International firms aim to cash in on Chinese companies' appetite for outbound M&A deals

When Smithfield, the world’s largest pork producer, announced at the end of May that it had agreed to be bought by a Chinese meat processing company, Shuanghui International, it made the US public sit up and take notice.

The $4.7bn (£3.1bn) deal, which still requires regulatory approval, would be the largest takeover of a US business by a Chinese conglomerate, adding to fears among some Americans about the expansionist plans of their biggest economic rival.

Certainly, the appetite of Chinese companies for international acquisitions is increasing; particularly private companies in sectors such as food and beverage, manufacturing and property.

According to Dealogic, there have been 61 outbound transactions by private enterprises since January this year valued at $10.4bn (£6.8bn), compared to 54 deals valued at $6.1bn (£4bn) during the same period in 2012.

Chinese businesses have this year been targeting new industries such as textiles, healthcare and lodging and dining, while the value of food and beverage and real estate acquisitions has far surpassed those in areas such as mining, machinery and oil and gas. The question is whether this trend will continue.

“Certainly that is people’s hope,” says Gregory Puff, Asia managing partner for Akin Gump, who has worked on several Chinese take-privates but is now eyeing outbound deals.

“There is plenty of noise in the marketplace about an interest in outbound deals and we’ve seen evidence, not yet announced, of a number of interested buyers. As more of these big deals get announced it gives other companies the courage to go ahead and try for a similar thing on their own.

“If financing is available and the Chinese buyers learn how to act quickly and participate meaningfully in those deals, then we’ll see more.”

wang-alan-webFreshfields Bruckhaus Deringer corporate partner Alan Wang (pictured), one of the lead partners on the recent purchase of Sunseeker, the UK luxury yacht-maker, by Chinese conglomerate Dalian Wanda Group, agrees that the outbound M&A market is perking up, with private Chinese companies playing a bigger part.

“Traditionally energy and natural resources deals have been very big, such as the CNOOC-Nexen deal, whereas with manufacturing the deal size varies,” he says. “But increasingly we’re seeing big deals in other sectors, such as those between Shuanghui and Smithfield and Bright Food and Weetabix.

“There is a recognition among Chinese companies that the domestic market is becoming more competitive and saturated, and Chinese customers are becoming more demanding. So there is a real need for them to upgrade their brand and tap into the international market to increase revenues. State-owned companies still dominate the bigger end of the market, the mega-deals, but the share for private companies is increasing.”

The advantage for law firms focused on outbound deals, partners say, is that fees tend to be marginally higher than on inbound work because of the complexity of the transactions and the tendency among clients to appreciate the need for reputable, international counsel. That said, pricing pressure is intense because of the highly competitive market, while deals can be difficult to close.

Skadden Arps Slate Meagher & Flom Beijing corporate partner Peter Huang says: “You only find out about most of the deals after they have been announced, so it’s important to get in with the company early.

“It is also difficult to negotiate a good fee. On some of those transactions the company might have a beauty parade of international law firms, and on others they just go to one firm. Knowing the company is very important.”

Looking at those who have advised on big deals recently, Puff says no firm has established a dominant grip on the market. He believes much depends on the location of the target acquisition in terms of who wins the mandates, while other M&A lawyers highlight the need for a proper investment in any firm’s global China group practice – including  training and regular meetings between staff around the world.

“If it’s a deal in Germany for example, certainly [a client] is going to be looking for someone [with offices] in both China and Germany,” says Puff, adding that the same would be true if the deal were in Moscow or anywhere else. But he points out: “In the US, it depends on your track record in the industry you’re talking about as well as your ability to bring a good M&A team to that project in China.”

Wang concludes by stressing the importance of the China-based group: “You always need to have one partner in China and one in the jurisdiction where the acquisition is being made… Chinese clients, a lot of the time, prefer to have things explained to them in Chinese, and they want to have things fairly instantaneously. All of that can only be achieved by having strong support in China.”