Chinese SOEs look abroad for acquisition targets

Zijin Mining's $1 billion acquisition of Canada's Continental Gold may be the beginning of a new acquisition wave for Chinese SOEs.

Chinese state-owned enterprises (SOEs) are gearing up for more outbound M&As next year after suffering an 18% year-on-year drop in the value of acquisition deals in the first half of this year.

Riding on the momentum of Zijin Mining’s $1 billion cash acquisition of Continental Gold last week, Chinese state-owned enterprises are slowly looking again at cross-border M&A deals, starting with the mining and energy sector. 

Headquartered in Canada, Continental Gold is a large-scale gold mining company which is developing a high-grade gold project in Antioquia, Columbia. Construction is expected to complete soon and operations should begin in the first quarter. It looks like a good deal for Zijin Mining as it can generate cash flow next year.


China outbound M&A is expected to pick up after hitting a seven-year low of $20 billion in the first half of this year. Beijing updated its M&A review process in October to approve applicants more quickly. State-owned companies can now focus again on business development after the central government completed its five-year reorgnisation of major SOEs. These companies now have more time to check on high-quality assets overseas and finally sign a deal.

“Chinese SOEs have returned to cross-border M&A especially in resources, mining, and oil & gas. There is a good pipeline across both regions and industries,” said Samson Lo, head of M&A for Asia at UBS. “With the exception of the US, China outbound M&A activity continues to span the globe including prospective targets in Europe and South America.”

Zijin Mining’s Candian move is just the latest example of this trend. “The deal has been in negotiations for more than two years,” one source familiar with the matter told FinanceAsia. “After Beijing relaxed its acquisition policy in October, there was a window for Chinese M&A activities, including outbound investment. That is why the deal was finalised in November.”

But this is only the beginning. “We still have two cases on hand. Both of them are Chinese SOEs which want to acquire European mining and power plants,” the source said. “Nowadays Chinese SOEs prefer to acquire resources overseas as domestic opportunities are running out.”

The timing is right for the SOEs. There has always been a hunger for high-quality assets but the dearth of domestic opportunities has spurred a resurgence in cross-border M&A. At the same time, the management of many SOEs has been reshuffled and new incumbents are ready to pull the trigger, according to Lo.

Chinese appetite for overseas assets is sending an alarming message to other governments. Those in Europe have become increasingly concerned about foreign capital, specifically from China, acquiring domestic resources. The German government had included the energy sector among its protected industries and will implement stricter reviews when foreign investors are involved.

“It is an indication of more government intervention in cross-border activities in key sectors,” Hui Zhao, a partner at King & Wood Mallesons, wrote on its website.

SOEs are also getting smarter at working around the regulations. A flexible structure helps companies get government approval more easily. “Companies continue to prefer to acquire controlling stakes but they are more flexible than they used to be – they are willing to take 70% to 80% of the company. Capital constraints recede when you are buying 70% rather than 100%,” said UBS' Lo.

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