February 19, 2017 / 11:21 PM / 8 months ago

Inbound China M&A takes flight on consumer promise

FILE PHOTO: People queue outside of a newly opened duty free shop in Shanghai, China, August 8, 2016. China Daily/via REUTERS/File Photo

HONG KONG (Reuters) - Overseas acquisitions by Chinese buyers are cooling after two record years as Beijing reins in capital outflows, but deals into China are on the rise, and new rules will make it easier for foreign buyers to tap China’s giant consumer potential.

Inbound M&A deals have already reached $7.1 billion so far in 2017, almost double the amount in the same period last year and are well on track to beat the 2016 total of $46 billion, while outbound deals tumbled more than 40 percent to $8.4 billion, Thomson Reuters data showed.

Deals in retail and consumer staples accounted for nearly half those early transactions, far outpacing real estate and financial deals, which usually dominate inbound M&A.

Belgian investment firm Verlinvest is ahead of the trend.

It set up a $300 million venture last year with Chinese state-owned conglomerate China Resources and has already deployed more than half of the funds.

Verlinvest, which manages funds for the founding families of Anheuser-Busch InBev (ABI.BR), is investing in minority and majority stakes in leading western brands so it can push them through China Resources’ distribution channels in China, said Nicholas Cator, who is responsible for the Asia business.

“We’re going to be focusing on those high-growth sectors that are based on consumer trends, like health-related food and beverage products, healthcare, education, cinema or entertainment, or anything linked to kind of cultural production and content,” he said.

Verlinvest’s joint venture in December bought an undisclosed stake in Oatly, a Swedish maker of dairy-free products, and plans to expand it into China, and in November it bought a majority stake in Red Sun Enterprise, which owns senior care homes in Shanghai and Nanjing.

LOOSER APPROVALS REGIME

The leadership in Beijing has long been trying to rebalance the economy away from infrastructure, heavy industry and export-led growth and towards domestic consumption, so in theory such investment should be welcome, but in practice foreign capital has fallen foul of barriers to entry.

That appears to be changing. After a trial in a few of its free-trade zones, China in October expanded to the entire country a new liberalization program.

Apart from a “negative list” of industries deemed too sensitive, foreign investments no longer need to go through a cumbersome approval system, and there has even been some loosening in the off-limits list.

“The direction China is going is that for most sectors, provided it’s not in the so-called negative list, where there would be additional scrutiny, the process for corporate establishment and changes including share transfers should be simpler,” said Tracy Wut, M&A partner at law firm Baker McKenzie in Hong Kong.

“From the recently amended negative list, there are further relaxations in certain sectors to which the government is trying to encourage foreign investments.”

CDIB Capital International Corp, part of Taiwanese financial group China Development Financial Holding (CDF) (2883.TW), is also seizing the opportunities.

Last August it invested 200 million yuan ($29.2 million) for a stake in outdoor sports retailer Tutwo (Xiamen) Outdoor Co Ltd, betting on a jump in demand for hiking, skiing and camping gear in China.

“Clearly there’s going to be more of a focus on domestic growth and consumption is one of the themes,” said Lionel de Saint-Exupery, president and CEO of CDIB. “Consumption is still relatively robust, but we’re not just seeking average growth, we’re seeking hyper growth and that you can see in new categories.”

The biggest fly in the ointment, according to David Cogman, a principal focusing on China at consulting firm McKinsey & Co, is the lofty valuations for Chinese assets.

Consumption and services companies listed in Shenzhen and Shanghai trade at about 30 times their earnings, compared with a multiple of 17 for similar companies trading in Hong Kong and about 20 for U.S.-listed companies, Thomson Reuters data shows.

“At the end of the day, particularly if you’re a fund looking across multiple markets, your investment committees still have to think where to put the capital and that’s hard to do with the current numbers you see in China,” he said.

For a Graphic on China's inbound and outbound M&A since 2000, click: here

Reporting by Elzio Barreto; Editing by Will Waterman

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