Cfius puts more China deals at risk of meltdown

Regulatory woes in Washington, including over China Zhongwang's deal for Aleris, are raising questions over whether Chinese buyers will be put off M&A in the USA

China’s biggest-ever purchase of an overseas metals processor is at risk of melting down as a key US regulatory panel stands in its way – and other deals are increasingly at risk of sharing the same fate.

The Committee on Foreign Investment in the United States (Cfius), has for the second time flagged "national security concerns" over the $2.33 billion purchase of US aluminium and alloys maker Aleris Corporation by China Zhongwang Holdings, the country’s largest producer of industrial aluminium extrusion products.

The two parties therefore withdrew their application for Cfius approval, Aleris said on August 9. According to the terms of the transaction, the takeover agreement will expire on August 31 – and either party can terminate the deal before that date.

“There can be no assurance that the merger will be consummated,” Aleris said in the announcement. Its spokesperson did not respond to requests for comment.

The renewed doubts over the Aleris deal put the spotlight on a string of other transactions, as investors study how the protectionist rhetoric of the Donald Trump administration plays out in practice amid fears heightened scrutiny and increased uncertainty will doom Sino-US deals.

Among the closely-watched deals in the Cfius pipeline is Ant Financial’s $1.3 billion (exclude debt) bid for US money transfer company MoneyGram. Investment bankers and lawyers worry that if that transaction fails, Chinese buyers – already under pressure from regulators at home – may step away from US dealmaking.

China Zhongwang agreed to buy Aleris in August last year and in February had to withdraw its first notice to Cfius after the US body flagged national security concerns. It re-filed the application in the second quarter, effectively resetting the 75-day deadline Cfius imposes for its investigations.

HNA Group last month failed to complete its proposed $416 million investment in Global Eagle Entertainment (GEE), an in-flight entertainment and wi-fi services provider, after Cfius did not give approval by an agreed date.

More Chinese deals (see table below) are still in the process of Cfius investigation and facing delays. MoneyGram had to restart the Cfius review of its sale to Jack Ma’s Ant Financial – Reuters reported in July – after failing to win the approval within a 75-day timeline. China Oceanwide Holdings’ $2.7 billion purchase of Genworth Financial, a Fortune 500 insurance company, was also re-filed with the committee last month.

Private equity fund Canyon Bridge Capital Partners – funded by China Venture Capital Fund which, according to corporate filings cited by Reuters, is closely tied to Beijing – submitted for the third time its application for approval to buy US chip-maker Lattice Semiconductor Corporation for $1.3 billion, the latter confirmed in an August 8 filing.

‘Security’ quagmire 

Cfius scrutinises deals for potential risks to the US national security, but what exactly constitutes a “national security concern” remains uncertain, given both the confidential nature of the review process and the fact US officials are now sweating hard to expand the scope of Cfius reviews.

Deals that were expected to hit “no regulatory hurdles” have proved otherwise – which dealmarkers and lawyers believe has something to do with the Chinese involvement in these deals.

“There is currently enhanced scrutiny of Chinese deals, particularly those involving the acquisition of critical infrastructure or technologies by Chinese entities,” Mark Herlach, a Washington DC-based partner at Eversheds Sutherland focusing on energy, international trade and defence matters, wrote in an email exchange with FinanceAsia.

In the HNA-GEE deal, for example, Jeff Leddy CEO of GEE said, in an April investor call that “Cfius, first of all, doesn’t give us detailed explanations of their findings. But we don’t think it’s necessarily related to our government business per se but related to the more general scope of what our company does and the fact there’ll be a significant foreign investor, in this case, particularly a Chinese investor, that is raising their concerns.”

That said, another recent deal involving an HNA Group affiliate was cleared by Cfius – the acquisition of Ingram Micro, the world's largest distributor of computer and technology products.

“This indicates that Cfius takes a case by case approach for each acquisition, and further reinforces the need for parties to proactively assess each transaction and address specific concerns at the earliest possible stage in a transaction,” said Peter Alfano, a lawyer at Squire Patton Boggs, who keeps a record of publicly-disclosed Cfius activity. He covers antitrust matters, including merger review representation before the Federal Trade Commission and the US Department of Justice.

What is certain now is that Chinese deals are getting even harder to close, on top of domestic hassles including a government crackdown on 'irrational M&A' and problematic financing.

Not worth the trouble?

That reflects concerns one Hong Kong-based senior investment banker covering the financing of Chinese foreign deals at a Wall Street bank shared with FinanceAsia on Tuesday. Bankers are re-thinking their positions in financing these deals and will likely back off if failures continue.

“I think the big question for the acquisition financing business is whether there will be acquisitions to finance. At this point in time, you still have a few guys who are giving it a try, but at some point if it becomes clear that you stand no chance to win, the willingness to try will disappear,” he said.

Chinese regulators have been trying to slow the pace of outbound acquisitions, but now there’s also a big concern about these getting approved in the US, he said, adding that the “combination of the two might just become too much”.

He specifically pointed to the Ant Financial-MoneyGram process. “Very high profile companies with clear synergies, so it’s a real M&A. It’s very interesting to see whether it gets through,” he summarised.

“If you get a 100% rejection from the US, then everyone is just going to say, 'all right, no more',” he said.

Selected Chinese M&A deals under Cfius scrunity

Deal announced

Acquirer

Target

Industry

Cfius status

Jan 2017

Ant Financial

MoneyGram

Financial services

Withdrawn and Refiled

Sep 2016

Ant Financial

EyeVerify

Software/Biometric authentication

Cleared

Aug 2016

China Zhongwang Holdings

Aleris Corp

Steel

Withdrawn (2nd time)

Oct 2016

China Oceanwide Holdings

Genworth Financial

Financial services

Withdrawn and refiled (2nd time)

Nov 2016

HNA Group

Global Eagle Entertainment

Multimedia

Abandoned

May 2017

HNA Group

OM Asset Management

Financial services

New/Upcoming filing

Jan 2017

HNA Group

SkyBridge Capital

Financial services

Pending filing

Feb 2016

HNA Group

Ingram Micro

Logistics/IT

Cleared

Apr 2017

Unic Capital Management

Xcerra Corp

Semiconductor

New/Upcoming filing

Nov 2016

Canyon Bridge Capital Partners

Lattice Semiconductor

Semiconductor

Withdrawn and refiled (2nd time)

Sep 2016

TCL Industries Holdings

Inseego Corporation

Telecoms

Abandoned, after being withdrawn and refiled twice

May 2016

Fujian Grand Chip Investment Fund

Germany’s Aixtron SE

Semiconductor

Blocked by order of President Barack Obama

Source: Squire Patton Boggs, FinanceAsia research (as of August 10, 2017)

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