China’s latest crackdown casts dealmaking shadow

Sumeet Chatterjee & Matthew Miller –

When news broke on March 1 that the chairman of CEFC China Energy, an acquisitive conglomerate, was being investigated for economic crimes, one particular group gulped — dealmakers involved with Chinese companies.
Even as China’s fast-growing conglomerates have been viewed by many global investors and regulators with suspicion for their opacity and finances, they have nonetheless been lucrative business partners for dealmakers, known for paying over the odds for flashy assets.
Now, more than ever before, would-be acquirers, sellers, investors and advisers are having to assess who is in and who is out in Beijing, a politically tricky question at the best of times.
The probe into CEFC — which has thrown into question its $9 billion deal for a 14 per cent stake in Rosneft, Russia’s top oil producer — came less than a week after the government announced it was taking control of the insurer Anbang, an equally eye-catching acquirer of assets. Anbang’s chairman, Wu Xiaohui, is being prosecuted for economic crimes.
The upheavals of the past weeks have left many dealmakers nervous — and unwilling to comment publicly about a topic so clearly sensitive in Beijing. The State Council Information Office, the Chinese government’s information arm, did not immediately respond to a faxed request for comment from Reuters.
Strategies on how best to navigate the latest upheaval range from focusing on top executives’ political connections to analysing debt levels and the growth potential of the companies involved.
“It’s taken that if you are a major Chinese company, in all likelihood, there is significant government influence,” said Edward Mermelstein, a partner at Rheem, Bell & Mermelstein in New York. “It’s just a question of to what extent is there significant government influence.”
Said a Hong Kong-based M&A banker at a global investment bank: “It will be just another reason for foreign sell-side folks to be very suspicious of major Chinese acquisitions, yet another hurdle that the Chinese firms will need to go across.”
Companies who appear to have Beijing’s backing include the carmaker Geely and, Fosun, another conglomerate with a one-time penchant for flashy deals, including a stake in Cirque du Soleil.
Geely last week stunned Daimler with its sudden acquisition of a $9 billion, 9.7 per cent stake in the German owner of Mercedes-Benz.
Meanwhile, Fosun has in the past week snapped up two European fashion labels and taken control of a Brazilian broker in deals worth a combined $245 million.
Beijing first put dealmaking conglomerates on notice last summer with a crackdown on their access to credit in the mainland and an edict barring “irrational” investments.
Since then, groups including Dalian Wanda and HNA Group have scrambled to ease the resulting cash crunch by offloading assets and changing business models while also pursuing more Beijing-friendly investment strategies. — Reuters