Dealmakers in China are still in the doghouse at home and abroad, with Beijing showing little intent to take the leash off domestic capital controls and foreign regulators keen to put Chinese purchases to sleep.
Still, China's investors are eager to sniff out quality assets around the world as they look to continue their growth and expand internationally. But capital controls mean remittance for deals has slowed to a halt, while regulators in some jurisdictions have killed even deals that made business sense and offered obvious synergies.
China's biggest private agribusiness firm, New Hope Group, has managed to find a way through the malaise. It is joining Beijing-based private equity house Hosen Capital and Singapore investment company Temasek in an investor group to buy Australia's Real Pet Food for A$1 billion ($772 million). The deal was announced by vendor Quadrant Private Equity on Tuesday.
The buyers plan to help Real Pet Food expand into overseas markets including China and the US.
The deal represents Chinese companies’ latest foray into Australia’s booming food and agribusiness sectors, where they see opportunities to tap China’s booming market demand for quality food while also aligning with Beijing's agenda of building the nation's food security.
Purely Chinese buyers [i.e. excluding joint deals] have offered more than $990 million since 2016 for Australian food and agribusiness assets, Dealogic data shows.
In Australia, they have pursued companies producing vitamin supplements, milk, baby formula, and now dog food.
In this case, the fact it is a “real-deal” with a strong business case definitely played into the hands of the New Hope consortium, investment bankers and lawyers say. Since late last year, Beijing has clamped down on overseas M&A it considers “irrational” or “fake” and restricted companies from investing in non-core businesses.
“It’s completely consistent with what we do, and is a wonderful opportunity to extend our partnership and operations offshore and bring great businesses onshore,” Nick Dowling, CEO of New Hope Group in Australia and New Zealand, told FinanceAsia in a call on Wednesday.
Founded in 1982, New Hope Group is mainly engaged in agriculture, animal husbandry and food processing, and today is China’s largest feed-grain producer. Given increasing pet ownership in China – now the third largest pet-owning country after the US and Japan, with a growing middle class population – this deal provides a lucrative opportunity for New Hope.
Although Chinese families have not raised pets for nearly as long as those in the US or Japan, studies show Chinese pet-lovers are increasingly following their peers in developed countries in picking a natural, organic and balanced diet for their four-legged friends. “Natural pet food” now takes a 24% market share in China and is growing at 55% year on year, according to GfK Pet Ownership report.
To be sure, New Hope Group had the money to make this deal alone if it had to – last year it budgeted a total of Rmb10 billion ($1.5 billion) to invest in food-related assets in a push to expand overseas.
But the co-investors are bringing stronger deal execution and business management capabilities to the table.
Hosen Capital, founded in 2010 with New Hope as its main stakeholder, just closed its $440 million third investment fund in March. The fund is focused on agriculture and the food industry, and has attracted investment from international investors including the World Bank’s International Finance Corporation.
“Hosen is a very commercial organisation operating in the PE world focusing on consumption upgrade across the emerging middle class in Asia,” said Dowling, “so as a consequence, it matched strongly with Quadrant Private Equity”, the seller which bought the company, then known as VIP Petfoods, in 2015. According to Dowling, Hosen Capital has provided the “thought leadership” on this transaction.
What's more, “the breadth and reach” that an investment partner like Temasek has globally will also yield greater opportunities to take the pet food business international, Dowling said. “We are genuinely excited about the global opportunity.”
There is a “natural partnership” among the trio, as Dowling put it: Temasek is also an investor in Hosen Capital.
All of the three investors will be putting their own capital into the deal, according to one source close to the transaction.
To sellers and regulators, a joint-purchase between a Chinese buyer and a sovereign wealth fund from elsewhere is more “reassuring”, according to cross-border deal advisors.
Some announced Chinese deals have been called off when investors couldn’t get their money out of China in time, as agencies including the Ministry of Commerce and the foreign exchange regulator take their time to give approval. But FinanceAsia understands this deal has cleared all the regulatory hurdles in China.
“The only remaining condition [to close the deal] is the Australian FIRB [Foreign Investment Review Board] approval, and we are going through that process,” Dowling said. A second person involved in the deal confirmed to FinanceAsia that the seller was “comfortable with the funding” for the transaction.
Partnering with an institution like Temasek on large-ticket transactions helps convince Chinese regulators of a deal's authenticity and quality, the person familiar with the deal said. At the same time it reduces the need for regulators worry about capital outflow, a key concern for Beijing.
The “credibility and independence of Temasek as a global institutional” would provide Australian regulators with the comfort that this deal is not too China-dominated, the person added.
This is critical for Chinese outbound dealmakers today as foreign regulators get more skittish about bids from China, due to factors ranging from national security concerns to local protects.
Dowling stressed that the buyers did not intend to change to Real Pet Food’s operation in Australia, other than to “bring a successful Australian business” to more markets.
Deloitte provided financial advisory to New Hope, and PwC worked as financial advisor to the target side.
Real Pet Food’s chief executive David Grant told the Australian Financial Review it planned to “go hard and go early” in terms of the China market, provided that FIRB approval came smoothly.
After all, 2018 will be the Chinese Year of the Dog.