Editor’s Note: For Chinese mining companies venturing into the international mining market, 2009 marked a watershed moment. As signs emerged that the financial crisis was bottoming out, several financially strong mining enterprises began preparing for overseas investments and participating in cross-border mining mergers and acquisitions. Although Chinalco’s investment in Rio Tinto ended in failure in the first half of the year, the second half saw a flurry of approvals for overseas M&A deals involving Chinese mining firms—a development that is truly encouraging. At the recently held National Commerce Work Conference, the Ministry of Commerce explicitly stated that in 2010, China would vigorously implement its “Going Global” strategy and encourage qualified, competitive Chinese enterprises to actively pursue foreign investment and multinational operations. Undoubtedly, energy and mining remain key priorities. To this end, this issue features an article that provides a detailed analysis of this year’s overseas M&A landscape and risk-prevention measures, for your reference.
Chinese companies’ overseas M&A activities are becoming increasingly mature.
Since the reform and opening-up, China has experienced three waves of mergers and acquisitions in just over 30 years. The earliest corporate M&A activity in China took place in 1984, coinciding with the fourth global wave of corporate M&A. At that time, corporate M&A in China was still in the pilot and exploratory stage, so both the scale and number of such transactions were extremely limited.
In the late 1990s, led by the United States, Japan, and Europe, developed countries' enterprises once again set off the fifth global wave of corporate mergers and acquisitions. Influenced by this fifth global wave of M&A, Chinese enterprises’ overseas M&A activities entered a phase of rapid development after 2000, experiencing an explosive expansion in scale and maintaining the strongest momentum for the longest duration. In 2007, China’s overseas M&A boom reached its peak, with total M&A transactions amounting to US$18.669 billion. In 2008, the global financial crisis triggered by the U.S. subprime mortgage crisis somewhat reduced the number of M&A deals. Since 2009, Chinese enterprises’ overseas M&A activities have continued to concentrate on three major sectors: energy, mining, and utilities. Data show that since 2003, transactions in these three sectors have accounted for 29% of the total volume of overseas M&A deals and 65% of their total value. By country, North American companies have been the top choice for Chinese acquirers; from 2003 to the end of the third quarter of 2009, there were approximately 106 such transactions, representing 24% of all publicly announced M&A deals. In terms of transaction value, China’s cumulative investment in North America during the same period reached US$432.2 billion, accounting for 28% of the total overseas M&A investment.
Although the journey of Chinese enterprises’ overseas M&A has not been smooth, there have been numerous painful lessons from repeated M&A failures. Nevertheless, for the overseas M&A market—which remains uncertain due to the financial crisis—Chinese companies with both the willingness and capability to acquire are still waiting for the right opportunity, thereby creating favorable conditions for new overseas M&A deals. Looking ahead, Chinese enterprises’ overseas M&A activities will remain vigorous in 2010, with energy, mining, and utilities continuing to dominate overseas M&A transactions.
Conditions for large-scale overseas M&A have become increasingly favorable.
First, the global economy has gradually stabilized and is showing signs of recovery. Currently, driven by Asian economies led by China, the world economy has entered a recovery trajectory, and the impact of the international financial crisis is steadily waning. A key indicator of this recovery is that the highly watched Purchasing Managers’ Index (PMI) has crossed the 50-point threshold—closely watched as the threshold for economic expansion—in nearly all countries. Moreover, the economic stimulus packages totaling over 3 trillion U.S. dollars launched by governments around the world have begun to take effect and will reach their peak impact in 2010. Central banks worldwide are maintaining very low guiding interest rates, ensuring ample liquidity in the markets. The gradual stabilization and recovery of the global economy have created an excellent economic environment for Chinese enterprises to undertake large-scale overseas mergers and acquisitions.
Second, there is the need to circumvent trade protection barriers imposed by multiple countries. Currently, multilateral trade protectionism led by the United States is harming Chinese manufacturing, and Chinese exports are facing an increasing number of trade barriers and restrictions. In the first three quarters of 2009, 19 countries initiated a total of 88 trade remedy investigations against Chinese products (including 57 anti-dumping cases, 9 anti-subsidy cases, 15 safeguard measures, and 7 special safeguard measures), involving a total amount of US$10.2 billion. The U.S. Department of Commerce issued a final ruling, imposing anti-subsidy tariffs ranging from 10.36% to 15.78% on relevant products, citing subsidies in China’s oil well pipe industry. The amount involved in this case is approximately US$2.7 billion, making it the largest trade sanction imposed by the U.S. on China to date. Moreover, in the future, Western countries will likely continue to play the “trade protectionism” card, raising trade barriers under the guise of carbon tariffs. It is possible that carbon tariffs will become the focal point of trade disputes in the years ahead. Trade protectionism pursued by Western countries has already drawn high attention from both the Chinese government and the Chinese business community. To effectively bypass these trade protection barriers and shift from a passive position in international trade relations, enterprises should promptly go global, make overseas acquisitions and investments, and take advantage of rules of origin by producing and selling locally.
Secondly, overseas M&A costs for enterprises are relatively low. Affected by the global financial crisis and the severe downturn in the world economy, many European and American companies have seen their market capitalization shrink and are facing liquidity challenges; the assets of some well-known large corporations continue to erode. In the current context of a gradual global economic recovery, enterprises are at a stage where consolidation is necessary, and asset values happen to be at their lowest point. Thus, conducting M&A at this time involves comparatively lower costs. Meanwhile, after decades of development, Chinese enterprises have steadily grown stronger. In particular, some domestically-oriented enterprises have been less affected by the financial crisis and still maintain considerable competitiveness, making their willingness to “go global” increasingly strong.
Finally, regulations and scrutiny on overseas M&A deals have been relaxed. Over the past several years, many Chinese companies’ overseas M&A initiatives have ended in failure, primarily because the “state-owned” background of these Chinese enterprises failed to win the acceptance of overseas entrepreneurs and politicians. However, the onset of the financial crisis—and the post-crisis era’s “recovery from a serious illness”—have prompted European and American companies as well as relevant government agencies to relatively ease their regulatory and review measures toward China’s state-owned enterprises, thereby reducing political obstacles and implicit costs associated with cross-border M&A transactions.
More importantly, the state provides strong support for enterprises’ overseas M&A activities. Since 2009, in order to expand domestic demand, stabilize external demand, and effectively respond to the financial crisis, the Ministry of Commerce has adopted six key measures to encourage and facilitate enterprises’ outbound investments. First, in March, the Ministry issued and implemented the new “Administrative Measures for Overseas Investment,” while also conducting research to promote the introduction of the “Regulations on the Administration of Outbound Investment.” Second, the Ministry has formulated supportive policies in collaboration with relevant departments, covering a wide range of areas including fiscal and tax policies, finance, insurance, foreign exchange, and entry-exit procedures. At the same time, various financial institutions are encouraged to actively provide credit support and financial services to enterprises “going global.” Third, the Ministry has improved its service system by releasing the “Country (Region) Guides for Foreign Investment Cooperation” covering 162 countries and regions and establishing the “Information Service System for Foreign Investment Cooperation.” Fourth, the Ministry has stepped up talent training efforts, continuing to entrust research institutes and higher education institutions with organizing training programs for professionals engaged in multinational operations. Fifth, the Ministry has established a robust security assurance framework, fully leveraging the roles of bilateral economic and trade mechanisms and bilateral investment protection agreements to safeguard enterprises’ legitimate rights and interests overseas. Sixth, the Ministry has intensified efforts to promote investment, organizing business delegations to Europe and the Americas to participate in seminars, negotiations, and project-matching activities, thereby providing a platform for enterprises to carry out outbound investments. These measures have been highly effective in helping Chinese enterprises go global. Meanwhile, the Ministry of Commerce is currently continuing to study and introduce new policy measures to encourage Chinese enterprises with competitive advantages to actively engage in outbound investment and multinational operations.
Summarize experiences and strictly guard against M&A risks.
Bear in mind the lessons learned from overseas M&A experiences. Here, we can draw on the insights of Li Hualin, Vice President of China National Petroleum Corporation, to offer guidance to Chinese enterprises that have already undertaken or are planning to undertake overseas M&A activities: "Mutual benefit and win-win outcomes, and harmonious development" are the fundamental principles that must be upheld in overseas M&A; continuous monitoring and research, accurate assessment, self-awareness and understanding of the other party, prudent planning, and sound decision-making are the keys to successful overseas M&A; fostering the integration of diverse cultures and consistently pursuing management innovation are the driving forces behind a company’s sustained development; having a highly qualified and experienced M&A and operations team is the cornerstone for successfully carrying out overseas M&A initiatives; and a nation’s robust political and economic strength, coupled with the government’s full support, are prerequisites for the success of overseas M&A endeavors.
Carefully select key target countries for overseas M&A. Under the current circumstances, we should focus on developing countries in regions such as Africa, Latin America, and Southeast Asia. These relatively underdeveloped countries and regions are rich in resources but lack sufficient capital. Moreover, they have been severely hit by this financial crisis, prompting many enterprises to sell off assets—or even entire businesses—at significantly reduced prices. At the same time, governments have relaxed restrictions on foreign investment, making these markets even more open. More importantly, these countries warmly welcome Chinese enterprises to invest or carry out M&A activities there. Only in these countries can Chinese companies acquire the resource-based materials they need at lower prices, thereby ensuring a long-term supply of critical resources necessary for sustaining China’s economic growth.
Accelerate the strategic upgrade of corporate overseas M&A initiatives. Chinese enterprises should seize the opportunity to treat overseas M&A as a long-term development strategy, making corresponding adjustments and strategic upgrades to the objectives of overseas M&A, financing channels, and investment approaches. Through these adjustments and strategic upgrades, overseas M&A activities should increasingly exhibit a diversified trend. At the same time, it’s important to note that although expanding into overseas markets remains the most critical goal for corporate overseas M&A in the current and coming years, reducing costs, acquiring advanced technologies and management expertise, building renowned brands, and developing and securing resources such as energy and raw materials must also become key priorities for companies engaging in foreign M&A.
Enterprises are encouraged to use RMB for overseas mergers and acquisitions. When enterprises engage in overseas M&A, adopting RMB as the settlement currency for overseas investments will—first, have absolutely no impact on the function of using investment to boost exports; and second, enable Chinese enterprises to wield greater influence, initiative, and bargaining power in their overseas M&A activities. Therefore, enterprises that meet the necessary conditions should increasingly rely on RMB for their overseas M&A endeavors.
Strictly guard against risks associated with overseas mergers and acquisitions. In the current context, where many countries are resorting to trade protectionism against Chinese enterprises, how to effectively mitigate various overseas M&A risks—such as country risk, technological risk, asset risk, labor risk, tax risks, and environmental risks—has become a pressing new challenge for companies engaged in overseas M&A activities. Under the present circumstances, country risk is likely to escalate and evolve into the primary risk facing overseas M&A enterprises. This is because country risk is a systemic risk characterized by high randomness and unpredictability—factors that businesses cannot control. Particularly troubling are cases where some national governments’ words and actions are inconsistent. Once such risks materialize, they can inflict substantial losses on enterprises. Therefore, it is essential to adopt measures such as leveraging the “four-party coordinated mechanism” and strengthening corporate credit risk management for overseas M&A activities, thereby rigorously guarding against overseas M&A risks. (Wang Yong)
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A Retrospective on Classic Overseas Mining M&A Cases in 2009
China Nonferrous Mining Group Corporation acquires the Luanshya Copper Mine in Zambia. On June 6, 2009, China Nonferrous Mining Group Co., Ltd. signed a share-transfer agreement for the Luanshya Copper Mine with the Zambian government in Lusaka, the capital of Zambia, marking the successful acquisition of the Luanshya Copper Mine by China Nonferrous Mining Group Co., Ltd.
China Minmetals acquired part of the assets of Australian company OZ for US$1.386 billion. On June 11, 2009, more than 91% of OZ Mining’s shareholders approved the revised acquisition proposal submitted by China Minmetals. As a result, China Minmetals acquired certain assets from Australia’s third-largest multi-metal mining company, as well as other assets in the exploration and development stages, in exchange for consideration totaling US$1.386 billion.
Yanzhou Coal Mining acquires 100% equity of Ausfleks. On August 13, 2009, Yanzhou Coal Mining Co., Ltd. acquired 100% equity interest in Australia’s Felix Resources for a total price of approximately RMB 18.951 billion. Felix Resources is a publicly listed coal company in Australia. As of December 31, 2008, the proven and probable reserves of Felix Resources’ coal mines totaled 510 million tons, with total resources amounting to 2.006 billion tons.
The East China Nonferrous Metals Bureau takes a controlling stake in an African copper mine for 180 million yuan. On September 14, 2009, the East China Nonferrous Geological Exploration Bureau announced that it had taken controlling interest in an African copper mine for RMB 180 million. A wholly-owned subsidiary of East China Nonferrous entered into an equity purchase agreement with Wessley International, the operator of the African copper mine. The Wessley project in Namibia is located along a key polymetallic mineralization belt and has confirmed copper reserves exceeding 360,000 tons.
Jinchuan Group has invested 2 million U.S. dollars to acquire a 51% stake in Zambia’s largest nickel mine. In October 2009, Jinchuan Group invested approximately US$2 million to acquire a 51% stake in Mwani, Zambia’s largest nickel mine. During the financial crisis, Jinchuan successively acquired 11% stakes in Canada’s Taylor Resources and Australia’s nickel miner and producer Fox Resources for CAD 214 million and USD 15.7 million, respectively.
Sichuan Hanlong Group acquires a 51% stake in the Australian molybdenum-iron mine for US$500 million. On November 16, 2009, the Foreign Investment Review Board (FIRB) of Australia formally approved Hanlong Group’s subsidiary, Hanlong Mining, to acquire a 51% stake in an Australian molybdenum mining company for US$500 million. The board also approved the group’s right, within three years, to exercise options to issue one new share for every six shares held. Taken together, these two rights amount to a 55.3% equity stake. This project represents the largest investment to date by a Chinese private enterprise in Australia.
Yunxi Group has acquired a 50% stake in Australia’s largest tin mine for A$50 million. In December 2009, Yunnan Tin Group acquired a 50% stake in Metallurgical Corporation of Tasmania’s Tasmanian operations for A$50 million, with the option to acquire an additional 10% stake depending on the performance of this business segment. The price for any additional acquisition will be contingent upon whether the tin concentrate production from this segment can reach 6,000 tons over the next year and whether operating costs can be reduced.