China’s growing economy has turned its attentions very firmly towards the UK in recent years, and the trend is paying off for everyone involved. This is according to enlightening new research from the Cass Business School. Additionally, there are indications that Germany and the US may soon be introducing new protectionist measures against trade with China, which could make the UK an even more attractive marketplace for Chinese M&A in the coming years.
This new Cass Business School report, entitled ‘An Analysis of Short-term Performance of UK Cross-border Mergers and Acquisitions by Chinese Listed Companies’ shows a clear pattern in which smaller deals are resulting in better financial results for Chinese acquirers. Anyone looking to buy a business in the UK would do well to take notice of this trend and enter the market before prices adjust to the pick-up in demand. Investing in UK businesses now, and especially in certain industries, such as real estate and healthcare, is likely to pay solid dividends down the line.
Why the UK? And why China?
The UK is largely seen by Chinese listed companies as the easiest place to do business in Europe. Reasons for this include a flexible exchange rate, an increasingly competitive corporate tax rate and prudent financial regulations.
With regards to the increase in M&A deals being made by Chinese firms on a cross-border basis, new government policies supporting increased globalisation and the growing Chinese economy and middle class has resulting in a rush of foreign direct investment (FDI) deals. In fact FDI has increased by nine times over the past five years alone.
As a result, a staggering 91 cross-border M&A deals from China to the UK took place between January 2012 and July 2016. These deals had an aggregate value of US$35 billion. Cross-border M&A between China and the UK reached its peak in 2015 when 29 deals took place.
What kinds of deals are being done?
Of the cross-border M&A deals from China, the real estate and consumer sectors accounted for the highest proportion - nearly half of the deals in volume terms. Large financial and oil and gas deals also took place, but these were found to have a rather less impressive impact on short-term financial returns.
Overall, deals involving smaller, privately-owned, consumer and real estate businesses had the most significantly positive impact for buyers.
Some of the more high profile and high value deals that took place during the study period were Greenland Holdings’ US$1 billion takeover of the Canary Wharf Project and China Minsheng Investment Corp’s US$1.5 billion buyout of new London Financial District-Royal Albert Dock. These deals were both on the real estate side, while Hony Capital’s takeover of Pizza Express in 2014 and Dalian Wanda Group’s US$1.2 billion deal to buy Odeon and UCI Cinemas illustrate the strength of the M&A market in the consumer category.
The latter of these deals, along with several others, took place after the referendum for Brexit. A deal announced this month involves Cultural Investment Holdings Co taking over UK visual effects studio Framestore for around US$187 million.
A number of household names have been snapped up by the Chinese in recent years, such as House of Fraser, Weetabix and even West Brom football club.
This continuing trend illustrates the fact that the market is resilient, with new opportunities continuing to be pursued by the Chinese despite - or perhaps because of - the turmoil in the UK markets post-Brexit.
Is the UK set to become even more attractive?
Europe as a whole has become all -too aware of the increase in takeovers from China and many countries are determined to put up protectionist barriers in response. It looks likely that Germany may lead the way on this and that the rest of Europe will follow. Germany’s Economics Minister, Sigmar Gabriel, has been vocal against the selling of German firms to China and is even calling for the EU as a whole to introduce restrictions. Across the Atlantic, Donald Trump has been a vociferous supporter of trade barriers between the US and China, so if he lives up to his pre-election rhetoric, we could well see this policy implemented in 2017.
The UK’s open-door policy on foreign investment and our newly found independence from the European Union, is set to make sure we become even more popular with Chinese investors.
What does this mean for UK buyers?
The Cass Business School research gives us a valuable insight into the financial rewards that can result from a buyout of UK firms in certain categories. Prospective acquirers from the UK shouldn’t ignore the insight that smaller buyouts, especially in the consumer, real estate, and now healthcare, sectors are resulting in strong financial results for Chinese firms - particularly in the days following the deal’s announcement.
With Chinese investors expected to descend on the UK in even greater numbers in the coming years, it’s now time for UK buyers to get ahead of the game and make purchases in these categories.
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