China takes the fetters off outbound investors

China is effectively removing the fetters for outbound investment, with a stroke making Chinese bidders more competitive in international M&A transactions.

If there are two words that are guaranteed to set the pulse of any M&A investment banker racing, those words are: “Chinese buyer”.

The fabled Chinese buyer is widely seen as the saviour of the desperate overseas corporate seller — with deep pockets, an insatiable appetite for foreign resources, brands and know-how, and sometimes an unfortunate reputation for being the dumb money at the table.

But the lengthy and complex PRC government approval process that any Chinese buyer had to navigate in order to consummate an overseas acquisition has meant that there were significant risks in any seller throwing in their lot with the Chinese bidder. In the case of a friendly bilateral negotiated transaction, or where there were no other obvious bidders waiting in the wings, this was fine.

But in an active competitive bidding situation or where a deal falling through would leave incumbent management awkwardly exposed (for example, leaving a previously stable company “in play” without a ready buyer), sellers would require Chinese bidders to pay hefty premiums for their bids to be accepted — and then take a deep breath and hope that the Chinese government approval process would come out in favour.

Of course, the other problem with the promise of a Chinese buyer was that there could always only be one of them. Any Chinese acquirer had to obtain the approval of the powerful National Development and Reform Commission, or NDRC, a modern-day remnant of the old planned economy. The NDRC's industrial planning policy mandate includes picking (or creating) winners among Chinese companies on an industry-by-industry basis — both domestically inside China and overseas. It has been common wisdom that the NDRC would prevent Chinese companies bidding up prices against one another for overseas assets, and ensure that only the company it regarded as the “right” Chinese bidder would receive approval to proceed.

All of these problems have been swept away with a PRC government announcement last week that, as of 8 May, NDRC approval will no longer be required for any outbound deal of US$1 billion or less. A simple filing for the record will suffice. Deals above US$1 billion, and deals in “sensitive countries, regions or sectors” will still need NDRC approval, and deals over US$2 billion will need to be submitted to China’s cabinet, the State Council, for approval. However, carte blanche for deals of up to US$1 billion leaves plenty of room to manoeuvre for mid-market deals, especially where a Chinese buyer may be taking a non-controlling or strategic stake.

With these new rules, China is effectively removing the fetters for outbound investment, with a stroke making Chinese bidders more competitive in international M&A transactions. This will be particularly helpful for privately-owned PRC companies, who have generally been regarded as having a less sure grasp of the government approval process than their state-owned brethren, and thus being an even more high risk bet for foreign sellers.

For Chinese companies seeking to do deals overseas, this will potentially save them real money by reducing the premium they have been paying to sellers by way of increased purchase prices or reverse break-up fees, to compensate the nervous sellers for the risk that the Chinese government approvals would not come through.

Perhaps more importantly for foreign companies, the new rules remove the mechanism which enabled the NDRC to pick their favourites, thereby opening up the possibility for genuine competition among Chinese bidders for the one target. This may ultimately lead to higher prices for foreign sellers.

Which means investment bankers may have real cause to celebrate: the days of the “Chinese buyers” — plural — may finally be upon us.

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