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Flight Path

18 February 2016 By Rachel Morarjee

To Western observers, HNA Group’s $6 billion bid for Ingram Micro is commercially baffling. There’s no clear rationale for a Chinese aviation and shipping conglomerate to buy a U.S. electronics distributor only to leave its management and business untouched. Viewed through a Chinese lens, however, the deal makes more sense.

The second-largest cross-border acquisition by a Chinese company this year seems odd for several reasons. To begin with, HNA is paying 31 percent more than Ingram’s last closing price despite an apparent lack of cost savings. The U.S. distributor of Apple iPhones and Cisco networking equipment stressed it would keep its California headquarters and existing management team.

Unlisted HNA is buying Ingram through a publicly traded affiliate, Tianjin Tianhai, whose market capitalisation before the deal was less than half that of its intended target. The assumption is that the container shipping group will borrow the cash from Chinese banks with a guarantee from its parent.

There are three reasons why the deal might make sense for HNA, however. For one, it offers a hedge against a devaluing yuan. Though authorities insist the currency will remain stable, borrowing cheaply in China to buy U.S. dollar cash flows could pay off if the renminbi’s value slides further.

Diversifying away from the slowing economy in the People’s Republic is another driver. Overseas assets held by Chinese corporations equal a mere 2 percent of Chinese GDP, according to HSBC. HNA is doing its best to change that: in the past seven months, it has spent more than $5 billion on cargo handling group Swissport and airline leasing group Avolon, and bought the London offices of Thomson Reuters, the parent company of Breakingviews.

Then there’s the need to amass political capital. If the Hainan-based group can become one of the standard bearers for China’s march into overseas markets it will curry favour with Chinese politicians, which in turn will give it access to more cheap credit.

In China, however, it is never certain how long political favour will last. Fosun, one of the most active overseas M&A players in recent years, is now on the defensive following the detention and subsequent release of Chairman Guo Guangchang during a corruption investigation. Two of Fosun’s planned bids have fallen through. That’s another reason for HNA to make the most of China’s weird M&A logic while it can.

 

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