Chinese firms look to be readying themselves for a purchasing push in Europe, where they think they can take advantage of discounted pricing because of the COVID-19 pandemic.
The coronavirus pandemic has European companies clambering for cash to stay afloat and in business.
Banks have seen a recent uptick in requests from Chinese firms and funds for proposals on European target companies. They say that many of the potential acquiring companies are state-owned enterprises. The deals headed by Chinese firms—especially ones owned or backed by the state—may potentially create conflicts with European governments, several of which have indicated a willingness to defend strategic sectors.
The preliminary discussions with Chinese firms are the result of the decline of listed company valuations and the MSCI Europe Index, which tracks the continent’s developed market performance. The MSCI Europe Index was down 23% this year in the worst performance since the global financial crisis.
Europe, like many other areas of the world, has industries that are reeling from the COVID-19 crisis. Business has ceased in industries, such as transportation, hospitality, and entertainment. These financial downturns from the coronavirus pandemic have led to cash-flow issues.
In anticipation of potential hostile suitors, like Chinese firms and the government of China, some of European companies are bolstering their defense strategy, and bankers have been asked to assist in defending against potential takeovers.
Although the pandemic’s resulting global travel restrictions may mean no deals being finalized anytime soon; nonetheless, Chinese acquirers are looking forward to exploring the landscape in Europe. That landscape has less competition from foreign rivals who are otherwise occupied with the COVID-19 outbreak.
Chinese Firms Ready to Return to the Global Stage
Observers say that a deal of any size overseas would be a sign of a comeback for China to the global stage after Beijing restricted what it called “irrational” international expansion by some privately-owned corporates like HNA Group Co. As a result, Chinese outbound deals dropped to $11.3 billion in Q1—the worst since the first three months of 2013, according to data compiled by Bloomberg.
State-owned enterprises often search for acquisitions in industries deemed to be a national strategic priority for China. Examples of this include the automobile, energy, infrastructure, and technology industries. CNIC Corp., a state-backed investment fund, is said to be thinking of acquiring roughly a 10% stake in Greenko Group, one of India’s largest renewable energy companies, according to a recent Bloomberg News report.
Likewise, private Chinese investors are beginning to look for targets. Fosun International Ltd. said in a March 2020 statement that the Chinese conglomerate will seek investment opportunities throughout the world as the “once-in-a-century” coronavirus pandemic creates an asset-price downturn. For example, Shanghai Yuyuan Tourist Mart Group Co., a Fosun unit listed in Shanghai, recently announced its acquisition of a 55.4% stake in French jewelry brand Djula for approximately $30 million.
One banker responding to interest from Chinese buyers said the companies were looking at assets in regions perceived as China-friendly, including southern Europe as well as South America, Africa, and the Middle East. And another Hong Kong-based banker said his firm had won several agreements to sell businesses in Europe and found that clients welcomed Chinese state-owned enterprises as prospective buyers. This banker is tasked with shopping companies to Chinese buyers. At the same time, Europe has been trying to restrict foreign acquisitions of important technologies. Because of this, Chinese firms may look to target less-sensitive areas such as industrial and manufacturing businesses.
Europe Plays Defense
The European Union has cautioned that the economic slump from the pandemic could result in the bloc’s vital industries being susceptible to hostile takeovers. In March 2020, the European Commission asked the member states to take all necessary measures to protect strategic assets and technology from foreign investments that could endanger public policy objectives.
Italy—the country with the highest COVID-19 death toll in Europe—and its government headed by Prime Minister Giuseppe Conte has announced moves designed to strengthen the so-called Golden Power protections against foreign takeovers. The checks to be put in place will now include a broader scope of sectors, including banks, insurers, energy, and healthcare, and will also be applicable to European Union companies looking to take stakes over 10%.
In the same manner, Spain has placed new rules on any foreign direct investment. The government announced last month that investors outside the European Union will be required to obtain a new authorization from the government if they seek to control or increase their participation to more than 10% in a local company—either public or private—in a strategic sector. Aena SME SA, Endesa SA, and other private companies in the telecom, energy, defense and technology sectors, which could be potential acquisition targets after dropping considerable stock value, found temporary protection from the Spanish government that could last until December, says Bloomberg Intelligence.
And in Germany, Chancellor Angela Merkel and her government are drafting new rules that enable the authority to block deals that present “potential interference” to the country’s interests, and to protect local German companies from acquisition by entities based outside the EU.