Global private equity firm CVC Capital’s latest bet on the Chinese consumer underscores the sector's glowing prospects as Beijing strives to build a consumer-led economy, even as growth slows and debt worries build.
CVC on Monday said it had completed the acquisition of a controlling stake in Da Niang Dumpling, a Chinese fast-food restaurant operator. Founded in 1996, Da Niang currently operates more than 440 outlets and — together with its franchised businesses — posted sales last year of more than Rmb1.5 billion ($244 million).
The fast-food restaurant business in China is growing at a double-digit percentage annual rate, said Bo Liu, a senior managing director with CVC, who is based in Shanghai.
Strong and growing consumer demand as more Chinese eat out is raising the investment profile of the local sector. “We have seen increasing consumer demand for local Chinese food chains, in addition to the stable interest in the Western-style food like KFC and McDonald’s,” said Liu.
CVC last year also snapped up a controlling stake in high-end Chinese food chain South Beauty, according to an approval statement from the Ministry of Commerce. Sources close to the target company said at that time CVC bought a 69% stake in South Beauty for $300 million.
CVC said it had helped hire Huang Zaide, formerly part of the management team in China at Pizza Hut and KFC, to be general manager at Da Niang. Da Niang’s founder Wu Guoqiang will remain as a shareholder.
That CVC likes to hold majority stakes in the companies it invests in rather than make minority, pre-IPO investments reflects the private equity firm’s long-term commitment, said one experienced banker who has closely monitored mergers and acquisitions in China but who declined to be named.
CVC’s China portfolio, which already has a strong retail and consumer sector bias, will continue to increase its exposure to those areas, Liu said. By that he means not just in the traditional sense by investing in consumer staples, clothing retailers and restaurant operators but also by putting money to work in consumer-orientated services in the healthcare, tourism, education and finance industries.
In this respect, the company last December completed the buyout of Education International Corp (EIC) from Actis and its founders. EIC specialises in overseas education counselling and test preparation in China.
The four consumer-related sub-sectors of food and beverage, leisure and recreation, professional services and healthcare are among the top-10 targeted sectors in China’s M&A market this year, up from two last year, according to Dealogic data.
Leisure and recreation plus professional services are proving especially popular; in terms of deal value so far this year, M&A in these sectors have grown by 1,067% and 32.3%, respectively, according to Dealogic data.
Dealogic data also shows that local technology companies are interested in retail and consumer assets due to the potential synergies between internet-based operations and physical store chains. In January, one of China’s largest e-commerce companies Tencent acquired 10% of South China City, a logistics and trade centre network operator, for Rmb1.5 billion.
Slowdown to drive M&A boom
Looking forward, CVC sees further investment opportunities as China’s reforms take hold and the economy restructures amid a slowdown and debt shakeout.
“The economy reshape will lead to industry consolidation and thus restructuring opportunities. M&A activities will continue to increase over the next few years, with good companies gaining leadership positions and undermanaged companies being pushed out,” Liu said.
CVC's intention is to focus mainly on the privately-owned sector and be cautious in participating in state-owned enterprises. “We (CVC) have experience in partnerships with SOEs globally, and have also looked at these in China. But the SOE reform process in China is seeing more minority investments and complicated restructuring process. As such, we evaluate carefully what role we are able to play in the process,” said Liu.
Clifford Chance and Junhe were legal advisors on the Da Niang acquisition deal. PwC conducted the financial due diligence and AT Kearney worked on the commercial due diligence.
CVC separately is raising US$3.5 billion for a fund with a focus in Asia and has secured commitments of US$3 billion. The fund will target the M&A opportunities in Greater China, South Korea, Japan and the Southeast Asia.