Samson Lo, head of Asia M&A for UBS, remains
bullish about the Chinese M&A market as financial sponsors,
SOE restructuring and capital controls continue to shape
Samson Lo, head of Asia M&A for UBS, looks beyond
the figures at the dynamics in the China and Hong Kong markets.
The dominating headlines about Chinese M&A have been the
slowdown in outbound deals, but this masks some interesting
trends beyond the numbers that may have longer term resonance.
For example, the restructuring of Chinese state-owned
enterprises, at times explicitly to create entities that can
compete on a global field. China Cosco Shipping being one
example of this. Although flashy outbound deals may be slowing,
corporate activity is not and nor are the prospects for
outbound. The much-discussed capital controls have also had an
interesting affect on Chinese private equity funds, which find
themselves in the position of being able to offer strategics
consortium arrangements in which the latter can benefit from
offshore financing to avoid local controls. Meanwhile, the
capital controls may be beginning to relax.
What is your reading of the M&A market in China and
Hong Kong right now? We keep hearing of a slowdown in outbound
investment from China, is that really the story to focus
Broadly, we have seen two types of deals in the Chinese
M&A market: domestic restructuring and outbound
Domestic restructuring has made a comeback over the last 12
months. There isn't any particular catalyst for it but the
Chinese government has never deviated from its ambition to
reform some of the state-owned entities (SOEs). SOE reform was
particularly active between 2014 and 2015; it then quietened
down and now the SOEs are back. For example, UBS advised on
recent restructurings by China Merchants Group and China Cosco
Corporation. Typically, SOEs have sought to merge subsidiaries
and streamline their businesses by consolidating assets and we
expect this trend to continue. There are persistent rumours of
large mergers in the offing, most notably, of a tie-up between
ChemChina and Sinochem.
There are persistent rumours of large mergers in the
offing, most notably, of a tie-up between ChemChina and
Speculation about a slowdown in outbound acquisitions has
been in the market for almost one and a half years now, but, in
my view, as long as the target is strategic, demand has
remained strong. Chinese companies continue to pursue these
targets and are structuring deals both to get around capital
controls and to cope with the lengthy regulatory approval
processes. Although capital controls have been in place since
November 2016, over that period we advised China Investment
Corporation (CIC) on its €12.25 billion acquisition of
Europe-based logistics company Logicor; a consortium of five
Chinese companies in its S$15.9 billion ($12 billion)
acquisition of Singapore-listed Global Logistic Properties
(GLP); and China Cosco Shipping in its $6.4 billion acquisition
of Orient Overseas International (a cross-border deal with an
SOE buying into a Hong Kong-listed company). While there has
been a slowdown, especially on the part of private enterprises,
activity among SOEs continues to be robust. Nonetheless, the
size of deals has tended to decline and we are seeing more
deals with a sweet spot of between $1 billion and $2
Some private enterprises with little access to offshore
funding can get stuck in lengthy regulatory processes but the
SOEs continue to be strong in outbound because they have ready
access to government funding.
At the same time, structuring has become more innovative.
For example, Chinese strategics are, increasingly, willing to
form consortia with Chinese private equity (PE) funds. We've
seen companies team up with not just one but a number of
Chinese sponsors to help circumvent capital controls, meet
funding requirements, and secure foreign currency approval. It
also seems like capital controls are slowly beginning to
How have capital controls influenced the way deals are
being done and the onshore/offshore structures being used?
Capital controls are most onerous for companies with all
their cash onshore. The approval process can take a long time;
for example, to get the equivalent of $1 billion in onshore
RMB, offshore, approvals are likely to come in batches, which
has implications for the prospective deal's completion time. As
a result, many onshore companies turn to international banks to
provide the SBLC (standby letter of credit), which involves
taking onshore cash as a collateral for an offshore bridge
financing. But it is important to note that such arrangements
are well established and pre-date capital controls. Onshore
companies are also willing to team up with Chinese sponsors,
which are comfortable with onshore cash as equity as well as
with being a shareholder in an A-share listed company. Under
such arrangements, the PE funds receive collateral or
guaranteed returns, in return for providing offshore
What will be the likely impact of the National Development
and Reform Commission (NDRC)'s Administrative Measures on
Enterprise Outbound Investment?
The measures are aimed at a specific group of industries
that are not encouraged by the Chinese government. They
include: football clubs, the entertainment/media-related
industries and property. But most deals we've been looking at
have been strategic – you just don't see many entities
looking to buy a football club in Europe any more. The measures
are unlikely to have much effect deal flow in the industrial,
tourism or logistics sectors. There have also been changes to
eliminate the so-called "roadpath" system, an informal process
for small deals that preceded the formal approval process. In
short, if a company got through the roadpath system the deal
was to all intents and purposes approved. Now, all deals need
formal approval. But Chinese outbound deals are all quite
sizeable and subject to formal approvals anyway, so removing
this conduit does not affect timings or deal flow. The
Administrative Measures have also made guidelines for the
outbound market more transparent, especially in terms of deal
size, approvals etc. It is more clear-cut and the new measures
allow for online applications which enhances transparency.
What implications does the restructuring of SOEs have and
what is behind the restructuring process?
Restructuring has made the SOEs more efficient. Many of the
large SOEs are multiple-listed entities; Hong Kong-listed,
A-share and even B-share, which means that often their
subsidiaries are competing with each other. Merging select
subsidiaries helps streamline the business and reduce overlaps
and competition between subsidiaries. At the same time, some
mergers were designed to create national champions, for
example, China Cosco Shipping. China Cosco Shipping was formed
by a series of asset restructurings to create a standalone
shipping giant that can compete globally and be a consolidator.
The company is now capable of competing against other shipping
giants around the world.
How have financial investors been influencing the Chinese
They've been both a facilitator and a threat to Chinese
strategics. They act as a facilitator when a Chinese strategic
is short on funding or is getting caught on capital controls;
sponsors are an alternative source of financing. They are also
user-friendly. Many are Chinese PE funds, so they understand
the culture and how to get things done. They can also help
carry the strategic, especially the one-timer, through a
competitive process. At the same time, they are a threat, and
there have been situations where Chinese investors have not
needed to team up with strategics because they have the
in-house knowledge to compete directly with them. With the
flush of capital in the market, Chinese PE funds have also been
driving up valuations. For example, funds have been very active
in the education and tourism sectors, competing with strategics
as well as against other PE funds. Ultimately, the winner pays
above and beyond to beat other financial investors. They have
reset the valuation benchmarks in some sectors.
The Hong Kong market has also been interesting and we've
seen Chinese SOEs buying out Hong Kong competitors or PE funds
taking Hong Kong-listed companies private. Hong Kong-listed
companies are trading at very low multiples and, for many,
their valuation relative to A-share listed companies means that
they are unable to compete. The Hong Kong market is rife with
privatisations and sales to SOEs. Another theme is the
conglomerate carve-out. Many Hong Kong-based conglomerates are
more willing to divest than the Chinese SOEs and they are
divesting non-core assets to external investors. This has been
going on over the past couple of years.
What trends have you seen in inbound M&A into China?
Have there been changes to foreign investment rules?
You just don't see a lot of inbound these days. The market
has moved from the one of many years ago where foreign
companies were seeking to make inroads into China. Foreign
investors have been perturbed by a couple of factors. In some
cases, the companies acquired were not what they seemed and
investors have been burnt. In addition, in some sectors, such
as pharmaceuticals, the Chinese government favoured incumbent
Chinese companies and put up hurdles to foreign companies. A
number of Western conglomerates including McDonalds China, Yum!
China, and office supplier Staples, have or are seeking to
divest from China inbound investments are now more likely to be
via joint-ventures (JV) with an incumbent local company.
Foreign investors are willing to take a minority position
because it offers an element of safety.
As for inbound investment rules, there are catalogues in
certain areas, for example in the automotive sector. For a
Chinese international car manufacturer, the catalogue says that
they cannot have more than two international JVs. That
continues to be the case. There may have been minor tweaks in
some catalogues but, broadly, some restrictions remain.
What is your outlook for the next 12 months?
In 2017, the focus was on falling deal flow, and the media
was reporting a 35% decline from 2016. But if you look behind
the scenes and discount some of the large and one-off
transactions, like Syngenta, the decline was really about 15%.
In terms of volumes, last year was still the second-highest for
Chinese outbound M&A. In 2018, China outbound is likely to
remain at the same level as 2017, but whether it will be the
second or the third-highest we don't yet know. China may be
more cautious towards the US but Europe will continue to be
very active. Chinese SOEs will also continue to be very active,
whether via asset restructurings or mergers.
Head of Asia M&A, UBS
Hong Kong, China
T: 852 2971 7121
Samson Lo is currently head of Asia M&A for UBS.
Lo joined UBS in 2010 and is primarily responsible for
M&A origination and execution in the Asia Pacific
region, with a focus in Greater China across many
industry sectors. From 2007-2010, Lo was a member of
Merrill Lynch Asia Pacific's investment banking team
for Hong Kong-based corporations and Macau-based gaming
companies. From 2000-2007, Lo was a member of Lehman
Brothers' M&A group in New York and led executions
for transactions across many industry sectors.
Notable transactions in Asia Pacific include PAG's
unsolicited offer for Yingde Gases for $2.6 billion;
China Mengniu Dairy's acquisition of China Modern Dairy
for up to $1.1 billion; LafargeHolcim's Fr1.1 billion
($1.1 billion) sale of a controlling stake in Sichuan
Shuangma Cement to IDG Capital; and sale of Nirvana
Asia to CVC for $1 billion.
Lo graduated magna cum laude from the University of
Pennsylvania's management & technology programme,
with joint undergraduate degrees from Wharton School
and School of Engineering & Applied Sciences.