Thursday, June 2, 2016

CHINA'S LATEST EXPORT IS BROKEN DEALS

China’s Latest Export: Broken Deals

String of unwound overseas acquisition bids highlights contradictions Beijing faces as it seeks global clout for businesses


Anbang Insurance Group, based in Beijing, recently pulled back from two overseas acquisition attempts and has hit snags in a third one. ENLARGE
Anbang Insurance Group, based in Beijing, recently pulled back from two overseas acquisition attempts and has hit snags in a third one. Photo: rolex dela pena/European Pressphoto Agency
China’s global deal-making boom is coming undone.
The mystery-shrouded Anbang Insurance Group Co. is leading the way. It moved a step closer to hitting the trifecta of broken deals this week, just days after a major Chinese construction-equipment maker bailed on its bid to buy U.S. crane maker Terex Corp. TEX 0.00 %
Announced overseas deals by Chinese companies topped 2015’s record before this year was half over, which would make China the world’s biggest buyer of foreign companies for the first time ever, according to Dealogic. Chinese companies have also failed to close on more deals than ever before, according to Dealogic.
It’s not a coincidence that the boom in Chinese overseas deal making occurred while businesses and individuals were pouring cash overseas, either to avoid an expected depreciation of the yuan or just to get assets out of the reach of Beijing. And the recent failures have happened while Beijing acts to stem the flow of these funds.
That is just part of the weirdness that surrounds many of these deals, and their demise. Another is the opaque nature of the companies involved and the government owners or regulators that determine what is and isn’t allowed. Last are the reasons behind the deals, which have foreign regulators on edge.
The latest deal on the ropes is Anbang’s planned $1.57 billion acquisition of U.S. insurer Fidelity & Guaranty Life, FGL -3.83 % one of the biggest sellers of fixed indexed annuities. Regulators in the U.S. have demanded but haven’t gotten detailed financial information from Anbang. Fidelity says it expects Anbang will try again to get the deal approved.
It isn’t surprising that the company hasn’t provided the requested information. Efforts to figure out Anbang’s corporate structure or where its cash came from have so far failed to yield much clarity. This is the third proposed Anbang deal to run into trouble. First was its effort to buy Starwood Hotels & Resorts Worldwide Inc. HOT 1.24 % After bidding up the price and threatening a rival deal, Anbang pulled out suddenly with little explanation.

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Then came its effort to buy a group of Canadian hotels. After weeks of negotiating, Anbang told Toronto-based InnVest Real Estate Investment Trust IVRVF 0.38 % it was no longer interested. Anbang’s chief negotiator then helpfully introduced the executives to another possible buyer, this one with an even more obscure structure than Anbang. The deal was signed May 10.
Days before the latest Anbang unwind, Zoomlion, one of China’s biggest construction-equipment makers, pulled out of a $3.4 billion deal to buy Terex after failing to come up with a fully financed, binding proposal, Terex said.
Despite the headlines, China succeeds in most of its deals. Of the 50 biggest overseas deals it has struck since the start of 2015, just five have been formally withdrawn while 19 are still pending. Companies globally are pulling out of deals at a record pace this year, with U.S. companies accounting for the top three scuttled mergers. But in those cases, the deals were canceled over objections by regulators or changes in tax laws, not unilateral decisions by the buyers.
The failed deals are an embarrassment to Beijing, which wants its businesses and financial system to wield the same clout globally as its huge economy. They also highlight the contradictions in China that will keep that from happening.
The most obvious is the Chinese currency, the yuan. Chinese officials know that a weaker yuan will boost the country’s economy, but signs of weakness have at times led to capital flight. In the past month, though, Beijing has been able to both devalue the currency to its lowest level in five years and stem capital flight. It’s unclear if the busted deals were casualties of that effort.
Another contradiction lies in China’s opaque corporate and regulatory structures. Skepticism runs so high that foreign targets of Chinese companies such as U.S. computer distributor Ingram Micro Inc. IM 0.72 % have recently forced their bidders to put down deposits that sit outside of China in case the deals don’t close.
Then there’s the tight link between Chinese companies and the government. Beijing wants to build important industries such as semiconductors and agriculture via acquisitions, which sends a clear message to foreign governments that the deals aren’t being done for purely economic reasons.
At least one chip deal failed because of regulatory concerns. The big test for now is China National Chemical Corp.’s $43 billion offer for Swiss seed maker Syngenta AG SYT 0.90 % , which would be by far the biggest overseas Chinese acquisition ever. Already there is opposition in the U.S.
That deal is especially important because it fits with China’s need to acquire sophisticated expertise in areas such as tech and health care. Other deals like Terex might have helped China shift some of its excess capacity overseas.
Failed acquisitions make targets and regulators more skeptical. Combined with a weaker yuan, deal making for Chinese companies will only get tougher.
Write to Ken Brown at ken.brown@wsj.com