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2015-04-08 14:04:59
More European businesses are coming under Chinese ownership
Mar 28th 2015 | MILAN | From the print edition
ITALIAN industrial policy is now made in Beijing, lamented Romano Prodi, a former Italian prime minister, on March 23rd. His comment followed news the day before that China National Chemical Corporation (CNCC), a state-owned conglomerate, would buy Pirelli, an Italian tyremaker, for 7 billion ($7.7 billion). It will be the biggest Chinese investment in Italy so far, but just the latest in a string of acquisitions driven by China s growing appetite for Europe s brands and technology.
CNCC agreed with Pirelli s controlling shareholders to buy Camfin, a holding company which owns 26% of the tyremaker, as a first step before launching a takeover bid for the whole group. The deal is in some ways an outlier, not just because of its size but because its shareholder structure, which includes Rosneft, a Russian oil firm under American sanctions, ruled out many industrial partners. Yet it is also part of a trend that has seen China s investment in Italian businesses grow from almost nothing in 2008 to 6 billion last year, according to KPMG, an accounting firm.
That made China Italy s biggest source of foreign investment in 2014, and Italy the biggest beneficiary in Europe of Chinese investment after Britain. Chinese deals in Europe as a whole rose from $2 billion in 2010 to $18 billion in 2014, according to research by Baker & McKenzie and the Rhodium Group, a law firm and a research outfit (see chart).
Chinese firms are following an edict to acquire advanced technology and high-quality brands from abroad that the government laid down in its five-year plan of 2011. Until recently most outbound dealmaking was by state firms buying up raw materials. Now high value-added businesses are the main target, and private capital is flowing: in 2014 private Chinese firms accounted for 41% of deal value. Like Japan in the 1980s, China is cash-rich and ready to pay up for prized assets.
Europe is attractive because it has lots of businesses going cheap privatisations, cash-strapped firms and a weak euro provide ample opportunities and because it is open for business. In France and Italy an obsession with national ownership has been eroded by a need for foreign investment. Germans are proud that their firms are desired by the world s rising economic power. America, by contrast, is choosier about who buys its strategic assets.
In Britain, which has long been open to foreign ownership, Chinese firms have stakes in Thames Water and Heathrow airport. In France they have invested in Toulouse airport; in PSA Peugeot Citro n, a carmaker; and in Club Med, a resort operator. In Greece a Chinese firm runs part of the port of Piraeus. In Sweden Volvo, another carmaker, is also Chinese-owned. InFront, a Swiss firm that is a big owner of sports-broadcasting rights, has just been bought by a Chinese conglomerate. And in Italy, besides Pirelli, Chinese firms purchases range from Ferretti, a yachtbuilder, to Salov Group, an olive-oil producer, and stakes in Ansaldo Energia, a maker of gas turbines, and Ferragamo, a fashion house.
China s appetite for European assets, particularly in areas such as technology, food and property, will keep growing. Less clear is how well Chinese firms can manage their acquisitions. They are not as quick at learning this as they have hitherto been at copying foreign products, reckons Alberto Forchielli of Mandarin Capital Partners, a Sino-Italian private-equity fund. Many are buffoons when it comes to doing business in the West, he says. They tend to centralise decision-making in China, while failing to give directions to local managers, leaving the company in limbo. In cases where Chinese owners leave their foreign acquisitions managers largely to do their own thing, while helping them gain access to China s huge domestic market, things go better.
Some deals offer hope. Many scoffed at Geely s acquisition of Volvo in 2010. It took a while, but Volvo s sales last year hit a record 465,900 cars. The acquisition by Changsha Zoomlion of Cifa, an Italian maker of concrete pumps, ultimately led to Asian construction contracts that saved the firm. And Peugeot s deal with Dongfeng, in partnership with the French government, helped the firm return to profit in 2014; it is now selling more cars in China than in France.
Francesco Moccagatta of N+1 SYZ, an adviser on mergers and acquisitions, thinks Chinese managers are rapidly wising up. Their fluency in English has improved greatly over the past five years; they are increasingly using big Western investment banks to handle deals instead of doing things for themselves; and Chinese admissions to American executive MBA courses are rising. They re going to kick our arses, he predicts. Maurizio Castello of KPMG agrees that Chinese investors no longer stumble around like tourists, but says too few of them understand due diligence and the other processes in M&A deals.
There would be more Chinese purchases of European firms but for a gap in expectations. Chinese firms are aware that buying and turning round an ailing foreign business would be beyond them, and yet the family owners of the best-performing European businesses the ones the Chinese covet are fussy about whom they might sell to. If the Pirelli deal and others go well, that could help shift attitudes. If so, and if Chinese firms master the art of doing business in the West, Mr Moccagatta could be proved right.