Monday 05 December 2016 7:24 am

Chinese takeover activity in UK and beyond set to accelerate further, despite political rhetoric and Brexit vote

Edinburgh-based flights search website Skyscanner and West Bromwich Albion Football Club have been among the high-profile UK targets gobbled up by Chinese businesses this year.

With most of December still to come, China-to-UK mergers and acquisitions (M&A) activity has already hit record levels. To date, 31 deals worth $7.65bn (£6.01bn) have been agreed, according to Dealogic statistics. This marks a record number of deals and the total value ranks behind only 2008, when 10 deals totalled $16.87bn.

This year has also set new highs for China-to-US deals – with a record 153 deals worth a record $67.29bn – and China-to-Europe deals – with a record 224 worth a record $94.88bn.

Political pressure on record levels

However, with 2017 on the horizon, these deal levels appear to be at risk:

In the US, Donald Trump ramped up the anti-China rhetoric in the run-up to the US presidential election, while congress was advised last month to block all state-owned Chinese companies taking over American assets.
In Germany, Europe’s biggest regional target for China this year, politicians have spoken out against Chinese investment and recently blocked a €670m takeover of chip equipment maker Aixtron. The European Commission also put ChemChina under pressure over its $43bn takeover of Swiss company Syngenta, the biggest Chinese outbound deal on record.
In the UK, the new government’s feelings towards China remain slightly unclear. Former business secretary Vince Cable has alleged that new PM Theresa May holds a “general prejudice” against Chinese investment. However, after a slight delay, her government gave its backing to the Hinkley Point project, which has Chinese backers. Morning Wire understands, meanwhile, that those working on the sale of a majority stake in the £11bn National Grid pipes network are aware that, with Chinese companies involved in the bidding process, the government is likely to be monitoring the progress of the deal.
In another twist, it emerged last week that the Chinese government wants to impose new M&A rules, with officials said to be concerned about: acquisitions worth more than $10bn; deals worth $1bn or more in an area not core to the buyers; and state-owned enterprises investing more than $1bn on overseas real estate.

China rules won’t change much

But China M&A experts spoken to by Morning Wire have played down the significance of the changes in China.

“I don’t see this as being something other than some internal housekeeping,” said Nick Davis, chief executive of law firm Memery Crystal, which has a partner firm, Yingke, in China and worked on the West Brom deal.

“I think the plan is just tightening slightly to make sure that… the days of the Chinese overpaying just because they can are long gone. And there needs to be a more sophisticated approach to M&A. And I think that’s probably what sits behind this.”

He added: “Big picture, it’s not going to make a huge amount of difference.”

Simon Clinton, of Magic Circle law firm Clifford Chance, agreed. “I really do question how much of an impact it will have on the overall volume of China outbound M&A,” he told Morning Wire

“Clearly, there will be far fewer $10bn-plus deals and deals involving the acquisition of non-core assets and high value real estate but, together, those categories currently form a relatively small proportion of the overall volume.”

US rhetoric and Brexit vote likely to lead to more UK takeovers

Dealmakers are unlikely to panic over China, then. But M&A experts spoken to by Morning Wire are more concerned about Europe, Germany and, in particular, the US.

“The rhetoric used during the presidential campaign caused concern to the Chinese authorities,” said Clifford Chance’s Clinton.

During my recent visits to Beijing and Shanghai it was clear that many SOEs [state-owned enterprises] and private entities are waiting to see if the rhetoric will translate to legislation being amended to curtail investment by Chinese companies, in particular SOEs.

“Chinese businesses will go where they feel most welcome,” said Angus Knowles-Cutler, China services group chairman for Deloitte. “So if the US seems increasingly unfriendly, what we’ll find is more Chinese interest and Chinese investment in Europe. And I think while Chinese buyers look into Europe, the UK – the fifth largest economy in the world, all the work that was done by the last Prime Minister and chancellor around the golden age – makes the UK look a prime area of interest for the Chinese.”

Clinton, of Clifford Chance, was also positive about UK M&A prospects:

The uncertainty that surrounded the UK government's delay in approving the Hinkley Point project and talk of introducing a government veto on certain types of foreign investment has largely been removed by the subsequent meetings between senior members of the UK government and the Chinese authorities.

Clinton added: “Clearly, the Brexit decision worried Chinese investors, but the recent depreciation of sterling has, to an extent, acted as a counter-balance to the uncertainty surrounding the Brexit vote.”

Davis of Memery Crystal went further, suggesting the Brexit vote made sense in China.

“It’s made it more attractive,” he said. “Because of the exchange rate initially. But when you talk to Chinese lawyers, for example, the fact that the British government didn’t have control of its own laws they just find astonishing.

“Brexit to most of the people I’ve spoken to makes sense. They didn’t see it as anything other than if there was a fall in prices there’s an opportunity to buy what would they would have already brought for a lower price.”