Industrials & Chemicals Sector Comment – April 2015

Date

As has been widely predicted, the Chinese appetite for investments in Europe is reaching a new high. In order to supplement the country’s growing demand for energy, to date the focus for Chinese investors has largely been on Western resource-focused businesses. Now both State-owned and privately-owned Chinese groups are turning to acquisitions and investments in other sectors, with industrial markets being a key focus of activity.

The most recent transactions demonstrate quite clearly that Chinese industrials groups are seeking to acquire European technologies in order to make themselves more competitive, as well as brands which would raise their own profile. The last month alone has seen Chinese investment fund GSR Ventures pay €3.1bn for an 80.1% stake in Lumileds Holdings BV, the combined LED components and automotive lighting business of Royal Philips Electronics NV. At the same time, China National Chemical Corp (ChemChina) has agreed a deal to acquire tyre manufacturer Pirelli SpA for €7.2bn. These transactions build on the 2014 acquisitions of a 40% stake in vehicle manufacturer PSA Peugeot Citroen SA by Dongfeng Motor group Ltd for €3.9bn and Shanghai Electric Group Ltd’s €520m acquisition of gas turbine manufacturer Ansaldo Energia SpA. Also last year, Beijing Construction & Engineering Group Ltd (BCEG) and Industrial & Commercial Bank of China (ICBC) invested in the €940m Airport City project at Manchester Airport, a transaction in which Clearwater International played a key role.

ChemChina’s acquisition of Pirelli will provide the group with the technology to penetrate the lucrative premium tyres market. The transaction will also bring the group a high profile global brand to allow it to compete in the automotive industry with the likes of Bridgestone, Continental, Goodyear and Michelin. The GSR Ventures deal for Lumileds, on the other hand, will give the buyer access to more than 600 patent families of world-class lighting technologies. It will also add a customer base which comprises the likes of Audi, BMW and Volkswagen to an investment portfolio within GSR Ventures which already includes Boston-Power Inc, a US manufacturer of electric vehicle batteries, and Xin Da Yang Co Ltd, a fast-growing Chinese developer of electric vehicles.

As Chinese industrial groups establish themselves in Europe and start to look for follow-on acquisitions, the Industrials & Chemicals Team at Clearwater International expects these mega-sized deals will spur the long-awaited increase in mid-market M&A activity. We will therefore be increasingly working with sellers of smaller and medium-sized industrial businesses in Europe to ensure that their businesses are more attractive to Chinese groups. Given the financial muscle which Chinese buyers now have, sellers will also need to make their sale processes more inclusive for Chinese groups. They must also recognise that the important features of transactions involving Chinese buyers include the need for local management to continue running the European target and to deliver both the commercial and cultural integration of the acquisition.