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Enter the dragon

4 January 2012 By John Foley

China’s M&A stars will align in 2012. If asset prices fall, and bank credit remains tight, the Year of the Dragon will give state-owned companies a chance to play to their two strengths: cheap financing and a mandate to acquire.

The value of deals involving Chinese buyers has tripled since 2006. The $49 billion haul in 2011 outbound deals nears the previous year’s record. Targets are often producers of materials China needs to grow, such as oil, iron and gas. On a smaller scale Chinese bidders have also rescued benighted firms such as the car-maker Volvo and the PC business of IBM.

Resources deals will continue apace. Sinopec’s $2.5 billion purchase of a stake in Devon Energy’s shale projects – on the same day rival PetroChina bought out minorities in a patch of Canadian oil sands – set the tone. Just days before, dam-builder Three Gorges paid a 53 percent premium for a 21 percent stake in EDP of Portugal, and threw in 20 years’ worth of low-cost credit from a state bank to boot. With so many developed world banks in trouble, offers of solid financing may be hard to refuse in 2012 – even from regimes with low transparency and poor human rights records.

Elsewhere, faded telecoms equipment makers like Nokia – whose shares fell 51 percent in 2011 – or Research In Motion could excite interest. A telecoms tie-up, say between cash-rich China Mobile and Spain’s Telefonica could also make sense, given Beijing’s penchant for Latin American connections. Further ahead, an acquisition of UK-based emerging market lender Standard Chartered by a Chinese megabank like ICBC remains a dream deal for M&A practitioners.

State-backed Chinese buyers’ low cost of capital gives them lots of ammo. Many state-owned enterprises don’t need to borrow from banks at all, after a 50 percent growth in earnings in 2010.

Yet it’s Chinese savers who ultimately foot the bill. China’s M&A engine relies on banks funneling cheap lines of credit to buyers and targets, leaving China’s depositors with below-inflation returns on their savings. State-enterprise profits are also still pumped up by low wages and an undervalued currency. The days of that arrangement are surely numbered, but for now it leaves China in the M&A box seat.

Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual ’Predictions Book’, produced in print and electronic form early in the New Year.


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