limited, Australia's largest provider of ophthalmic care.

With health spending in China predicted to rise to $US1 trillion by 2020 and with some 394 million citizens over the age of 50 – more than the entire population of the United States – Jangho's objective to introduce Australia's leading medical service concepts, skills and models into the Chinese market simply makes sense.

Like privately owned enterprises before (including Fosun and Tianqi), Jangho swooped on an already in-play target – Vision Eye Institute, which was the subject of a hostile takeover by Pulse Health. Pulse Health had made an all scrip offer for Vision Eye which the independent expert found to be neither fair nor reasonable. Within 25 days of the Pulse Health bid, Jangho acquired a 19.99% stake from Primary Health and 7 days later announced it had entered into a Bid Implementation Agreement with Vision Eye – successfully completing the acquisition by mid-November 2015.

We remain of the view that there are material M&A opportunities in the Australian health care market for astute Chinese buyers.

Clean and green

Perhaps inevitably, there were doomsday predictions following the changes to foreign investment rules. However, as predicted in our 2014 M&A Review, the demands of an increasingly prosperous and more discerning middle class, the falling Australian dollar and the long awaited China Free Trade Agreement saw a number of PRC investors looking to invest in Australian agriculture (albeit largely outside of the public market).

Notable deals included:

  • Dalian based retail and supermarket giant Dashang Group acquired Glenrock Station for $45 million. Dashang also acquired a 14.99% cornerstone stake in the recently listed Beston Global Food Company Limited.
  • Hailiang Group – one of China's top 500 companies and controlled by Feng Hailiang (reported to be China's 90th richest man) – acquired $40 million worth of cattle and cropping land east of St George in southern Queensland.
  • Fucheng Group's $28 million acquisition of major cattle station Woodlands from the MP Evans Group (the major owner of one of Australia's largest landholders and cattle producers, the North Australian Pastoral Company).
  • Chinese billionaire Xingfa Ma's acquisition of Wollogorang and Wentworth cattle stations on the shores of the Gulf of Carpentaria in the Northern Territory for $47 million. Mr Ma, who owns the Tianma Bearing Group, is listed as one of the 400 wealthiest men in China and already has significant agricultural land holdings in Australia including Balfour Downs and Wandanya stations, Ferngrove Wine Group and Emu Downs Station in Western Australia.
  • The Sino-Australian milk processing and farming consortium comprising Leppington Pastoral Company, New Hope Dairy Holdings and Freedom Foods Group acquired Moxey Farms for $100 million.

Chinese investment in Australian agriculture is possible.

The clear message from the Australian Government on Chinese investment in agriculture (particularly in iconic Australia's agricultural companies such as S. Kidman & Co.) is that more sophisticated investment structures, including the acquisition of minority stakes, the use of joint venture arrangements (such as New Hope's arrangement for Moxey) or capital structured as debt are more likely to be acceptable than 100% acquisitions.

The playing field

POEs here to stay

While not necessarily evident in Australian public M&A – Jangho Health Care was the only privately owned enterprise (POE) bidder in public M&A – POEs continued to make significant inroads in Chinese M&A in Australia including (in addition to the Chinese bidders acquiring agricultural assets) Hony Capital's investment in Santos and Landbridge's acquisition of the Port of Darwin.

POEs have irrevocably changed the way in which Chinese bidders approach Australian public M&A. SOEs are now also adopting more sophisticated M&A technology, having learned from the success of Chinese POEs. For example, Zijin made an unsolicited approach for Phoenix Gold via its wholly owned subsidiary Norton Gold Fields, which Zijin had mopped up earlier in the year. The approach was a defensive tactic in advance of a shareholders' meeting to approve a 20% placement to Evolution. Phoenix was clearly attractive to both suitors because of its strategic landholding beside the Mungari operations Evolution picked up in its acquisition of La Mancha Australia, and near the Paddington mill Zijin acquired as part of its takeover of Norton Gold Fields. In a growing sign of maturity by Chinese bidders and a preparedness to fail and not over pay, Zijin allowed its $0.10 per share bid to lapse in favour of the $0.158 per share bid by Evolution.

New kid on the block

Chinese insurers have been on a shopping spree over the past three years since a ban on foreign property investment was lifted. Driving China's outbound insurance investments are the 2012 rule changes by the country's insurance regulator that allowed companies to invest in real estate outside of the mainland and Hong Kong and invest up to 15% of their US$1.69 trillion in assets. High profile real estate asset acquisitions have included:

  • Ping An's acquisition of the Tower Place office block in London for Ł327 million and Lloyds of London insurance building.
  • Anbang's acquisition of New York City's Waldorf Astoria Hotel for US$1.95 billion.

In April 2015 China's insurance regulator further relaxed outbound investment rules for insurers allowing them to invest beyond Hong Kong. Following the announcement, acquisitions included Anbang's acquisition of a 63% stake in Tong Tang Life Insurance, a Korean listed financial services provider and its acquisition of the insurance arm of Dutch bank and insurer SNS Reaal for US$1.6 billion.

Following these developments, we expect to see further interest by PRC bidders in the Australian commercial property and insurance sectors.

A flexible approach

As predicted in our 2014 M&A Review, the pattern of Chinese foreign direct investment in 2015 evidenced more confidence by Chinese investors and a willingness to "test the waters" with the acquisition of minority stakes including Dashang's acquisition of a 14.99% interest in Beston Global Food Company. Like foreign investors before it, Chinese bidders have learnt the value that minority stakes provide including access to skills and knowledge.

2015 saw a significant rise in the forming of joint ventures between both listed and unlisted Australian companies and Chinese companies including the announcement in late 2015 that residential developer Mirvac will jointly venture with Chinese insurer Ping An to develop residential projects. Under the 50:50 joint venture, Mirvac will provide development, construction and sales management services for its Chinese partner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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