TORONTO, September 29, 2011 — Canadian entities have announced $1.42 billion worth of acquisitions in China over the last nine months, a 158% increase over annual 2010 dollars volumes, says PwC’s latest M&A report to clients, the Capital Markets Flash. This upward trend outpaced the broader Canadian M&A market over the same period, where M&A dollar volumes remained 5% higher than 2010 and 33% less than the 2007 peak.
aggregate annual deal values at the height of the global M&A boom in 2007. Canadian buyers have moved off the sidelines to pursue strategic acquisitions with a view to the long-term.”
“This is, however, an isolated rally,” says Knibutat, referring to four large transactions led by Canadian giants Power Corporation of Canada, The Bank of Nova Scotia, CPP Investment Board and Bank of Montreal which announced $1.3 billion worth of acquisitions in China year-to-date—representative of 98% of deal value. “Each of these deals was supported by sound long-term rationale and was highly strategic to the acquirer,” the report says.
By deal value, Canadian dealmakers continue to be outpaced by their US counterparts, who have announced $4.7 billion in China-bound acquisitions year-to-date.
“It’s not just the numbers that are different,” notes Knibutat, “Buyers from opposite sides of the border have approached China in dramatically different ways.”
The report highlights that, since 2007, US buyers have hailed from both the public and private markets across a wide range of industry sectors. These buyers are targeting niche emerging (mainland) Chinese markets. In contrast, the majority of China-bound Canadian buyers were “blue chip” financial, real estate and mining entities. Canadian buyers also typically preferred well-established targets in the more “westernized” Hong Kong (as opposed to mainland China).
Notably absent from the Canadian buyer universe was private equity.
“Canadian funds have taken a cautious approach to China,” says Knibutat. “By and large, Canadian funds prefer to penetrate China via investment into funds of funds or co-investing alongside a US lead (as opposed to direct investment).”
The PwC report notes that some analysts are suggesting recent regulatory reforms have encouraged a plethora of yuan-denominated fundraising activity in China. Some argue that there may be a surplus of capital chasing Chinese deals. “In light of recent comments about fundraising levels, the Canadian private equity approach, prudent, but opportunistic, appears to be one that is well thought out and effective,” says Knibutat.
During the last decade, Chinese entities have been significantly more acquisitive in Canada than vice-versa. In fact, at the height of the global M&A boom in 2007, the value of Chinese acquisitions in Canada was nearly 28 times the value of Canadian acquisitions in China. “Four deals do not a trend make,” notes Knibutat.
Chinese authorities have been explicit in their 12th five-year plan that acquisitions of industrial know-how, technology and consumer brands will be a vital ingredient to the success of rebalancing the Chinese economy. This new type of buy side activity, coupled with continued resource investments, will mean that inbound deal volumes from China will likely outpace outbound volumes for some time.
Says Knibutat in the report: “We would suggest most Canadian entities to continue following a cautious but calculated approach to China-bound acquisitions. Markets are questioning the trajectory of growth in China, not necessarily the growth story itself. Canadians would be well advised to consider such risk-mitigating strategies as the ‘global joint venture model’: Chinese-Canadian partnerships that offer each player a mutual advantage in working together on a global basis, not necessarily driven by acquiring China-exposure only.”
Here is a link to the full report, www.pwc.com/ca/cmf which includes an information supplement about the types of deal structures that Canadians can utilize to complete acquisitions in China.
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1 Source: Kennedy;”Business Advisory Services Marketplace 2009-2011”; ©BNA Subsidiaries, LLC. Reproduced under license.
2 Source: Acquisitions Monthly Awards 2010