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Foreign deal makers expect a difficult year in China
Foreign deal makers are worried that Beijing's recent move to encourage Chinese banks to lend money for domestic mergers and takeovers will make winning deals in China even harder next year. Chinese banks have long been barred from offering more sophisticated financial tools such as equity-linked loans or convertible bonds to finance takeovers within China. But in a surprise policy shift this month, Beijing said it would allow its banks to lend money to Chinese enterprises to buy smaller domestic rivals, one of a number of measures announced to promote consolidation and economic growth. In the past, some major Chinese companies have been supported by big state-owned banks for funding large, high-profile offshore deals like Lenovo Group's acquisition of IBM's PC arm in 2005 for $1.25 billion. But until now, Chinese lenders have been prevented from offering such services at home. Armed with a war chest of $2 trillion in personal savings, Chinese banks are expected to begin arranging financing for such deals early next year. That has worried some foreign deal makers, who say they will be at a disadvantage when they have to compete with big Chinese funds. This year the U.S. buyout giant Carlyle Group walked away from three years of negotiations to buy Xugong, the top Chinese construction equipment maker, after running into bureaucratic obstacles. Foreign deal makers, in particular private capital funds, have often complained about local protectionism, opaque rules and a long wait for deal approvals in China. But while some of them are concerned about the latest move, Beijing sees it as leveling the playing field. "From the regulator's perspective, the aim of providing M&A loans is to create a fair environment for competition for deals in China," said Cheng Binhong, head of the corporate restructuring and mergers and acquisitions division of Industrial and Commercial Bank of China, the biggest Chinese lender. "In the past, Chinese enterprises had to face some negative impacts due to a lack of such financing tools for M&As when competing with foreign investors for deals," said Cheng, who is also a member of a Chinese committee that drafted the new mergers and acquisitions loan rules. The lifting of a ban on the loans complements Beijing's 4 trillion yuan economic stimulus plan, which the government announced in November in a sweeping effort to sustain economic growth despite the unfolding global financial crisis. New local merger and acquisition loan services are good news for Chinese entrepreneurs who have lobbied the government for years to expand the range of financing options available to them. The need has grown as the credit crisis has locked up access to funding around the world. Globally, private equity firms like Carlyle and Kohlberg Kravis Roberts have increasingly pursued all-cash deals as Western banks like Citigroup and HSBC Holdings have pulled back on corporate lending in the credit crisis. Maurice Hoo, a lawyer specializing in global private equity investments in China with the law firm Paul Hastings, said the new loan policy could increase domestic industry consolidation, especially in sectors favored by Beijing, like clean energy. "It won't mean an overnight move into leveraged buyouts, but given that companies have less access to capital markets these days, loans can provide the capital that a company will need to build itself into an industry leader," Hoo said. "The Chinese government has always been focused on domestic consolidation and building national leaders to compete on a global basis - these guidelines should give Chinese companies an important tool," he added. But in spite of central government support, domestic banks may be wary of financing mergers and acquisitions because of the poor market environment and general lack of expertise, experts say. Kenneth Zhou, a lawyer specializing in China merger and acquisition rules with the law firm Wilmer Hale, said Chinese banks would have to take some time to get prepared for the new loan services by hiring experts who can strengthen risk control of the business. "My feeling is that probably the appetite isn't that high," said Chris Gradel, a Hong Kong-based managing partner of Pacific Alliance Group, which runs $1.6 billion in hedge funds. "A slowing economy and falling asset prices isn't necessarily the environment where banks are most excited to lend." |
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