Weichai Power, an automotive and equipment manufacturing group in China, has agreed to invest €738 million ($929 million) for a stake in German industrial truck maker Kion Group, which is already backed by KKR and Goldman Sachs Capital Partners. The transaction is the largest Chinese direct investment in Germany to date and accelerates the Chinese company’s course to gain much-coveted Western industrial know-how and win a foothold in the global market.
Under the agreement, Weichai Power will spend €467 million to acquire a 25% stake in Kion via a capital increase and the remaining €271 million for a 70% stake in Kion’s hydraulics business. Nomura is the sole financial adviser to Weichai Power.
The deal size exceeds Sany Heavy Industry’s acquisition of Putzmeister, a German concrete pump maker, which held the previous record as the largest Chinese acquisition in Germany. The Chinese construction-equipment maker agreed in January to buy the German company for more than $660 million.
China outbound M&A is set to reach a record this year as more buying opportunities arise in Europe and the US, according to PricewaterhouseCoopers. Outbound deal values tripled in the first half of 2012, although overall Chinese M&A activity fell 33% during the period.
Weichai’s deal was announced one day after German chancellor Angela Merkel met with Chinese premier Wen Jiabao in Beijing on Thursday and pledged closer trade relations in areas such as aviation and automobiles.
Weichai is one of four listed subsidiaries of state-owned Shandong Heavy Industry Group. The other three are Weichai Heavy Machinery, Yaxing Motor Coach and Shantui Construction Machinery, which are all listed in the domestic A-share market. Weichai Power is the only one with shares listed both in Shenzhen and Hong Kong.
Shandong Heavy announced earlier this year that it was buying a controlling interest in the world’s biggest luxury yacht maker, Italy’s Ferretti, for $477 million.
China’s state-backed enterprises have stepped up their interest in buying assets in the global markets in recent years. At home, these deals often stir fierce debate as people question the rationale of investing workers’ savings in distressed foreign assets, but high-profile acquisitions also fuel nationalism as many people take pride in China’s progress.
Kion will use the proceeds to further strengthen its capital structure. Affiliates of KKR and Goldman Sachs Capital Partners will retain their existing investments in Kion and will not receive any proceeds from this transaction.
Weichai Power has the option to increase its stake in Kion to 30% if the company should do an initial public offering in the future. Weichai also has the right to increase its stake in Kion’s hydraulics business, according to a company statement.
The hydraulics business will be operated and managed as an independent company named Linde Hydraulics. Kion will retain a strategic stake in the company.
The partnership between Weichai and Kion “is an important step in our five-year strategy to globalise and expand our business activities into new markets and products”, Tan Xuguang, chairman of Weichai Power, said in the statement. “With this partnership, we will leverage Kion’s strong position and utilise growth opportunities for Kion and Weichai Power to further enhance the competitive edge of both companies.”
He added that Weichai has complete confidence in Kion and its management team when it comes to leading and developing the business. Under the agreement, Weichai has emphasised that it will honour all existing collective labour agreements, bargaining agreements and co-determination, in order to ensure the long-term job security of all employees of Linde Hydraulics worldwide.
Tan’s statement will be worth revisiting a few years from now, to see how a German manufacturer turns out in Chinese hands.