Date
19 October 2017
Clarence T'ao, chief executive of BNP Paribas (China), expects a significant increase in outbound M&A deals by private Chinese firms in the coming years.
Clarence T'ao, chief executive of BNP Paribas (China), expects a significant increase in outbound M&A deals by private Chinese firms in the coming years.

BNP sees private firms driving next China M&A wave

Privately-owned Chinese firms are likely to be involved in more outbound mergers and acquisitions (M&A) deals in the coming years as the companies will try to diversify their businesses and build their brands overseas, a top executive of BNP Paribas said.

“We see a trend of increasing number of privately-owned enterprises (POEs) making M&A deals,” Clarence T’ao, chief executive of BNP Paribas (China) Ltd., told EJ Insight.

“Those deals from the POEs may be small in [terms of] the amount, but the number of deals should be significant,” he said in an interview, without giving a specific forecast for the expected growth in M&A transactions.

Chinese firms undertook 78 outbound M&A deals in the first half this year, down from 95 deals in the same period last year as many companies were focused on dealing with the problems in their domestic businesses, PricewaterhouseCoopers Ltd. (PwC) said in August.

The drop in overseas deals was also due to difficulties the enterprises faced in getting financing, the consultancy firm said, while adding that things would turn better in the second half this year and in 2014.

State-owned enterprise (SOE) investments in materials and resources were the big drivers of outbound deal values, whereas POEs looked to consumer products, brands, know-how and technologies that can be brought back and put to use in China, PwC said in an Aug. 29 statement.

“Chinese firms are likely to buy assets to help build brands, not only intangible brands but also business associated with brands,” said T’ao of BNP Paribas.

“As building a brand is not something that can be done over two months, six months or a year… when Chinese companies have the technical capability and strong presence in the domestic market, it makes sense for them to diversify to the international market,” he said, adding that deals are more likely to be sealed in mature markets, rather than in the emerging ones, in the short term.

An example of this is the recently completed acquisition deal of Shuanghui International Holdings Ltd. (000858.CN) for Smithfield Foods Inc., the world’s biggest pork processor and hog producer. The US$7.1 billion transaction marks the largest acquisition to date of a US company by a Chinese firm.

“For example, Shuanghui’s acquisition and Geely Automobile Holding’s (00175.HK) one earlier with Volvo Car Corp. are good cases of [Chinese firms] acquiring brands with solid businesses, T’ao said, noting “good cooperation in terms of technological exchanges and other things.”

Natural resources segment will continue play a big part in outbound M&As as China is the world’s biggest consumer of many raw materials, he said.

Leveraging the parent

“We mainly focus on helping cross border deals, that is helping Chinese firms buy foreign assets and vice versa,” T’ao said. “We can leverage on our parent company’s worldwide network to help Chinese firms secure finance once they buy assets in a particular country,” the BNP Paribas executive said.

“It is important that we not only provide investment and acquisition financing, [the buyers] also need a local bank in the country once the deal is completed to service daily requirements such as trade finance, money market loans as well as day-to-day banking services,” T’ao added.

“Over the past three to four years, many international banks have scaled back their presence and returned to focus on their home market, but in our case we have maintained the network,” he said.

HSBC Holdings plc (00005.HK) announced that five further bank branches will close, in an apparent resumption of its closure program, BBC News reported in mid-April. The bank has closed more than 200 branches in the UK over the last three years, and four so far in 2013. It is thought a further 20 closure announcements will be made before October, the report said.

BNP Paribas has four branches and a representative office in China while its parent has a presence in 78 countries. T’ao said the China office has no plan to expand the network at this moment.

“We would like to use our existing platform to expand our client base and enhance our product capability,” T’ao said, adding that his firm would be interested in participating in the domestic bond market and the renminbi internationalization if the government opens up the market for foreign banks.

In other comments, he said that BNP Paribas is interested in the potential opportunities arising from the Shanghai free trade zone. “We are closely analyzing” the regulatory developments in the zone, he said.

– Contact the reporter at [email protected]

RC 

    Ayishah Ma is a financial reporter on Greater China issues.

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