Hunt For Foreign Assets Pits Japan Inc vs China

China’s desire to upgrade its slowing economy through foreign acquisitions could put it on a collision course with Japanese companies, which are also aggressively shopping abroad to escape stagnation at home.

ChemChina’s $43 billion purchase of Switzerland’s GMO-seed maker Syngenta (SYNN.VX), set to revolutionize food technology in China, has pushed China’s outbound dealmaking spree to $65 billion this year, a record for so early in the year.

Japanese firms have so far in 2016 announced $3.5 billion of transactions, including Asahi Group Holdings’ (2502.T) bid for the Peroni and Grolsch beer brands. With Japanese companies collectively hoarding an estimated $3 trillion in cash, according to Sanford C. Bernstein estimates, outbound M&A is expected to accelerate.

Buyers from the two nations have already clashed over an Italian train company last year, and sources say they could soon be among the pack chasing a Thai bank.

Chinese buyers are normally state-linked, and their aims often involve Beijing’s industrial policy objectives, so profitability is not always the top priority, while Japanese buying is led by private companies looking to expand abroad to offset deflation, flat growth and a shrinking population at home.

The Japanese buyers usually go for assets in their own sector, and relative to the Chinese are more constrained by shareholders in what they are prepared to pay.

While China was focusing on seizing energy and food resources, the two rarely clashed.

But as China targets more advanced technology and brands to shift the economy away from low-end manufacturing, the companies from the world’s second and third-largest economies are more likely to clash, especially in high-value manufacturing segments such as high-speed railways.

“As the pace of economic growth slows, more Chinese companies are set to look outside. That could lead to Chinese and Japanese companies competing for similar assets,” said Keith Pogson, EY senior partner for Financial Services, Asia-Pacific.

TECH AMBITIONS

Last year Chinese Hitachi (6501.T) and China’s CNR Corp competed for Italian train maker Ansaldo Breda and signal-maker Ansaldo STS.

Hitachi emerged the victor as Italian seller Finmeccanica was anxious about the distraction of CNR’s prospective merger with rival CSR Corp in the middle of the bid battle, sources familiar with the matter said.

And sources said on Tuesday that Canada’s Bank of Nova Scotia has approached a unit of Bank of China (601988.SS) and Japanese lenders, among others, to gauge interest in its 49 percent stake in Thai lender Thanachart, valued at $1.7 billion.

The two nations are also likely to compete for food and beverage brands, bankers and lawyers said. Last year Asian M&A touched a record $1.5 trillion, with Chinese and Japanese companies announcing $113 billion and $90 billion worth of deals, respectively.

“Japanese companies are buying assets or brands in the same industry with the aim to expand their geographical footprint,” said Hikaru Ogata, CEO Asia Pacific, corporate & investment banking at Societe Generale. “These are strategic acquisitions by private companies,” Ogata added.

In the United States, which has been targeted by China along with Europe, Japanese companies are expected to have an edge when bidding for telecoms, defense and energy segments that are partly restricted to Chinese firms, said Tokyo-based Mitsuhiro Kamiya, a partner at Skadden Arps Law.

Last month Washington blocked Philips’s (PHG.AS) sale of a lighting components business to a consortium of Chinese buyers on security grounds.

But where those constraints don’t apply, the pendulum can swing back to the Chinese, who are often willing to pay handsome premiums to seize a target, knowing they can slot it into a market of nearly 1.4 billion people.

Last month, Haier Group lobbed a knockout bid to buy General Electric’s (GE.N) appliance unit, beating half a dozen suitors.

“The Chinese are far more brutal at acquisitions … as they recognize the value they can extract from an asset by leveraging up in mainland China. The Japanese acquirers don’t have that home market,” Pogson added.

By DENNY THOMAS and THOMAS WILSON Feb. 23, 2016 on Reuters

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