Chinese Go Shopping for European Businesses

 

Li Shufu, chairman of China's Geely, which bought Volvo cars from Ford, seen at Tiananmen Square in March.

BRUSSELS—The chairman of China's biggest food company was blunt. "We need to buy a top-three European food company," Wang Zong Nan told two consultants over Sunday brunch at a downtown Sheraton hotel here.
Mr. Wang, chairman of Bright Food Group, is among Chinese business leaders going shopping for European companies. Their ambitions, encouraged by the government in Beijing, have the potential to reshape global trade and investment flows in coming years and are already creating anxieties in the European Union.




The world's top exporting nation amassed $2.7 trillion in aggregate domestic savings by the end of 2009, a pot likely to grow sixfold by 2020, according to the World Bank. Experts are predicting a surge of overseas takeovers by Chinese companies over the next decade. A five-year plan Beijing approved in March calls for establishing "international sales networks and brand names."
Chinese companies' investment in European businesses, which totaled just $853 million in 2003-05, surged to $43.9 billion in 2008 through 2010, according to Dealogic, a London consultancy. The burst gave Chinese companies control of 118 European businesses.
In the latest deal, Chinese personal-computer maker Lenovo Group Ltd. last week agreed to buy 37% of Medion AG, a German computer and consumer-electronics company, and will launch a public offer for enough additional shares to gain control. 
While some of the deals make headlines, such as last year's purchase of Volvo auto operations from Ford Motor Co. by Zhejiang Geely Holding Group, Chinese companies have also quietly acquired control of more than 100 smaller European businesses, ranging from a Czech cigarette company to a Dutch pharmaceuticals firm to a British wood producer. The frequency of these takeovers is increasing.
Thilo Hanemann, research director at New York consultancy Rhodium Group, predicts Chinese companies will invest more than $1 trillion overseas between now and 2020 and says that besides their well-known interest in natural resources, Chinese companies "are increasingly looking for opportunities in mature markets."
That makes the EU a focus. With thousands of manufacturers and sellers of products ranging from cars to glass—in a 27-nation market that is the world's richest by economic output—Europe has quietly become the top target for Chinese mergers and acquisitions. A third of 3,000 large Chinese companies polled in a 2009 government survey said they had invested in EU nations, compared with 28% that named the U.S.
For the most part, Chinese investment has been welcomed in Europe as a source of capital, but in a few places, it has unleashed tensions. The EU's industry commissioner, Antonio Tajani, and some officials of southern-tier EU countries like Spain, Italy and France say they worry that Chinese companies are buying European businesses to strip them of their technology.
One reason Chinese business leaders cite for favoring Europe: Unlike America, where the Committee on Foreign Investment in the U.S. can block deals involving foreign direct investment on national-security grounds, EU regulators have no say on money coming in to buy businesses.
"There are hundreds of attractive companies [in Europe] and there is a lower sensitivity on national-security issues compared to the U.S. and other economies," says Mr. Hanemann, the consultant.
One deal made several years ago proved a rocky marriage. Chinese company Qianjing Group acquired Italian motorcycle maker Benelli from Gruppo Merloni. With sales slipping, Chinese management then put Italian workers on part-time schedules.

  
According to a report in a magazine called Motocross Action, a manager with Qianjing in China said Benelli was hurt by "rampant Italian bureaucracy, the convoluted system of granting various permits and chaotic business processes."
Qianjing hasn't been able to make Benelli profitable, at least through 2009. Benelli lost €3.5 million that year. Qianjing said the same year that it would invest $26 million more in the company. Results for Benelli in 2010 aren't yet available.
Benelli CEO Pierluigi Marconi resigned last summer—in protest, according to people familiar with the matter. He told a motorcycle magazine called AMCN that changes the company needed to make take time, "but the market won't wait for you, and it's been hard explaining this to the Chinese."
Mr. Marconi didn't respond to a request for comment, and a representative for Qianjing declined to comment.
Chinese investment is the object of intense debate in the EU, with people divided over whether it is a positive or a negative. EU Industry Commissioner Tajani is particularly aware of China's trade and investment might and is among those concerned about the loss of technology to China. He would like to give the EU power to block investments and has suggested creating a European version of the U.S.'s Committee on Foreign Investment.
"The time to fireproof your house is before it catches fire," Mr. Tajani said. "We want to be sure we know who is investing in Europe, and why."
Mr. Tajani spoke out against one sensitive Chinese deal last fall. An Italian maker of fiber-optic cable had agreed to take over a Dutch rival for $1 billion. Executives of the Italian company, Milan-based Prysmian SpA, celebrated with champagne. But a week later, out of nowhere, a Chinese company said it could pay $1.3 billion for the Dutch target company.
"We were shocked," said Lorenzo Caruso, the Italian company's marketing director.
Suspecting that the Chinese bidder, Tianjin Xinmao S&T Investment Corp., could manage such an offer only with the help of the Chinese government, the Italian company counterattacked. Its officials hired a lobbying firm, gave media interviews voicing its suspicions, and appealed to the European Commission in Brussels.
Mr. Tajani and others in the EU bureaucracy were concerned because the Dutch company, called Draka Holding NV, had a subsidiary that supplied fiber-optic cables to several Western militaries, including the U.S. Navy. They threatened to block the Chinese takeover, although it wasn't clear how they could, since the Dutch government wasn't opposed to it and the EU doesn't have a board that can review acquisitions on national-security grounds.
In any case, the pressure proved too much for the Chinese company. It dropped its bid for the Dutch company, citing a problem with timing in securing approval from the Chinese government.

China's Lenovo is investing in German computer firm Medion.

The food sector might not appear as strategic as fiber-optic cable, but the Chinese government has tagged the food business as an area in which Chinese companies should acquire technologies and become more efficient. Shanghai-based Bright Food last year had revenue equivalent to $7 billion and it wants to double this by 2015.
"There aren't that many alternatives to achieve that, other than through acquisition," said Chen Gang, a food and beverage analyst with Sinolink Securities in Shanghai. He said Bright Food is looking to buy companies and keep management teams in place "because it doesn't have much experience in managing international enterprise." Bright Food agreed with that analysis.
To do business in Europe, Bright Food turned to Yufang Guo, a Rotterdam-based consultant who says he has about 100 Chinese clients who are looking to buy business operations in Western Europe.
To tempt sellers, Mr. Guo said, Chinese companies make the arguments that they have plenty of capital to invest, can offer a bigger consumer market for products and will leave local management alone.
Mr. Guo, the son of schoolteachers from rural China, came to Europe as a postgraduate student 25 years ago and stayed to study law. After working for major accounting firms, he started his own business providing a range of services from tax accounting to translation.
The business, called Jomec, is focused on mergers & acquisitions and corporate finance. His work entails "road shows, showing delegations of Chinese businessmen around Europe," says Mr. Guo. "I introduce them to stock exchanges, private equity, venture-capital firms."
He adds, "I'm Chinese, so I can tell what a Chinese person really means just by looking at him. It's a feeling."
One day in February, Bright Food's Mr. Wang flew into Brussels with two colleagues, Ji Lu Qing and Tang Zhi Jian, and went to the downtown Sheraton hotel for brunch with Mr. Guo. Over fruit, coffee and eggs, the Chinese laid out their ambitions to him and to a European trade and investment lawyer, Laurent Ruessmann, allowing a reporter to sit in.
What they were seeking, the Chinese executives said, were European companies rich in brand names and technology. They wanted to buy a majority stake.
An example Mr. Wang cited: "Belgian and Italian chocolate companies. But getting them to sell out is hard. They're family-owned and they want to hold on."
Mr. Ji chimed in. "But when we offer enough money, they want to do a deal," he said.
The Chinese government provides help to Chinese companies on their overseas shopping tours. It publishes guide books for individual countries on investing in them.
While much information in the catalogs, which were reviewed by The Wall Street Journal, is routine, the guides also carry suggestions for Chinese investors, such as that Cyprus has "light manufacturing industry" with "textiles, shoes and hats," and that Belgium is known for chemical products, logistics and ocean freight shipping.
Niche European businesses are attractive to Chinese companies because they often come with familiar brands and deep expertise.
Messrs. Guo and Ruessmann explained to their Chinese visitors that Europe is divided into many markets. "Be careful about trying to buy anything that's too high-profile," Mr. Ruessmann counseled. "There are sensitivities in Europe, just as in China or elsewhere, about major acquisitions by foreign companies."
In Europe, he continued, "it is very difficult to go from zero to 100. You may be able to try that in America. Not in Europe. Here, it is better to build up trust and go more slowly."
What about Eastern Europe, the visiting executives asked. "Well, there's more openness to investment by the Chinese," Mr. Ruessmann said. "But you won't find the knowhow and technology you have in Western Europe."
He cautioned against going for size: "Big companies may be big because they have too many employees," the investment lawyer said. Even famous European companies, he added, "may be bloated and in need of cost-cutting."
Mr. Ji nodded. "Trade unions," he said. "We just need a brand."
Mr. Ruessmann warned the visitors they might encounter some opposition to a Chinese takeover. "European companies anticipate a wave of Chinese investment, and, if they hear the buyer is a Chinese company, may try to obtain a premium," he said. "The price automatically goes up."
The resistance became evident to the Chinese executives a short time later. After the meeting in Brussels, Bright Food's Mr. Wang went to Paris. Within days, his company placed a bid for a 50% stake in a major French yogurt maker, Yoplait, owned by a French dairy farmers' cooperative, Sodiaal.
But there were other bidders, and Minneapolis-based General Mills Inc. won out with a $1.1 billion offer. Even though Bright Food's bid had a higher valuation, the French government endorsed the General Mills deal.
"The government reaffirms its concern over the preservation of jobs and the future of the dairy industry in France," French Agriculture Minister Bruno Le Maire said in a statement.
The Shanghai company isn't giving up. "We have no plans to change our strategy for overseas expansion," its president, Cao Shumin, told Shanghai Daily.