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The Deal: Overseas Dealmaking Appetite Increases Among Private Chinese Companies

LONDON (The Deal) -- The West may be cautious about foreign investment, but China is still putting its money into cross-border deals and the private sector is gradually increasing its share of an overseas direct investment scene once dominated by state-owned enterprises.

Those are the findings of the latest survey of Chinese overseas direct investment from Beijing- and Brussels-based private equity firm A Capital, which co-invests with Chinese companies in European businesses looking to accelerate their growth in China and other emerging markets.

A Capital's latest Dragon Index, a quarterly indicator of the globalization of the Chinese economy, rose to 2,483 for the first nine months of 2013, up from 2,348 in December 2012 - and from a base of 1,000 in December 2001. The indicator attempts to track all outbound Chinese investments that are either worth more than $5 million or, where it involves M&A transactions specifically, entails more than a 10% stake in a target company.

On this definition, M&A deals accounted for $46 billion, or 57% of all Chinese outbound investment in the first nine months of the year. The total value was up from $34.3 billion in the same period last year.

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The biggest deals by far, which somewhat distort the picture both in terms of geographical distribution of Chinese investment and in comparison with the same period the previous year, were China National Offshore Oil Corp.'s $14.5 billion acquisition of Canadian energy producer Nexen Inc. and Shuanghui International Holdings Ltd.'s $7.1 billion acquisition of Smithfield Foods Inc. Shuanghui's private sector status showed that it is not only China's state-owned enterprises that have the cash and the boldness of vision to strike big deals overseas.

Thus, while state-owned enterprises remained the biggest investors, with almost 75% of all Chinese outbound M&A worldwide by value (down from 84% in the same period in 2012) and 71% of the value of all majority takeovers (compared with 40% the previous year), private firms accounted for about 39% of M&A by value and 28% by number of deals in both North America and Europe. The private sector also accounted for 58% of the value of M&A in Asia in January through to September.

Painting a broader macro-economic picture, A Capital says China's push for globalization has meant that outbound investments have grown about 20% compared with the first nine months of 2012 - almost three times faster than GDP - and that overseas direct investment is closing the gap with its inbound equivalent - foreign direct investment. Overseas direct investment grew to 82% of the size of foreign direct investment in the first nine months, up from 74% a year earlier, and could equal foreign direct investment in the next three years.

Meanwhile, the growth in investments in resources has slowed, rising to $23.7 billion from $21.5 billion last year -an increase largely driven by the acquisition of Nexen - while the number of deals has fallen by 45%. In contrast, investments in industry and services has increased from $12.6 billion to $17.billion - largely due to the Smithfield acquisition.

A Capital also finds that Chinese M&A investments in Europe have declined compared with last year, falling from $7.73 billion to $5.81 billion in 2013, but investments in the U.S. have soared from $8.68 to $24.77 billion, suggesting that "despite [the] political noise, North America is perceived as [an] easier [place] to do business." But the figures are so distorted by the Nexen and Smithfield deals, that that conclusion may be called into doubt unless the trend continues.

Written by Jonathan Braude

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