New China M&A Rules Worry Foreign Dealmakers

HONG KONG (Reuters) – Foreign dealmakers are worried that Beijing’s recent move to encourage Chinese banks to lend money to boost domestic mergers and takeovers will make winning deal mandates in China even harder next year.

Chinese banks have long been barred from offering more sophisticated financial tools such as equity-linked loans or convertible bonds to finance takeovers within China.

But in a surprise policy shift earlier this month, Beijing said it would allow its banks to lend money to Chinese enterprises to buy smaller domestic rivals, one of a number of measures announced to promote consolidation and economic growth.

In the past, some major Chinese companies have been supported by big state-owned banks for funding large, high-profile offshore M&A deals such as Lenovo Group’s acquisition of IBM’s PC arm in 2005 for US$1.25bn.

But until now, Chinese lenders have been prevented from offering such services at home.

Armed with a war chest of US$2 trn in personal savings, Chinese banks are expected to begin arranging financing for such deals early next year.

That’s worried some foreign dealmakers, who say they will be disadvantaged when they have to compete with big Chinese funds.

Earlier this year, US buyout giant Carlyle Group finally walked away from three years of negotiations to buy Xugong, China’s top construction equipment maker, after running into bureaucratic obstacles.

“In a case like Xugong, I think in the future the government can just pick a big Chinese firm and ask it to restructure Xugong with the support of the new M&A loan policy without letting Carlyle or someone else outside China even bid for it,” said a foreign dealmaker with investment experience in China.

LEVEL PLAYING FIELD?

Already, foreign dealmakers, in particular private capital funds, often complain about local protectionism, opaque rules and a long wait for deal approvals in China.

While some foreign dealmakers are concerned, Beijing sees the latest move as levelling the playing field.

“From the regulator’s perspective, the aim of providing M&A loans is to create a fair environment for competition for deals in China,” said Cheng Binhong, head of corporate restructuring and M&A division of Industrial and Commercial Bank of China Ltd, China’s biggest lender.

“In the past, Chinese enterprises had to face some negative impacts due to a lack of such financing tools for M&As when competing with foreign investors for deals,” said Cheng, who is also a member of China’s banking regulator’s special committee, which drafted the new M&A loan rules.

The lifting of a ban on M&A loans complements Beijing’s 4 trillion yuan (US$585.3bn) economic stimulus plan, which the government announced in November in sweeping efforts to sustain economic growth despite the unfolding global financial crisis.

TIGHT CREDIT

New local M&A loan services are good news for Chinese entrepreneurs who have lobbied the government for years to expand the range of financing options available to them.

The need has grown as the credit crisis locks up access to funding around the world.

Globally, private equity firms such as Carlyle and Kohlberg Kravis Roberts & Co have increasingly pursued all-cash deals as Western banks like Citigroup Inc and HSBC Holdings Plc have pulled back on corporate lending amid the credit crisis.

Maurice Hoo, a lawyer specialising in global private equity investments in China with law firm Paul Hastings, said the new loan policy could boost domestic industry consolidation, especially in sectors favoured by Beijing such as clean energy.

“It won’t mean an overnight move into leveraged buyouts, but given that companies have less access to capital markets these days, loans can provide the capital that a company will need to build itself into an industry leader,” Hoo said.

“The Chinese government has always been focused on domestic consolidation and building national leaders to compete on a global basis — these guidelines should give Chinese companies an important tool,” he added.

NO RUSH

But in spite of central government support, domestic banks may be wary of financing M&As due to the poor market environment and general lack of expertise, China M&A experts say.

Kenneth Zhou, a lawyer specialising in China M&A rules with law firm Wilmer Hale, said Chinese banks had to take some time to get prepared for the new M&A loan services by hiring experts in these areas, who can strengthen risk control of the business.

“My feeling is that probably the appetite isn’t that high,” said Chris Gradel, a Hong Kong-based managing partner of Pacific Alliance Group, which runs $1.6 billion in hedge funds.

“A slowing economy and falling asset prices isn’t necessarily the environment where banks are most excited to lend.” ($1=6.834 Yuan)

By George Chen
(Additional reporting by Samuel Shen in SHANGHAI and Tony Munroe in HONG KONG; Editing by Lincoln Feast)