Private equity-backed M&A in China stalls
August 21, 2018 Category China News Round-up, Weekly
Mergers and acquisitions in China are likely to slow further in the second half as private equity investors put transactions on hold amid the escalating U.S.-China trade war. Industry players also say private equity buyers and business owners are beginning to discuss the impact from the U.S. trade tariffs ranging between 10% to 25% on Chinese companies’ gross margins, and their negotiations are increasingly touching on how to split the additional tariff cost. Inbound deal value into China dropped 20% for the first half of 2018 from the second half of 2017, to USD4.91 billion across 206 deals. That figure includes M&A activity from both corporate buyers and private equity and venture capital sponsors, data from Dealogic shows.
Jeffrey Wang, Managing Director of BDA Partners’ Shanghai office, which advises on cross-border M&A deals, said in the first half the escalating trade friction between China and the U.S. had not affected the pace of private equity M&A activity in China, but if the trade war worsens considerably, more deals will get suspended as supply chains get disrupted. “If trade tensions worsen considerably to the extent that imports affect domestic demand, then it’s conceivable that more deals will get suspended,” said Wang. Completed China-inbound deals dropped by 29% in the first half of 2018 from a year ago while pending deals rose 10 times, according to Dealogic.
Lyndon Hsu, global head of leveraged and structured solutions at Standard Chartered in Singapore, said private equity investors looking at capital goods manufacturers or businesses that have a supply chain embedded within China are most likely to be affected by the trade war. These contrast with businesses that have purely domestic exposure, such as retail services and consumption-focused sectors. Hsu said that if the trade war remains unresolved, and tariffs imposed by the two sides stay indefinitely, then sellers and investors would come to accept new valuation benchmarks, as investors’ capital still needs to be put to work, the South China Morning Post reports.
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