15 January 2016

Mammoth deals amid China’s economic woes

Often described as being as volatile as a casino, China’s stock market began to experience a growing bubble in H2 2014. This led to Shanghai’s SSE Composite Index skyrocketing 152 per cent between 1st July 2014 and 12th June 2015, reaching its highest level since 2007.

Given the seemingly ever-soaring share prices, perhaps it was not difficult to foresee an end to this investor optimism. Sparked by concerns over China’s slowing economic growth, the index plunged 31 per cent between 12th June (its highest point during the bull market) and the end of 2015.

However, the decline does not seem to have dampened investor appetite too much as a number of large deals targeting Chinese companies were announced in H2 2015, with a capital increase by Tongfang Guoxin being one of the most significant in terms of deal value, according to Zephyr, the M&A database published by Bureau van Dijk.

In November, the Tsinghua University controlled chip maker agreed to raise about CNY 80 billion (USD 12 billion) in the largest Chinese private placing of the year. Buyers include Tongfang’s employees, as well as other affiliates indirectly held by the university.  Shenzhen SME Board-listed Tongfang will use the proceeds to invest in a new semiconductor plant, in line with its aim of becoming the world’s third largest chip manufacturer.

Another notable deal was signed off about two months before this placing; Shanghai Stock Exchange-listed China Yangtze Power agreed to pay CNY 80 billion for Three Gorges Jinsha River Chuanyun Hydropower Development, a Chengdu-based hydro power operator, in line with expansion plans. To finance this transaction, the acquiror announced a simultaneous share issue involving participants such as China Life Insurance and Ping An. 

Meanwhile, amid the market turmoil, low oil prices prompted companies in China to consolidate their businesses, with one of the most notable instance being state-owned PetroChina’s restructuring, according to Zephyr. Last month, the oil and gas company announced its intention to bundle together its subsidiaries through three separate deals with a combined value of around CNY 281 billion, highlighting PetroChina’s effort to divest non-core assets and slash capital spending. These entities, also partially held by firms such as Baoshan Iron & Steel and Youngor Group, will be transferred to a new unit set up by PetroChina. Additionally, the other asset holders will receive some stock in the merged unit upon completion.

Overall, according to Zephyr, total deal value in the Greater China region stood at a whopping USD 1,215 billion in 2015, which is the largest year on record and almost double the USD 639,150 million injected into companies based in the region in 2014.

As 2016 gets underway, the world’s second-largest economy has been met with news of a slowdown in its manufacturing activity. As a result, the SSE Composite Index has fallen by a further 11 per cent from the last trading day of 2015 through 13th January. With a gloomy economic outlook and talks about a possible financial crisis in China, it will be interesting to see how the region will fare in the coming year in terms of M&A activity. Considering the government’s desperate attempt to restructure state-owned enterprises during this tough time, perhaps we could see even more mega deals popping up again in the region this year.  

© Zephyr