For months, Chinese conglomerate Fujian Thai Hot has been on the cusp of completing a $1.4bn buyout of a Hong Kong-based life insurer.
There has been just one problem: the cash needed to pay for the deal has been stuck inside China, awaiting a final regulatory sign-off from the country’s foreign exchange watchdog.
In the space of 12 months, China’s companies have gone from being the most prolific and sought after bidders in international dealmaking to some of the most unreliable and sometimes even unwelcome, according to senior bankers and lawyers.
The stark change reflects the regulatory crackdown in China on outbound transactions since the start of 2017, which has been part of a co-ordinated effort to stem the hundreds of billions of dollars in capital pouring out of the country.
Thai Hot finally secured clearance to wire the money out of China in the past few days but the hurdles that held up the deal have been emblematic of the challenges that Chinese acquirers now face in pursuing overseas transactions.
In the first three months of the year, the value of announced outbound deals from China dropped sharply to $23.8bn, according to Thomson Reuters data, its lowest level since 2014. The decline has dented hopes among dealmakers that China would become established as a powerful source of funds in a market historically dominated by companies from the US and Europe.
Chinese bidders are now being asked to be able to provide some assurances that they can bring funds offshore. “Sellers want higher certainty of financing and regulatory approval,” says James Tam, Asia head of M&A at Morgan Stanley, who notes that deals are being struck in 2017 but at a slower pace. “It is the degree of emphasis [on certainty] that has gone up.”
The slump in cross-border deals in the first quarter of 2017 is even more stark given the previous year was the busiest for Chinese M&A on record.
In 2016, Chinese companies agreed about $222bn worth of deals, boosted by a handful of blockbuster transactions, including ChemChina’s $44bn buyout of Syngenta, which was the largest ever foreign takeover by a Chinese group.
This year, the biggest transactions have been in the materials industry, such as Wang Tai Holdings’ two purchases of iron mine interests in Mongolia for a combined $5.5bn, including debt. Yan Kuang Group bought a coal mine from Rio Tinto for about $2.5bn.
A number of smaller deals recently announced — including the purchase of a 5 per cent stake in US electric carmaker Tesla by Tencent and CEFC China acquisition of about 20 per cent in Cowen — have been noticeably less bold than the blockbuster deals of a year ago.
News: US raids on cheaper rivals send European M&A soaring
Investment banking league table: List of top advisers
The slowdown started in November last year when a notice circulated at Chinese banks warning that the State Administration of Foreign Exchange planned to clamp down on acquisitions that appeared speculative, or as fronts for moving cash offshore.
Foreign reserves used by China to stabilise the value of the yuan had fallen at a rapid rate over the preceding months, spurring a crackdown on all channels for taking money overseas.
Companies overseas activities would be restricted to buying assets that matched their core lines of business in China. Situations where a mining outfit buys a gaming company, for example, would no longer be acceptable.
Chinese regulators quickly showed that these were not empty threats. The sort of troubles afflicting companies such as Thai Hot have become commonplace.
When regulators said they would scrutinise entertainment-related deals late last year, Anhui Xinke New Materials, a Chinese copper smelter, quickly scrapped its agreement to pay $350m for Voltage Pictures, producer of Hollywood films such as The Hurt Locker.
In a sign that even experienced conglomerates already spanning global markets were not exempt, Dalian Wanda’s $1bn buyout of Dick Clark Productions fell apart in February as it struggled to win permission to move cash offshore.
Wanda, which owns AMC Entertainment, the world’s largest cinema chain, has spent billions of dollars overseas over the past five years.
Sellers in these situations face a dilemma, according to Paul Strecker, a partner at Shearman & Sterling. “Do you want to have a Chinese investor who potentially can pay a premium — and have paid premiums on deals — versus the uncertainty that these restrictions represent,” he says. “Or do you just conclude that the risk is too great and you go with a lower bid but with more certainty?”
In some cases, the impact of the regulations has been more subtle, tripping up negotiations before they go too far.
Legend Holdings, owner of the world’s largest computer maker, Lenovo, had been considered a serious bidder for Allfunds, a Spanish funds platform, earlier this year.
At the last minute, the group “vanished” despite being consistently engaged throughout the process, according to two people involved in the auction.
Even state-owned groups have been hurt. When UK public house operator Punch Taverns went up for sale late last year, a state-backed group approached banks with the intention of making a bid, according to people with direct knowledge of the matter.
But after the new regulations were announced, the company disappeared from the process, leaving bankers with the sense that it had been forced to back out.
For companies that rely on onshore financing from Chinese banks, the capital controls have been devastating when sellers ask for assurance that the Chinese company can pay on time.
“The purchaser is not able to give much, if any, concrete information,” says Lisa Chung, a partner at Slaughter and May in Hong Kong. “It is unclear if that will take weeks or months.”
However, many Chinese companies no longer count on onshore funding for deals, Ms Chung said. Some groups already have a significant amount of assets abroad or have strong relationships with global banks. In those cases, the restrictions on capital outflow have not materially affected overseas acquisitions, she said.
Groups with sizeable assets overseas, such as the airlines and hospitality conglomerate HNA Group, have continued to ink deals at a ravenous pace this year.
Last week, HNA agreed to acquire a 25 per cent stake in Old Mutual’s US asset management business for about $445m, capping a months-long buying spree. It has taken a 4.7 per cent stake in Deutsche Bank and is linked with deals for Forbes Magazine, Swiss airport retailer Durfy and a $2.2bn office building in New York.
HNA’s activity shows that acquisitions can still get done. One solution to keep Chinese groups plugged into global deals, including private equity auctions, is to engage them as early as possible, says Axel Beck, co-head of financial sponsors at JPMorgan Chase.
Several M&A transactions over the past year have started with private equity companies granting Chinese groups a “sneak preview” of the assets for sale before an auction process began. For example, Imagina, a Spanish media company, invited Citic Private Equity to review the company before the start of the sale — although Citic did not then go on to seal the deal.
“You have to allow more time when it comes to Chinese buyers and to let them do the due diligence,” Mr Beck says.
Get alerts on Mergers & Acquisitions when a new story is published