Friday, April 6, 2018



ma chinese investment fire rooster
3 March 2017
In 2016, China’s total outbound M&A volume increased for the seventh consecutive year by US$219 billion, accounting for more than half of Asia Pacific’s outbound volume and, in a first, exceeding US outbound M&A investment.
In this, the year of the Fire Rooster – a year of intelligence, fast pace and anxiety – as the Chinese authorities strengthen their scrutiny of outbound M&A activity and tighten checks on capital outflows – Chinese acquirers are likely to continue to focus on strategic acquisitions in healthcare and tourism in 2017. To realise the full benefits of M&A in these two sectors, bolt-on acquisitions by Chinese investors in vocational training services, for example, aged care and hospitality, is likely to grow in 2017.
In response to heightened concern about regulatory risk, we suspect the formation of consortia (with an underwrite by non-PRC investors) and the potential for the reintroduction of break fees will be more likely.


As predicted in our 2015 M&A Review, the weakening yuan, the slowdown in the Chinese domestic market, and the relaxation of controls on outbound capital saw a drive to seek returns offshore. Indeed, China’s foreign exchange reserves fell by US$320 billion to US$3.011 trillion in 2016 (on top of a record drop of US$513 billion in 2015) and in February this year fell below the all-important US$3 trillion level.
To support China’s reserves, in 2016 Beijing required the State Administration of Foreign Exchange (SAFE) to strictly enforce the US$50,000 limit on outbound transfers coupled with a personal pledge that the money is not being used to buy overseas property, securities or insurance.
In addition, at the end of 2016, new rules were placed on outbound investments by centrally-controlled state firms, including a “negative list” of investment projects in which centrally-controlled state firms would not be allowed to invest.
At this stage the impact of the new rules is one of timing. Anecdotally, provided an acquisition has the requisite Government support, while transfers are delayed (in some cases over a month), the money does flow.
With SAFE in a defacto “approval” role (despite the relaxation on outbound approvals previously undertaken by the NDRC and MOFCOM), heightened concern about regulatory risk may result in the reimposition of break fees to ensure Chinese bidders are confident about their ability to close transactions.


Unsurprisingly and consistent with the rise of global populism and increased M&A activity by Chinese bidders, 2016 was also characterised by concern about Chinese ownership of strategic assets and the possible security implications relating to the acquisition of technology and data. Chinese bids to the value of US$35 billion failed in 2016 as a result of this regulatory push back – with the largest number of knockbacks being proposed Chinese acquisitions in the United States.
The Committee on Foreign Investment US (CFIUS) increased scrutiny of Chinese deals for reasons which were not always immediately clear. Anbang Insurance Group's acquisition of Hotel del Coronado, which is located near a US naval base, fell through after US national security officials opposed the deal. In an unusual move, CFIUS approached Fosun International about a month after it closed on a deal to buy an 80% stake in property and casualty insurer Ironshore for $1.84 billion with concerns about how Fosun would handle professional liability coverage to the US.  In the four week period between 22 January and 23 February 2016, three deals were rejected by CFIUS – all in the technology space and all faced undisclosed security concerns, including GO Scale Capital’s proposal to acquire an 80.1% stake in Philips’ Lumileds division, China Resources Microelectronics’ and Hua Capital Management’s bid for Fairchild Semiconductor and Tsinghua Unisplendour’s proposal to acquire a 15% stake in Western Digital.
The concerns about Chinese investment in the US, culminated in the recommendation from the US-China Economic and Security Review Commission that CFIUS’s mandate be extended to authorise CFIUS to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of US companies.
Concerns extended to the United Kingdom and Europe in countries without specific foreign investment regimes. For example, listed Shenzhen company Midea Group’s efforts to buy out German industrial robot maker Kuka provoked a political furor in Germany, resulting in Midea offering numerous guarantees on preserving local sites and jobs. Similarly, Chinese investment in the Hinkley nuclear project in England resulted in intervention by the new British Prime Minister.
Consistent with these concerns in February of this year, Germany, France and Italy requested the EU grant them a right of veto over Chinese high-tech takeovers and a right to intervene in direct investments by state-controlled entities.
The Australian Government broadcast its focus on security matters with the appointment of David Peever (former Chair of the Minister of Defence’s First Principles Review of Defence) and David Irvine (former director general of ASIO and the Australian Secret Intelligence Service) in 2015, stating:
In the years ahead it will be increasingly important for FIRB to not only have commercial expertise and background to deal with complex commercial transactions but to also have an even greater understanding of the broader strategic issues including national security.
This focus was most prominently seen last year when the FIRB Board unanimously agreed that the sale of Ausgrid to State Grid Corporation and Cheung Kong International posed an unacceptable security risk after consultation with Department of Defence, ASIO and DFAT.
Recognising the concerns of foreign investors about predictability and transparency of a foreign investment, Treasurer Scott Morrison announced in January the establishment of a Critical Infrastructure Centre and foreshadowed a package of foreign investment policy reforms intended to provide guidance about the national interest test.
The events of 2016 make clear there is increased international inter-agency sharing of security information and concerns, highlighted by the FIRB checklist that asks applicants to provide details of any relevant information pertaining to domestic or international investigations, rulings, ineligibilities, or conditions imposed as part of previous foreign investment approvals, or exclusions relating to the purchaser.
For Chinese bidders the lessons from 2016 make it evident that national security is a sensitive area and bidders (as has always been the case for politically sensitive acquisitions) should engage early with FIRB and proactively address key concerns. The Treasurer’s approval for the acquisition of Kidmans by the Hancock/Shanghai CRED consortium is an exemplar of effectively addressing sensitivities. 


In a fragile M&A environment concerned with deal completion risk, PRC bidders (whether state-owned, private or otherwise) wishing to invest in Australia need to actively address market concerns.
As we predicted in our 2015 M&A Review, Chinese investors continue to demonstrate flexibility and a willingness to test the waters, being increasingly receptive to a variety of transaction structures including consortium arrangements (for example, on Genesis HealthCare), the acquisition of strategic minority stakes (for example, HNA’s 13% stake in Virgin Airlines) and an appreciation of the political context by offering mitigation measures to preserve jobs and operational independence.
In 2017, we anticipate Chinese bidders will also need to contend with a general wariness of boards and concern about Chinese bidders’ ability to close the deal. Continuing to adopt a flexible approach through the use of break fees paid as upfront deposits, as was the case in Tianqi’s bid for Talison (see Corrs’ thinking piece Reverse break fees payable upfront – The new name of the PRC M&A game), and the use of bidding consortia involving non–Chinese entities who in effect provide funding support, will assist to provide comfort that a bidder is committed to closing the deal. 


We anticipate that Chinese buyers in 2017 will focus on consumer and leisure opportunities associated with a rising middle class.


As predicted in our 2015 M&A Review, Chinese acquirers continued to focus on the Australian healthcare market and the healthcare sector globally:  
  • GenesisCare – China Resources and Macquarie acquiring a 66.6% stake in cancer and cardiac services business GenesisCare. GenesisCare is Australia's largest provider of cancer and cardiac care, and the biggest private provider of cancer care in the UK and Spain.
  • Bio Products Laboratory Limited – China’s Creat Group Corp acquired Bio Products Laboratory Limited  – a maker of human blood plasma products in the UK – for US$1.2 billion in one of the largest international pharma acquisitions by a Chinese company.
  • Gland Pharma and Ambrx – Fosun Pharma made a non-binding offer to buy 96% of India’s Gland Pharma Ltd (focused on injectable drugs) and with a consortium of Chinese companies jointly acquired Ambrx Inc.
  • Epic Pharma – China’s Humanwell Healthcare group also recently bought New York-based Epic Pharma LLC for US$550 million.
From pharmaceuticals to medical products to consumer health, China’s healthcare sector continues to develop at breakneck speed with health spending predicted to rise to US$1 trillion in 2020.
Growth in demand for care is likely to remain strong for a number of reasons:
  • chronic conditions – diabetes and hypertension are proliferating rapidly as the population ages, many more people move to cities, and lifestyles change;
  • affluent middle class – increasing incomes and more extensive insurance coverage improve patients’ ability to pay;
  • demand for treatment – cancer, depression, and respiratory illness remain largely underdiagnosed and undertreated in China. Better and earlier diagnosis, as well as demand for treatment from the middle class will significantly expand the number of patients;
  • Government support – the PRC Government is actively committed to developing and providing strategic support for the biomedical industry, including pharmaceuticals and vaccines, medical devices and diagnostics.
Australia is an excellent destination for astute Chinese buyers to “go out and bring in” technology and expertise in healthcare. The acquisition of an Australian healthcare company with know-how, trained staff and stringent compliance with Australian regulatory standards will answer the PRC Government’s push to upgrade the “Made in China” brand.


Chinese tourists spent a record US$164.8 billion overseas last year and as we foreshadowed (see Corrs’ thinking piece Year of the Monkey Riding the Third Wave), in 2016 Chinese investors have set their sights on the fast growing tourism industry, including:
  • China’s HNA (which owns China’s fourth-largest airline, Hainan Airlines) acquired Carlson Hotels (the US owner of the Radisson brand), acquired a 13% stake in Virgin Australia and established a joint venture in China with Spain’s NH Hotels; and
  • Jin Jiang acquired the Louvre Hotels portfolio of brands.
For the year ending 30 November 2016, 1.193 million Chinese tourists visited Australia representing a 19% increase from 2015. Tourism Australia surveyed Chinese consumers about their key considerations when choosing a destination and 45% cited food and wine. Although packaged tours are common, the category known as "free and independent travel" is becoming increasingly popular, especially with younger tourists – an indication that Chinese travellers are interested in different "experiences".[1]
Chinese investors accounted for 38% of investment in Australian tourism in 2016 with Chinese investors having already snapped up hundreds of millions of dollars in Queensland tourism assets, including iconic resorts Daydream Island and Lindeman Island, the Sheraton Mirage Port Douglas and Gold Coast hotels such as ­Palazzo Versace, the Hilton Surfers Paradise, the Sofitel and the Crowne Plaza.
Riding the tourism wave is likely to continue in 2017. At the end of January this year, Dalian Wanda pledged to invest $1 billion for development in the Sydney CBD with Wanda having already acquired a controlling stake in a $900 million-plus Gold Coast property in August that it hopes to turn into a luxury hotel and serviced apartment complex.
As the tourist cycle comes full circle, the announced sale of the Japanese real estate group Cosmos Initia Co Ltd’s Fraser Island Kingfisher Bay Resort, Eurong Beach Resort and accompanying tour and marine businesses means Chinese buyers will have an opportunity to ensure that legions of Chinese tourists in Australia shop, dine and play at a property owned by them.

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