1.
Dissecting the Current Merger Wave in
China and the Implications for EU
Xiaoyang Li
Assistant Professor of Finance
Cheung Kong Graduate School of Business
Sixth EU Asia Top Economist Round Table
EU China Economic and Finance Forum
Beijing, 17 November 2014

2.
2
Booming Domestic M&As

3.
Burgeoning Cross Border Acquisitions
3

4.
Regional Decomposition (2000-2014)
4

5.
5
Mega Mergers by Chinese Firms

6.
6
New Features of Current Merger Wave
1) BAT’s (Baidu, Alibaba, and Tencent) expansion through acquisitions
2) Hybrid ownership reforms offer private enterprises with golden
opportunities
3) More acquirers are private rather than state-owned enterprises
4) More and more firms seek targets overseas
5) Most targets are in different industries from acquirers
6) Acquisition becomes public-listed companies’ key value enhancing tool and
becomes the main exit channel for VC/PE
7) Many buyout funds are assisting
▪ Investment banks/Financial advisors
▪ PE
▪ PE+Listed Companies
- Combining primary and secondary markets

7.
7
Forces behind Recent Merger Waves
National
Industrial
and
Financial
Policies
Merger &
Acquisition
RMB and
Capital
Market
Globalization
Technology
and
Consumption
Upgrading
MBO and
Hybrid
Ownership
Reforms
Banks, PE,
and Buyout
Funds

8.
8
Macro Policies
• In 2008, the State Council’s Nine Measures: #5: Create new financing channels
through M&A loans, REITs, Private Equity, and regulated informal lending
• In December 2008, CBRC’s Guidelines on Commercial Banks’ M&A Loans
• In September 2010, the State Council’s Opinions on Promoting Enterprise’s M&As
• CSRC promulgates “Provisions on the Material Asset Reorganization and Ancillary
Financing of Listed Companies”
• In January 2013, 12 ministries promulgated “Guidelines on Promoting Important
Sectors’ M&As” set priorities on Steel, Cement, Auto, Ship, Aluminum, Rare Earth,
Information, Pharmaceutical, and Agriculture sectors
• 07/14，People’s Bank of China loosens restrictions on individual/firm investing
abroad
National
Industrial and
Financial
Policies

9.
9
Reviving State-Owned Sector
• Capital-output efficiency
Year 2003 2004 2005 2006 2007 2008 2009 2010
Capital
%
50.1% 48.8% 48.9% 48.5% 52.0% 53.3% 51.6% 41.9%
Output
%
37.5% 35.2% 33.3% 31.2% 29.5% 28.4% 26.7% 26.6%
• Over capacity in some sectors
21% 21%
28%
35%
93% 95%
Steel Automobile Cement Electrolyti Aluminum Glass Solar Battery

10.
10
SinoPec’s Ownership Reform
MBO and
Hybrid
Ownership
Reforms
• Who are behind the curtain?
1. 三洲隆微实业
2. BoHai industrial private equity
3. Pacific Insurance
4. CICC
5. HOPU (厚朴投资)
6. Haier
7. ICBC
8. Huaxia mutual fund
9. Huaxia mutual fund
10. Harvest mutual fund
11. Harvest mutual fund
12. RRJ Capital
13.国家开发投资公司
14. Fosun (复星)
15. A PE
16. CICC
17. Tencent
18. A life insurance company
19. CICC
20. 新奥控股
21. Cinda AMC (信达资产管理)
22. Huiyuan
23. China Life
24. China Tobacco
25. China Postal Insurance

11.
11
VC/PE Investments vs. IPO
Banks, PE,
and Buyout
Funds

12.
12
VC/PE Investments vs. IPO
Banks, PE,
and Buyout
Funds

13.
13
Hony Capital Eats Pizza
Banks, PE,
and Buyout
Funds

14.
14
Deal Synopsis
Banks, PE,
and Buyout
Funds
• July, Hony Capital (investment arm of Lenovo) announced to
buy Pizza Express, for £900 million (¥9.55 billion)
– Largest acquisition in Europe in restaurant industry
– Highly levered buyout (LBO) with about £200 million rated below
investment grade (by Moody’s)
• Pizza Express was founded in London in 1965, famous for
Italian Pizzas
• 22 stores in Greater China (1 in Beijing, 9 in Shanghai, 12 in
Hong Kong)
• Hony capital is also very active in SOE privatization

15.
15
Bright Food Acquires Weetabix
• Bright Food group, a state-owned conglomerate of
food/liquor/supermarkets, one of Shanghai’s chosen champion
• Has failed to acquire United Biscuits, Yoplait before
• Acquired Weetabix in 2012 from Lion capital
– £ 1.2 billion using bank loans, bridge loans, bonds

16.
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Another PE Deal
Banks, PE,
and Buyout
Funds
• April, 2012, Wuhan WuTong GuiGuTianTang used €32.45
million (~¥284 million) acquire Steyr Motors in Austria
• November 5, 2012, Boying investment (博盈投资000760.SZ)
announced to conduct a private-placement of 314 million shares
to 6 institutions at ¥4.77 per share to raise ¥1.5 billion
– ¥ 500 million to buy WuTong GuiGuTianTang’s 100% shares; ¥ 300
million to invest more in Steyr Motors; ¥ 300 million for R&D; rest for
liquid capital
▪ 5 PEs participated, including GuiGuTianTang

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Common Traits
• Chinese companies seek brand and technology to upgrade
consumer discretionary goods and machinery manufacturing
• EU targets tend to exhibit stagnant growth and high leverage
• China buyers offer capital and market growth prospect
• State champions, private equities, and private enterprises are all
active

18.
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Smile Curve
Consolidation
Resources &
Technology
Branding &
Channels
Upstrea1m8 Downstream
Value
Manufacture
China Market

19.
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Conclusions
• Forces driving China’s merger waves are brewing
▪ Government deregulation
▪ Technology disruption
▪ Financial innovation
▪ Economy globalization
▪ State Privatization
▪ PE/Buyout funds
• Mergers and acquisitions are invigorating the Chinese economy!
• Two-way street for China-EU M&As!

20.
Thank you!
xyli@ckgsb.edu.cn