- Governments including Spain, France and Australia have introduced or toughened rules for foreign buyers to protect strategic assets through the recession caused by the COVID-19 pandemic
- But new data reveals no wave of Chinese interest as investors are staying home so far, with announced outbound deal value falling 93% in the first five months of the year to just US$ 1.4 billion in Europe and 89% to $700 million in North America
- Investment has remained more resilient the other way - the first five months of 2020 saw announced foreign M&A into China total $9 billion, surpassing Chinese outbound M&A activity in both volume and value terms for the first time in a decade.
Many countries around the world have expanded investment screening rules since the beginning of the COVID-19 pandemic to protect strategic assets from being bought up cheaply by opportunistic foreign investors. When it comes to Chinese investment at least, these fears are so far unfounded, according to the latest research from leading global law firm Baker McKenzie in partnership with Rhodium Group.
In the first five months of 2020, Chinese outbound M&A activity collapsed compared to previous years. The number of newly announced transactions dropped from around 90 per month in the 2016-2018 peak period to barely 30 per month between January-May 2020. Compared to the same period in 2019, new outbound deal making by Chinese firms is down 71% in volume and 88% in value terms.
The sharp drop in newly announced outbound Chinese M&A is a global phenomenon. So far this year, all companies in China combined have announced around the same amount on overseas acquisitions as HNA Group did in 2016 in one transaction – its purchase of a 25% stake in Hilton Worldwide Holdings (US$ 6.5 billion). While Asia witnessed a 65% drop in value, announced takeovers in Europe fell 93% from US$ 19.5 billion to US$ 1.4 billion in Europe, and a 89% fall in North America, from USD$ 6 billion to US$ 0.7 billion.
"In comparison to the boom years China’s outbound investors are simply not in the same position to ramp up overseas buying at the moment," said Thomas Gilles, Chair of the EMEA-China Group of Baker McKenzie. "Chinese companies with global ambitions face a very different environment today, due to the combination of heavier debt loads, tighter domestic liquidity conditions, Beijing’s controls on outbound capital flows and an increase in trade and investment restrictions abroad."
Rise on restrictions despite fall in demand
Governments have been increasingly placing restrictions on foreign investment, despite the G20 commitment to keep FDI and trade going through the COVID-19 pandemic. To add to new EU rules in 2019 and US rules in 2020, the European Union released in March 2020 updated guidance for FDI screening urging member states to support European public security by protecting “companies and critical assets” in health-related industries from foreign buyout.
Many countries have put the brakes on FDI. Australia announced temporary measures to drop investment review thresholds to zero for all economic sectors as of March 29, 2020. Similar measures followed in France, which reduced investment screening threshold to 25 per cent, and Spain, which imposed a 10 per cent threshold on non-European FDI flows and released guidelines to protect public security, order and health, while Italy also temporarily expanded its screening regime. In more permanent changes, Germany extended its foreign investment review regime to cover the health care sector, while Sweden, New Zealand and Poland all announced plans for screening legislation. Meanwhile, after years of deliberation the UK is also soon to propose a new screening regime via a long-delayed National Security and Investment Bill.
In the United States, the Committee on Foreign Investment in the United States or CFIUS, completed implementation of recent legislative reforms a month before the pandemic hit the country. While work-from-home policies initially delayed consideration of transactions, the pandemic has had no visible impact on US policy. "The pandemic may prompt CFIUS to examine healthcare sector transactions more closely than before, but one would otherwise expect a stable US FDI regulatory environment," said Rod Hunter, a partner at Baker McKenzie and a former CFIUS official.
This week the European Commission also published proposals for new regulatory tools to address its concern that foreign subsidies facilitate acquisitions of EU companies or distort the investment decisions, market operations or pricing policies of their beneficiaries, to the disadvantage of non-subsidised companies. The proposals include a mandatory notification system that would enable the Commission to review proposed acquisitions that involve foreign subsidies, and the power to investigate whether foreign subsidies cause distortions in the EU internal market, and if so, impose behavioural or structural remedies. The proposed rules will apply to subsidies granted by all non-EU countries.
Full details of Foreign Investment Review regimes can be accessed via Baker McKenzie's FIRE analysis platform, which answers 49 detailed questions on foreign investment review regimes across 24 jurisdictions and provides a roadmap to regulatory timetables, risks and barriers.
Are the tables turning?
With the spotlight on Chinese outbound investment, few have noticed how resilient foreign M&A into China has been over the past 18 months. In the first five months of 2020, newly announced foreign M&A into China totaled $9 billion, surpassing Chinese outbound M&A activity in both volume and value terms for the first time in a decade. European and American multinationals have been major drivers behind this trend.
Recent deals offer clues about what is driving foreign appetite for Chinese assets. First, while consumption has taken a hit, firms are still betting on the secular rise of China’s middle class. One example from 1Q 2020 is Pepsi’s $700 million acquisition of Chinese snack brand Be & Cheery.
Second, foreign firms are buying shares in their own joint ventures, after China lifted foreign equity thresholds. Volkswagen announced it would take control of its joint venture with Anhui Jianghuai Automotive Group in a $1.1 billion deal, and JP Morgan is acquiring full control of its Chinese mutual fund joint venture for an estimated $1 billion.
Third, Chinese firms have matured to become leaders in some industries. For the first time, it is attractive for foreigners to buy technology and industrial assets rather than build from scratch. Volkswagen’s plans to acquire a 26% stake in Chinese battery maker Guoxuan High-Tech for $1.2 billion is a prime example.
"China has relaxed a number of restrictions on foreign investment recently, while its leading position as a market in many industries makes it attractive to international companies seeking growth through acquisitions," said Tracy Wut, Baker McKenzie's head of M&A for Hong Kong and China.
Outbound activity led by Financial Services and Logistics
Despite the precipitous fall in new Chinese outbound M&A activity, some sectors continued to attract interest from Chinese buyers.
Financial and business services attracted new Chinese acquisitions worth US$1.3 billion between January-May 2020. The most significant deal was Binance, the world's biggest cryptocurrency exchange, which acquired CoinMarketCap, one of the most-referenced crypto data websites, in a deal worth an estimated US$400 million. Fosun-owned Hauck & Aufhaeuser is also acquiring German private bank Bankhaus Lampe for an estimated $280 million.
Chinese investors also remained interested in the infrastructure and logistics sector, with announced acquisitions of US$1.2 billion in the same period. This was primarily thanks to investment manager GLP’s acquisition of Goodman Group’s central and eastern European logistics real estate assets for US$1.1 billion. GLP also announced to take a 40% stake in Hong Kong based Li & Fung for 371 million.