•Chinese companies invest more in European targets than vice versa
•Privately-owned Chinese companies now looking to acquire overseas
•UK starting to lose out to Germany as most favoured European destination
Despite recent signs of a slowdown in China’s economic growth and the continuing uncertainties of the eurozone crisis, analysis from PwC shows there has been a steady rise in the value and volume of mainland Chinese investments in Europe over the last six years, increasing from just 11 deals in 2006 to 61 in 2011. Although historically European investors have been more acquisitive in China, the gap in deal flow between Europe and China is narrowing, and despite having done fewer deals, Chinese companies have actually invested more in European targets than vice versa.
Deal flow in the opposite direction, from Europe to China, shows a decline from a peak of 163 deals in 2006, to a low of 85 in 2009, though since then they have recovered somewhat as European investors have pushed for growth through deals in China’s faster growing market.
These are some of the findings of an analysis of M&A activity between China and Europe in a new report, China Deals; A fresh perspective, from PwC’s emerging markets group.
The report notes that in the first quarter of 2012 there were 32 Chinese investments in Europe and just 26 deals made by European companies in China, marking the first time that deal volume has been greater to Europe than to China. While Chinese state-owned enterprises have led the way in investing in Europe, the country’s privately owned businesses are now also looking to expand by acquiring companies overseas and in a range of sectors.
The UK has for many years accounted for the lion’s share of M&A activity between China and Europe, with deal flows very much a two-way street between the two countries. Much of the UK-bound investment came from Hong Kong, but as more mainland Chinese investors turn to Europe for deal opportunities, they are also targeting UK companies. Despite this trend, the UK’s share of Chinese investment in Europe has fallen slightly over the last 15 months and Germany has become the main European destination for Chinese M&A transactions. By the same token 2011 saw France overtake the UK as the largest investor in Chinese M&A.
Philip Bloomfield, transaction services partner, PwC said:
“The Chinese are proving to be thoughtful investors in Europe. They have been seen to pay a premium for strategic investments, often with an eye to whether the technology they acquire is transportable back to China or whether the acquisition gains them access to new markets.
“Longer term, the volume and value of Chinese M&A activity in Europe will rise. We expect to see an increase in more conventional transactions whilst the practice of taking minority stakes is likely to continue.”
PwC’s report notes that Chinese companies have generally bought smaller percentage stakes in UK and other European businesses but for larger sums of money, whereas UK and other European corporate investing in China have tended to invest smaller sums for large stakes. This is indicative of the different focus between Chinese state directed enterprises and European businesses when it comes to investment strategy.
It also shows that although the most valuable deals done by the Chinese in Europe have tended to be in the energy, utilities, mining and infrastructure sectors -12 of the 20 largest deals since 2006 were in these sectors and seven were worth between one and six billion euros - the greater volume of transactions are in industries such as industrial products, telecoms, media and technology, and retail and consumer.
Allan Zhang, a director at PwC who advises on outbound deals from China, said:
“M&A transactions are challenging, even in the good times. In the eyes of some Chinese investors, the on-going eurozone uncertainties improve their chances of striking good deals with debt-ridden European companies, some of which were off limits before.
“With their growing awareness of European assets, Chinese bidders are likely to become more common in the future. UK-based asset holders should therefore be seriously considering China as a means of achieving full or partial exits from their investments. However, because of the lengthy Chinese regulatory process, they need to think about engaging with Chinese investors earlier and managing an active and effective communication process to have the deal done in good time.”
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