December 4, 2012 8:18 pm
This article is provided to FT.com readers by PaRR (Policy and Regulatory Report)— a newly launched product of The Mergermarket Group providing proprietary intelligence and research on competition law and sector-specific regulatory changes around the world. www.parr-global.com
Contrary to recent press reports, China’s leadership change, rather than its island feud with Japan, is likely to be the major factor holding up reviews of Japanese mergers and acquisitions, lawyers familiar with the Chinese regulatory process told PaRR.
A report in Japan’s Nikkei newspaper last week suggested the dispute over the islands – which Japan calls Senkaku and are known in China as Diaoyu – had caused “unreasonable delays” for a host of Japanese companies awaiting the nod from China’s Ministry of Commerce (MOFCOM).
Among the most high profile, trading house Marubeni’s USD 5.6bn purchase of US grain merchant Gavilon had been expected to close in September but has been stalled, with MOFCOM approval still pending.
Likewise, a merger of the shipbuilding units of IHI Corp and JFE Holdings originally slated for an October close will now not close until the New Year as it awaits Chinese clearance.
Elsewhere, Dentsu’s proposed GBP 3.2bn acquisition of UK media group Aegis has already been cleared by several international competition regulators, but not MOFCOM, which only accepted its filing on 16 November.
Itochu is also awaiting MOFCOM clearance for its USD 1.7bn acquisition of Dole Food’s packaged fruit and Asian fresh fruit businesses, which was announced in September. A spokesperson for the Japanese company told PaRR that it is aiming to obtain approval by the end of this year and so far has not noted any delays.
While some lawyers working with Japanese companies said they suspect souring relations between the world’s second and third largest economies may not have helped some transactions, they argued it would be too simplistic to simply connect the dots between the East China Sea discord and the delays.
“It’s true there might be heightened sensitivity [about Japanese deals] because of the strained relations but it’s a little too easy to say that’s why my deal is being held up,” one China-based competition lawyer told PaRR.
A source close to MOFCOM said the island issue has not been taken into account in any of the above transactions.
Advisors have noticed a general slowdown in MOFCOM’s merger review process in recent months, said one Beijing-based competition lawyer. The agency typically needs around a month to take up a deal for review but lately it has been taking up to three months, he said.
The lawyer added that MOFCOM is also asking for more time to consider transactions without giving reasons, including one deal he is working on which recently went into a 60-day Phase III review, though MOFCOM did not highlight any specific concerns.
China’s 18th Party Congress held in early November 2012 and the nation’s ongoing leadership change, which affects government bodies from top to bottom, are seen as the major causes for MOFCOM’s slowdown.
“At the time of the party congress, China’s administrative system tends to become stagnant,” one Tokyo-based competition lawyer specializing in China told PaRR. “Approval processes generally stopped toward the end of September and, in a number of deals, responses from the regulatory authority ground to a complete halt.”
While the top echelon of China’s new leadership, with incoming President Xi Jinping at the helm, may have been decided, the layers underneath including key ministries such as MOFCOM and the National Development and Reform Commission have yet to see changes in leadership.
Between now and the National People’s Congress in March 2013, however, these ministries will also see a change as new Premier Li Keqiang reshuffles central leaders and mid-ranking officials, said another lawyer familiar with Chinese merger control.
“Who will stay, who will be promoted and who will retire remains to be seen,” said the Beijing-based lawyer, adding that the uncertainty is weighing on the merger review process.
Nonetheless, some signs are emerging that certain reviews at least are gathering a little more momentum.
“Business will start moving again,” said the Tokyo-based lawyer. “Since last week, we have started receiving requests for additional documents from the regulatory authorities.”
Another factor causing delays to high profile Japanese deals is that they are in sectors recognized as sensitive.
Although recent press coverage has in particular highlighted Dentsu’s struggles to get Chinese approval for its Aegis acquisition, Marc Waha of Norton Rose told PaRR that media deals have experienced difficulties in the past. In 2009, for example, Sina Corp abandoned plans to buy a stake worth CNY 9.5bn in Focus Media Holding amid heavy MOFCOM scrutiny.
Meanwhile, Marubeni is not the only acquirer enduring delays in getting the Chinese green light for a deal related to agriculture, another highly sensitive sector for China.
Glencore has been similarly frustrated in its efforts to seal MOFCOM approval for its proposed acquisition of Canadian grain handler Viterra, amid suspicions of Chinese concern over the deal’s impact on food prices. The transaction was initially scheduled to close in July but has been held up since then, with Chinese approval the last outstanding condition to be satisfied.
“MOFCOM always spends a great deal of time reviewing the deals that the Chinese government is concerned about, such as the Sanyo/Panasonic deal,” another Japanese lawyer told PaRR. That deal was notified to MOFCOM in January 2009 and was taken up for review in May that year, after MOFCOM asked for supplementary documents. The transaction entered a Phase II review in September, which was subsequently extended, with Chinese approval ultimately coming with conditions in early November. MOFCOM harboured concerns about the deal’s impact on three segments of the battery industry and imposed structural remedies.
Aside from sector sensitivities, there are also logistical reasons explaining why MOFCOM has been taking more time in assessing deals, including Japanese ones. For one, the agency is severely understaffed.
“MOFCOM is slow recently because they are short of hands,” said Song Ying, of An Jie Law Firm.
Moreover, the fact that Japanese companies are feeling the impact of MOFCOM delays more than those from some other countries is also down to the sheer weight of numbers, Norton Rose’s Waha pointed out. Japan ranks second only to Europe in terms of MOFCOM filings, followed by the US.
While at this juncture Japanese companies may not be able to solely blame the island dispute for their MOFCOM troubles, the issue is likely to remain a talking point, with many other Japanese companies needing to file in China.
Announced Japanese deals yet to file with MOFCOM but most likely needing to, include Sumitomo Light Metal Industries’ purchase of Furukawa Sky Aluminum and a KDDI/Sumitomo-led consortium’s offer for the outstanding shares in cable television provider Jupiter Telecommunications.
With Japanese firms being meticulous, long-term planners in their acquisition strategies, the real impact – if any – of the Diaoyu/Senkaku feud on Japanese companies filing with MOFCOM isn’t likely to be felt for another six months or so, Waha said.
But another of the lawyers explained that any Japanese company looking to do a deal that involves commodities, energy or other sensitive industries is likely to face a careful review in China, regardless of whether the political climate or MOFCOM’s logistical issues improve.
“You can’t get around MOFCOM,” the lawyer said.
With additional reporting by Eliot Gao in Beijing, and Joy Shaw in Shanghai
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