China goes abroad (abstract) - Maverlinn

China did not really go West yet … for good reasons

Confidential, January 2014

Presentation

• Why China is now interested to move abroad

• Objectives for a smooth external growth policy

• How to design a successful high return M&A strategy

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A simple GDP growth differential analysis explains why Chinese companies have been more prone to stay home

Results in a strong rebalancing of world real GDP mix

Long term base line worldgrowth diffential

China

Euro zone

8,2%

3,5%

0,0

2,0

2000-2007 2010 2013 2020 2025 2030

of world real GDP mix at 2005 PPP

6649 43

18

23 28

1628 29

0%

20%

40%

60%

80%

100%

2010 2030 2050

China

Non OECD

OECD

With a stronger emphasison emerging countries

Therefore the market mix is likely to impact the value

of OECD firms

Sources : OECD

+ 75%

China GDP has been steadily decelerating in the last 4 years

40 000

50 000

60 000

8

10

12

14

0

10 000

20 000

30 000

Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13

0

2

4

6

8

GDP GDP growthSource : World Bank

China maintains its 2013 GDP growth target at around 7.5% to leave some leeway for economic restructuring…

But usual suspects for M&A operations including « mittelstand » represent only 10% of total firms in China

Large firmsRevenues > 300 Mio RMB

1 %9 %

37 % • 80% of SMEs put priority on APAC markets

China company profile by size in China

Source : China statistical yearbook, UPS Monitor, China SMEs Economic Information Press

Medium firms Revenues > 30-300 Mio RMB

Small firms Revenues > 30-300 Mio RMB

90 %30 %

33 %

APAC markets

• SMEs contribute to :− 55% of GDP− 63% of export− 80% of employment

# of companiesest. 350.000

Σ revenuesin China

As the direct M&A fast track seems too risky, China firms has much focused on alternative routes to go abroad

Prepare for external growth

Preparing carefully for M&A routes was perceived as tedious and time consuming

Minority investmentsPrestige acquisitions

Joint dealsRestructurings

Assets deals

Direct M&A“Fast track to acquisition too risky”

A dilemna :M&A is needed but perceived as too risky

Access to global markets Time/risk are key

Presentation



• How to design a high return M&A strategy

There are four objectives for Chinese companies to develop more agressively abroad

Normal step in corporate development :Chinese then global presence

Comments :

Switch from export based economy to richer development model based on indigenous

1

Switch business model from workshop of the world to innovation powerhouse

Access to worldwide profit pool

Secure access to strategic resources : IP, natural resources

model based on indigenous innovation

• Build strong brands in China and abroad and build quality “made in China” image

• Chinese companies are still in the early stage of making M&A investment abroad 4

3

2

The development of a high quality M&A pipeline takes a bit of time to avoid the usual “dead rat syndrom”

Initial scan of key possible external

Smooth and effective closing of deals

Short list of best opportunities on the market « investment minded »

• The track record of China M&A operations is likely to improve quickly• The objective is to develop the best quality network for best deals on the market

possible external growth options

closing of deals

Active maping and market positionning as a « first call » party to deal with

On-field integration excellence

We favor integrated M&A approach with emphasis on selection of best option for maximum impact

We emphasize multicultural strategic finance as our distinctive

• We rely on an international network in China, in Europe and beyond• Most of our customers are Fortune 500, dealing with complex growth issues

We serve industry leaders on impact M&A and also advise on preparation and integration to optimize success

strategic finance as our distinctive footprint, meaning we integrate M&A, culture and strategy

It seems almost common sense that participating to world global growth opportunities is the way forward for China

China faces some challenges … and trusted partners are much needed

Getting“China and the United States are going to be

the two big factors in the world over the -

• Perception of « made in China »• Innovation / R&D / Value Chain

Getting

to the

point

the two big factors in the world over the -over decades to come”

Warren Buffett

“Emerging markets like India and China are witnessing a remarkable transformation”

Bern Bernanke

“Chinese growth is a wonderful human success story that could kill us all”

Paul Krugman• Real Estate Bubble• Income distribution

• Labor costs• Environmental liabilities

Industry Household

Macro Eco

Presentation




Deal story lineDeal background

"Mittelstand" M&A Case : SHI (China) – Ferretti (Italy)

• After Ferretti was delisted in 2003 and taken over by Permira, Candover acquired the business in 2007 for € 1.7 billion

• SHI, Shandong Heavy Industrial the parent of

• Ferretti based in Forli (Italy) is the European leader for luxury 7 to 80 meters yachts on the US$ 11 billion yacht market

• Ferretti made € 750 million revenues in 2011 :

Shandong Heavy built an expertise in distressed security deals

• SHI, Shandong Heavy Industrial the parent of Shantui and Weichai, made a first deal acquiring ailing Moteurs Baudoin in Marseille

• Shandong Heavy has been looking for a while to make some acquisition in this space in Europe, especially on the distressed equity market

• Shandong Heavy paid only € 178 million for 70% of the yacht maker

• Ferretti made € 750 million revenues in 2011 : 500 yachts / year (only 17 sold in China), 2,800 staff. Ferretti carried a € 700 million debt

• Strong growth of Brazil demand and € 300 million invested in a brand new Brazilian shipyard (40% of revenues)

Deal story lineDeal background

“Mega” M&A Case : Shuanghui (China) – Smithfield (USA)

• Shuanghui acquired Smithfield Foods in May 2013 for $ 4.7 billion at a total value including debt of $ 7.1 billion. A 31% premium to May 29 stock closing price

• Smithfield Foods founded in 1936 in (USA) is the world largest hog farmer and processor

• Shuanghui (Shineway) is a fast moving private

Shuanghui managed to strike swiftly a critical deal for China in the US

stock closing price

• Smithfield Foods made € 13.1 billion revenues in 2012, about twice the size of its better value acquiror, which posted $ 6.5 billion revenues

• Shuanghui was looking for a large external pork source for China : Smithfield can provide a capacity to slaughter as many as 110,000 hogs / day. They already had a long relationship

• Smithfield Foods is known for its quality breeding and processing of hogs

• Shuanghui (Shineway) is a fast moving private company based near Shenzhen

The size of the deal and its careful preparation is a clear example of what Chinese companies can now achieve

Comments

• China has learn how to navigate the delicate political and regulatory waters in the USA

• China sweet spot used to be < $ 500 million firms, but 13.1

Smithfield Foods Henan Shuanghui

SalesBillion USD

now acquiring large listed companies is no problem

• Joint ventures and private companies are no longer the sole focus for China moving abroad

• Strategic investment are still key: Smithfield and 4 others control 73% of the US pork processing industry

• Smithfield was identified as a company in need following loss making exercice in 2008 and 2009 and Continental Grain recommandation to split the firm

Good upstream preparation was a key success factor

13.1+7% from 2011 6.5

+11% from 2011

Market Cap.Billion USD

2012 ProfitMillion USD

Meat outputMillion of tons

Staff

3.6 14.2

361 472

3.64 1.71

46,050 61,050

China appetite for outside opportunities and high returns can be better leveraged to step-in on good M&A deals

+ Lower risk

Best conditions for stepping up on the market have materialized

Awareness Opportunities=• For China MNCs

− Enhanced • Have a dedicated • Capacity to scan − Enhanced strategy

− Better IRR

− Visibility

• For senior management

– Preparation

– Confidence

China M&A has to continue to adjust and strive for excellence

• Have a dedicated team to ensure higher quality

• Better manage KSF

– Organization

– Knowledge

– Due diligence

– Final deal structure

• Capacity to scan best opportunities, including hidden ones

• Define key targets

– By sector

– By country

The secret for successful M&A is good upstream and downstream preparation

1. Upstream preparationM&A strategic group

2. M&A executionTrusted expert team

Expert M&A team

Clear external growthstrategy

1 Strategic M&A is a three step process

M&A strategic group Trusted expert team

3. IntegrationTransition management

Expert M&A team Trust & empowerment

for fast action

Early identificationof acquisition benefits

Smart transition management to leverage

acquisition

2

3

A Chinese value added M&A strategy must be designed as a two way bridge to deliver even better results

Strategy + M&A create value

• Strategic and finance expertise are key to position quickly on best deals

• Real rep. office with trusted local partners

• Real rep. office with trusted local partners

• Communication lines must be effective and smooth to move quickly

• Immediate benefits for Chinese firms :

– Macro-economic / industrial weekly insights

– Sectorial knowledge for priority investments

– « à la carte » services to Chinese strategy team

Investing for value added M&A is a winning investment

We have built an express way bridge to « launch & run » a trusted and effective integrated M&A desk

2. What we bring from China :

– Understanding of China key ambitions and constraints

– Up-and-running full service team to detect and chase best M&A opportunities

– Precision due diligence capacity made to measure

1. What we bring from Europe :

– Unparalleled M&A on-field experience in a large EU industry cross section and beyond (ex. Africa)

– In-depth understanding of European expectations regarding transactions

– Euro team single point of contact for China

• China : Long term local presence, excellent M&A expertise and business network• Europe : Home base, capacity to spot opportunities and quickly profile best targets

Conclusion




Next steps

Deploy “Value Added” M&A strategy

• Define key priorities for Chinese client

• Taylor best M&A strategy

• Taylor best M&A strategy

• Implement winning organization

• Start external investment programme

• Agressively / smoothly manage investment

Leading a world of change, together

China goes abroad (abstract) - Maverlinn

Economy & Finance

Transcript of China goes abroad (abstract) - Maverlinn