Deloitte/IEB : Continuous growth of Chinese M&As in Europe despite economic slowdown in China

Published: 26 February 2016

Deloitte and Instituto de Estudios Bursátiles (IEB) has recently launched together the report: China: Investments in Europe and Spain, which analyzes the latest trend of Chinese M&A in Europe under the “new normal” economy in China – slower economic growth coupled with RMB internationalization and the challenges from the new Five-year plan. The report includes a special analysis of Spain, which joins many other European countries to become an attractive investment destination for Chinese companies due in part to RMB depreciation.

María Fernández Jiménez, Héctor Flores García and Paul Moran Sheehan, authors of the report, highlighted that “outbound mergers and acquisitions from Chinese companies are growing both in terms of number of transactions and volume, and the number of signed deals over the past months is indicative of this rising trend in the next few years with China playing an increasingly relevant role in the international market of mergers and acquisitions.”

The report stresses Chinese companies are aware of the importance to build their presence in both the U.S. and Europe as part of their globalization and expansion journey. That is why companies such as Huawei and Lenovo have undergone significant overseas expansion in the past years. Today these companies have been widely recognized all over the world.

“China has recorded significant outbound investments and become a net capital outflow country since 2014. M&A is one of the fastest routes for Chinese companies to expand their businesses and tap the global markets. Over the past five years, we have witnessed the growth in the number of Chinese companies in the Fortune Global 500 list,” said Rosa Yang, Chairman of Deloitte Global Chinese Services Group (CSG). “Yet, companies need to devote more time and efforts for putting together a comprehensive plan, covering the different aspects of M&A such as pre-deal due diligence, structuring and post-deal integration. Otherwise, it will be a challenge for them to unleash the full benefits from investing overseas,” she warned.

According to Yi-Wen Qian, M&A Transaction Services Partner, Deloitte China, “Europe has become one of the major destinations for Chinese outbound investment. Among the European countries, Spain keeps being one of the attractive countries, and 2015 is a record-breaking year for Chinese investment in Spain.”

China has invested in all the 28 countries of the EU, although most of the investments have taken place in Europe’s central economies: the United Kingdom, Germany and France. Portugal is the fourth largest receiver of Chinese investments.

In that sense José María Revello de Toro, Director of the IEB’s Master in Corporate Finance and Investment Banking, states that “this is because Europe is the largest market for the Chinese exports and the entry barriers are less stringent in Europe than in the U.S. or Japan for Chinese companies to gain access to new technology. This is a relevant factor for Chinese companies when contemplating overseas M&A.”

The most common way for Chinese companies to invest in Western Europe is through mergers and acquisitions (M&A). With the objective to obtain high-end technology and acquire a well-recognized brand, Chinese companies may find it more relevant to buy an existing overseas company, rather than investing in new production facilities and human talent in a foreign market, where the cost would be much higher than in China.

Based on historical data and information from the past four years, the report concluded that M&A activities by Chinese companies have become increasingly active in the European market. In 2014, there was a 65 per cent rise in the number of transactions. During the first four months of 2015, there were 41 deals, against 38 transactions for the same period in 2014. There is a strong likelihood that more transactions will take place in 2015 than in the previous year when there were 121 M&A deals.

The signature deal in 2015 was the acquisition of Pirelli by Chinese state-owned company National Chemical Corporation (Chemchina) for over 9,000 million euros. It was the largest transaction in Europe last year, making up 60 percent of the total value of all transactions.

Will we witness an increase of Chinese investments in Spain?

Revello de Toro added that “Chinese foreign direct investment in Spain has remained very low during the last few years. It was not until 2010 when the investment went over 10 million euros, and it has been steadily growing ever since, reaching a new record in 2014 with 610.5 million euros.”

Regarding the main transactions carried out by Chinese companies in Spain, the report highlights that “during the first nine months of 2015, seven investment deals have been signed by Chinese organizations in Spain, the most relevant being the acquisition of Madrileña Red de Gas by an international consortium in which the Chinese sovereign wealth fund Gingko Tree Investment intervenes.

Major sectors for M&A by Chinese companies in Spain

Over the last few years, mergers and acquisitions undertaken by Chinese companies have concentrated on three industry sectors:

• Tourism industry: it is a sector which has become increasingly relevant for Chinese investors not only in Spain, but also in Europe or even at a global level. In fact, it has been the most important sector for M&A by number of deals in Spain. In addition to M&A deals, enthusiasm from Chinese investors in the sector is attested by the rising number of strategic agreements signed between Chinese and Spanish companies to work for possible synergies. Spanish hotel groups Meliá Hotels International and NH Hotels have garnered the strongest interest from Chinese companies.
• Real Estate: one single transaction was signed by a Chinese company in the Spanish real estate industry during the last years, and that was the purchase of the España building by Wanda Group for 265 million euros. There was wide media coverage about the transaction because of the profile of Wanda Group’s Chairman Wang Jianlin as one of the richest man in China. Journalists are also reporting extensively about Wanda Group’s interest in the properties owned by the Ministry Defense in the neighborhood of Campamento in Madrid, with a total area of 2.1 million m². Wanda Group is planning to invest 3,000 million euros in this mega-complex develop project, comprising restaurants, shopping centres and hotels.
• Agro-food industry: China is investing aggressively in the agricultural and food sectors globally in order to increase food supply in the long term. It is done through acquisition of arable land and food business operators in overseas countries. In Spain, two major deals have been signed involving Campofrío and Osborne. The report suggested there are two subindustries within the agro-food sector which could see transactions in the short/medium term – the olive oil sector and the production of Spanish dehydrated alfalfa; the latter has aroused strong interest from Chinese companies.

About IEB

The IEB, Instituto de Estudios Bursátiles, whose head office is in Madrid, is currently the leading official centre in the field of financial training in Spain and Ibero America. Affiliated to the Complutense University, it is sponsored by the Madrid Stock Exchange. The authority of the Study Centre arises from the Association formed by high profile personalities from the Spanish political and economic, public life (President and Vice-President of the Madrid Stock Exchange, the President of the Prínce of Asturias Foundation, former members of Spanish Governments – Vice-President of the Government, Minister of the Economy -, the Former Governor of the Bank of Spain, and Head of the Household of H.M. the King or the President of the BBVA.

The IEB is furthermore the leader in in-company financial training for companies. Among its clients are the main Spanish and Ibero-american financial institutions, (banks, saving banks, pension fund managers, stockbrokers, etc). In addition, technical training courses are regularly given to official and supervisory organisations in the financial field.