US regulations hinder China's strategics

In recent months, Chinese corporations have been handicapped by regulations in both the US and China in their bid for US-based portfolio companies. 

The problem has become acute as more large Chinese trade buyers take an interest in US portfolio company auctions, according to Marcia Ellis, partner at law firm Ropes & Gray. “Chinese bidders show up and are often offering the highest price,” she explained.

For example, Chinese conglomerate the Wanda Group is currently closing a deal to buy US cinema chain AMC Entertainment, which is owned by a consortium of private equity firms including Apollo Global Management, Bain Capital and The Carlyle Group, according to an industry source. Financial terms of the deal were not disclosed but the source said it is likely to be pushed through.

However, China-based buyers are not always the ideal candidate. “Often the CFIUS [Committee of Foreign Investment in the United States] review issue raises its head, even if the companies are ostensibly not sensitive industries,” Ellis told sister publication PE Asia. 

In the US, selling businesses in sectors considered sensitive (such as telecommunications, transport and energy) to foreign buyers requires approval from CFIUS. “It is an election year in the US and the CFIUS review is very political. So people become unsure about what is going to happen with any particular filing.”

More problems arise on the Chinese side. US sellers of an asset require a reverse termination fee in case the chosen bidder doesn’t get Chinese government approval for the deal. “In an auction process the last thing you want as the seller is to choose the winner of the auction and not be able to come to terms with them,” Ellis said.

“If the Chinese buyer is coming out directly from China as a PRC-incorporated entity, then it is difficult for them to put up any kind of initial fee.” Ellis explained that this is because there are no foreign exchange controls and the approval needed from the Chinese government for the company to pay a fee would be the same approval needed for the deal.

“From a private equity point of view, they want [an exit] to be as clean and simple as possible. So your Chinese bidder comes in, they have the highest price, but effectively that price gets discounted in people’s minds because of the risk involved in the sale. You’re only really going to see a Chinese bidder chosen if there aren’t a whole lot of other choices.”

Steve Xiang, partner at law firm Weil Gotshal & Manges agreed that issues surrounding Chinese approval processes have curbed deal flow.

However, he also said that China-based firms are a perfect fit for US assets now. “Many investments by US private equity firms were done at the height of the leveraged buyout market, so now they are being burdened with the high leverage financing costs of the companies.”

Last week, Chinese aviation business Superior Aviation Beijing signed an exclusivity agreement to buy private equity firms Goldman Sachs and Onex-owned jet-maker Hawker Beechcraft in a $1.79 billion deal, having previously filed for bankruptcy in the US, PE Asia reported earlier. The firms had acquired Hawker for $3.3 billion in 2007 in a highly-leveraged transaction.

Xiang continued, “Chinese companies are natural potential buyers for debt-burdened assets because for many of these companies the US market is not growing fast enough to overcome high financing costs. If the company teams up with a Chinese company, those assets can be combined with the higher growth Chinese market.”