Once Gun-Shy, China Gains Deal-Making Confidence

HONG KONG (Reuters) – Emboldened by recent success and backed byBeijing’s deep pockets, an increasingly sophisticated China Inc ispoised to make bigger overseas acquisitions in its quest to securenatural resources, technology and prestige.

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

It affirms China’s ability not only to identify deals, but tocomplete them — something mainland firms have not always managed topull off. Settling for minority stakes shows a recognition of politicalrealities abroad and management limitations at home.

"The government has for several years had a policy called the ‘goout’ policy, in which Chinese companies are encouraged to do outboundM&A. Until now it’s been more talk than action. Now you’re finallystarting to see real signs of activity," said Philip Partnow, managingdirector 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 andCommercial 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, aninterest. I think Chinese companies after a number of years of strongperformance have a lot of capital they can employ, and I think theyhave also become more skilled deal-makers," said Jonathan Zhu, managingdirector at U.S. buyout firm Bain Capital.

WEALTH, SOPHISTICATION

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 itsmost noteworthy foray was its US$18.5 billion 2005 bid for U.S. oilproducer 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 ChinaNational Chemical Corp after the buyers were unable to make a formaloffer.

"You try a few times, accumulate the experience so that you succeedthe next time around. I think it really is a confluence of events thathas 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 howto approach and execute on complicated cross-border transactions," saidColin Banfield, head of Asia ex-Japan M&A at Lehman Brothers, whichrepresented Chinalco.

The Rio deal, financed by state-owned China Development Bank, is thelatest to highlight the financial muscle at Beijing’s disposal. Inanother deal, a government fund in December invested $5 billion in WallStreet’s ailing Morgan Stanley.

While China’s biggest companies are state-run, observers say Beijingtends to exercise its influence by setting strategic goals rather thanpicking acquisition targets. The companies have autonomy, but needgovernment approval before making a deal.

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

MISFIRES AND MINORITY STAKES

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 ofthe ruling Communist Party, for a planned $22 billion share sale thatcontributed 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 billionsovereign wealth fund, China Investment Corp, paid US$3 billion for astake 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: thebiggest deals have been for minority stakes, which are more palatableoverseas and easier for management to swallow.

"It’s perceived to be safer to go in and buy only a part of thecompany rather than to try to buy the whole thing," Partnow said."Chinese companies are concerned about the added execution risk ofintegrating 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 someChinese state-owned enterprises begin to take a significant stake inCanadian, 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)

CopyrightReuters 2008. All rights reserved. Users may download and print extracts ofcontent from this website for their own personal and non-commercial use only.Republication or redistribution of Reuters content, including by framing orsimilar means, is expressly prohibited without the prior written consent ofReuters. Reuters and the Reuters sphere logo are registered trademarks ortrademarks of the Reuters group of companies around the world.