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Once Gun-Shy, China Gains Deal-Making Confidence

By Reuters -  |  Posted 2008-02-05 Print this article Print

Emboldened by recent success and backed by Beijing's deep pockets, an increasingly sophisticated China Inc is poised to make bigger overseas acquisitions in its quest to secure natural resources, technology and prestige.

HONG KONG (Reuters) - Emboldened by recent success and backed by Beijing's deep pockets, an increasingly sophisticated China Inc is poised to make bigger overseas acquisitions in its quest to secure natural resources, technology and prestige.

State-run Chinalco's $14 billion swoop on Friday for a chunk of global miner Rio Tinto in China's largest foreign investment was funded by a state policy bank and underscores the ambition and financial might wielded by Beijing.

It affirms China's ability not only to identify deals, but to complete them -- something mainland firms have not always managed to pull off. Settling for minority stakes shows a recognition of political realities abroad and management limitations at home.

"The government has for several years had a policy called the 'go out' policy, in which Chinese companies are encouraged to do outbound M&A. Until now it's been more talk than action. Now you're finally starting to see real signs of activity," said Philip Partnow, managing director at UBS Securities in Beijing.

Outbound deals from China last year nearly doubled to $29.5 billion, according to Thomson Financial. The biggest was Industrial and Commercial Bank of China's US $5.6 billion investment in South Africa's Standard Bank.

"Clearly from a Chinese point of view, there is an appetite, an interest. I think Chinese companies after a number of years of strong performance have a lot of capital they can employ, and I think they have also become more skilled deal-makers," said Jonathan Zhu, managing director at U.S. buyout firm Bain Capital.


China's rising deal-making prowess stems from surging economic clout, increasing financial savvy, and hard lessons of the past.

Beijing has long been keen to buy abroad, but until last year its most noteworthy foray was its US$18.5 billion 2005 bid for U.S. oil producer Unocal, which was thwarted by political opposition.

Other failed deals include a bid by the parent of China Mobile for Millicom International Cellular. More recently, Australia's Nufarm Ltd ended talks for a US$2.7 billion sale to a group including China National Chemical Corp after the buyers were unable to make a formal offer.

"You try a few times, accumulate the experience so that you succeed the next time around. I think it really is a confluence of events that has led to more recent successes," said Bain's Zhu.

Chinalco's purchase of the Rio stake, backed with US$1.2 billion from U.S. peer Alcoa, shows China is an increasingly canny corporate player: the deal may thwart BHP Billiton's BHP.L bid for Rio, a tie-up that threatens to narrow China's choice of iron ore suppliers from three to two.

"There's an increased sophistication and awareness in terms of how to approach and execute on complicated cross-border transactions," said Colin Banfield, head of Asia ex-Japan M&A at Lehman Brothers, which represented Chinalco.

The Rio deal, financed by state-owned China Development Bank, is the latest to highlight the financial muscle at Beijing's disposal. In another deal, a government fund in December invested $5 billion in Wall Street's ailing Morgan Stanley.

While China's biggest companies are state-run, observers say Beijing tends to exercise its influence by setting strategic goals rather than picking acquisition targets. The companies have autonomy, but need government approval before making a deal.

Thus, it was Chinalco, not Baosteel as had been speculated, that wound up taking the stake in Rio.


China remains capable of the occasional clumsy maneuver.

Ping An Insurance, which last year invested US$2.7 billion in Dutch-Belgian financial firm Fortis, drew a rare rebuke on Monday from the People's Daily, the mouthpiece of the ruling Communist Party, for a planned $22 billion share sale that contributed to a market fall.

Ping An is believed to be building a war chest to make a big investment in a European player such as Prudential.

And China's timing is hardly infallible: its new US$200 billion sovereign wealth fund, China Investment Corp, paid US$3 billion for a stake in U.S. buyout firm Blackstone Group ahead of its 2007 IPO.

Blackstone shares have since fallen 39 percent.

A key to China's recent M&A success has been its restraint: the biggest deals have been for minority stakes, which are more palatable overseas and easier for management to swallow.

"It's perceived to be safer to go in and buy only a part of the company rather than to try to buy the whole thing," Partnow said. "Chinese companies are concerned about the added execution risk of integrating and managing a large foreign acquisition."

The Rio deal stokes China's confidence after its loss of courage over Unocal, said Na Liu, strategist at Scotia Capital.

"With this initial success, we would not be surprised to see some Chinese state-owned enterprises begin to take a significant stake in Canadian, Australian, and American coal and oil and gas companies, without attempting an outright takeover," she wrote.

(Additional reporting by Tom Miles; Editing by Ian Geoghegan)

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