Chinese firms continue on acquisition trail

China has become an increasingly important global investor in recent years. Chinese companies, usually part state-owned, spent €163 billion on foreign direct investment in 2016, up 44 per cent on 2015, according to United Nations figures. This saw China ascend from fifth to second place in the ranking of the world’s largest foreign investors, with only the US ahead of it.

This rapid growth pace slowed somewhat in 2017, however, as a result of tighter capital controls imposed by the government to shore up the renminbi and encourage more inward investment.

"The increased restrictions on international trade out of China resulted in the absence of major Chinese buyers for Irish assets during 2017 compared to the $2.9 billion of investment in 2016,"says BDO corporate finance director Katharine Byrne. "Property and leisure were the sectors most affected, but energy and food continue to be of interest to the Chinese buyers we have met. There is still a perception of high-execution risk when dealing with Chinese investors and in a market where significant alternative international buyers are available, the certainty of completion is key."

On a more positive note, she says the opening of a Dublin branch by Bank of China has helped demonstrate the strengthening of trade links between Ireland and China. “This should facilitate an increase in Chinese M&A activity within Ireland,” she adds. “If you look at 2016, the biggest deal was Avolon and this overshadowed a lot of what was happening in market. There are two types of Chinese investor. Those that tend to be more interested in asset-backed investments like nursing homes and so on and corporates who are interested in areas like food and energy as well as in innovative early-stage medtech companies. We will see continued activity from these investors in 2018.”

She also believes the Chinese government’s “Silk Road” initiative will further stimulate activity. “This is probably not talked about as much as it would be if it were an EU initiative but it is very important,” she says.

Also known as “One Belt One Road”, the initiative was originally proposed by Chinese President Xi Jinping in 2013 to enhance the connectivity and cooperation among 65 countries from east Asia to western Europe. It consists of two main components, the land-based “Silk Road Economic Belt” (SREB) and oceangoing “Maritime Silk Road” (MSR). The main purpose of the initiative is the creation of a cohesive economic area through infrastructure development, enhanced cultural exchanges, and increased trade.

Co-operating countries include Israel, India, New Zealand, Hungary, Estonia, Romania and more than 30 others.

The five priority areas for the initiative include policy coordination, facilities connectivity, the removal of trade barriers, increased financial integration, and closer co-operation between people.

Connect cities

According to HSBC Bank, the Belt and Road Initiative (BRI), as it's also known, will connect cities in more than 65 countries across Europe, Asia and Africa. This represents about 4.4 billion people, or about 63 per cent of the world's population and 29 per cent of global GDP.

China hosted the Belt and Road Forum for International Cooperation in Beijing in mid-May 2017. Delegations from more than 100 countries attended the forum and exchanged views on coordination of national development strategies, improving connectivity, enhancing cultural communication and other topics. An official delegation from the Irish Government also attended the forum and expressed this country’s readiness to participate in BRI cooperation.

“The BRI should help support further investment into the EU which in turn will benefit Ireland by enabling ease of access for industrial products and services as well as food and pharma sectors,” says Byrne. “There is also a continual flow of monies from China via the Immigrant Investment Programme, which has proved useful in smaller transactions.”

UCD professor of Corporate Finance Ronan Powell believes it’s highly likely that Chinese firms will continue to look for opportunities in Ireland, especially given their track record in the aircraft-leasing industry. “In Australia, China has invested heavily in key sectors, including commercial real estate and infrastructure, but maybe not surprisingly investment in the agri-food industry now exceeds mining. Ireland’s agri-food industry has a very strong international reputation, and with an increasing Chinese appetite for higher-quality agri products – especially dairy which was up 13 per cent in 2017, largely due to increasing disposable incomes and reputational damage in the local market that’s still evident today – Irish firms offer an attractive opportunity. Ireland’s climate and EU membership also offers advantages over closer providers such as Australia and New Zealand.”

He also believes more recent changes in Chinese legislation in relation to food safety standards and import tax will make it more expensive for Chinese consumers to source food products such as baby formula from international e-commerce providers. “This potentially provides a stronger incentive for Chinese to form alliances with international high-quality international providers. Not surprisingly, when Chinese travel, some tend to stock up.”

Davy corporate finance director Nicholas O’Gorman believes that Chinese investment activity will continue at strong levels for the foreseeable future. “There was some slowdown in Chinese activity over the past year,” he says. “They had been quite prolific in 2016 but then the Chinese government introduced some capital controls and that had some effect on activity but it won’t take the steam out of it in the longer term.”

With the Chinese government recreating the ancient Silk Road on both land and sea and the world’s leading economies queuing to sign up to co-operate, it appears that China will be a major player on both the global and domestic M&A scene for some time to come.