Two major new deals are showing why China’s credit remains low when it comes to global M&A.
Chinese firms are hobbled by factors like lack of experience, unknown brands and a growing realization that Beijing may not provide bailouts if their business runs into trouble.
The first deal comes in the high-tech chip sector.
The credit rating of Singaporean heavyweight Stats ChipPac Ltd. took a hit after a Chinese firm bought the company.
In the second deal, leading Chinese hotelier Shanghai Jin Jiang International Hotels (Group) Co. Ltd. (02006.HK) was snubbed in its bid for US hotel giant Starwood Hotels & Resorts Worldwide Inc., operator of the Sheraton and Westin Brands.
Neither of these developments comes as a big surprise, but they do reflect the very real challenges that Chinese companies will face as they try to become players on the global M&A scene.
Many of these Chinese names have access to big cash from their state-run connections, though converting that to foreign currency and getting necessary government approvals is sometimes challenging.
More importantly, these firms have little or no track record at running a major global company, which makes creditors wary and other more experienced suitors often look more attractive.
Creditors are already feeling quite wary following the recent sale of Stats ChipPac, Southeast Asia’s leading chip assembler, to Jiangsu Changjiang Electronics Technology Co.
Stats ChipPac was previously owned by Singaporean sovereign wealth fund Temasek, which helped the company borrow money at very attractive rates owing to its own stellar rating.
But the media is reporting that following recent completion of the sale, which was first disclosed late last year, Stats ChipPac is certain to see its rating downgraded sharply as it tries to refinance US$400 million of its current debt.
Temasek’s exit after the sale closed last month has already triggered two downgrades to Stats ChipPac’s credit ratings by Standard & Poor’s, meaning it will have to pay significantly higher interest rates when it issues the new bonds.
Starwood opts for Marriott
Next, there’s Jin Jiang, which has been on a global buying spree.
The media reported last month that it planned to bid for Starwood.
Jin Jiang was actually competing with Chinese sovereign wealth fund China Investment Corp. in bidding for Starwood.
Beijing wanted to choose just one domestic company to avoid too much competition.
The biggest competition didn’t come from other Chinese buyers but instead from big global names that were also interested in Starwood, the medium size of which was making it hard for the firm to compete with larger, better-run operators.
Reports of Jin Jiang’s interest were quickly followed by others saying US operator Hyatt Hotels Corp. was also interested.
Now Starwood has just announced a formal deal to sell itself to global giant Marriott International Inc. for US$12.2 billion, creating the world’s largest hotel operator.
While Starwood certainly would have been a big bite to swallow, Jin Jiang does have some experience with major global M&A.
Its biggest deal came about a year ago, when it paid 1.2 billion euros (US$1.3 billion) for Louvre Hotels Group, Europe’s second largest hotel operator but clearly a second-tier player.
Perhaps not coincidentally, Jin Jiang bought Louvre from Starwood affiliate Starwood Capital Group, which probably established the relationship behind this latest bid for the US hotel operator.
At the end of the day, you really can’t blame investors in either of these instances.
If I were lending money to Stats ChipPac a year ago, I would have felt far more secure about getting repaid knowing that the company was owned by Temasek rather than an obscure name like Jiangsu Changjiang Electronics.
Likewise, a premier name like Marriott will be far more likely to help revive Starwood’s fading fortunes than an unknown name like Jin Jiang, even though Jin Jiang might have been prepared to pay more for the company.
This kind of credibility gap will continue to hamstring Chinese companies in the M&A market for premier global assets for at least the next 5-10 years, and only time and experience will improve their position.
In the meantime, Chinese buyers will have to settle for second-tier assets like Louvre Hotels and Stats ChipPac.
Bottom line: Chinese buyers will lose out to world-class rivals in bidding for top global M&A targets over the next 5-10 years, and credit ratings for the second-tier assets they do acquire will fall after ownership changes.
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