China Cross-Border M&A Continues

In one of the larger overseas industrial acquisitions ever by a Chinese State-Owned Enterprise (“SOE”), Shanghai listed (600458.SS) Times New Material Technology Co., Ltd. (“TMT”) announced last week that it agreed to acquire the Rubber and Plastics Business Unit of ZF Friedrichshafen AG (“ZF”) for $399.3 million.

While a number of billion-dollar plus overseas deals have been completed by Chinese SOEs in the energy and natural resource sectors, and large private companies like Wanda and Shuanghui Group have made billion dollar plus overseas acquisitions, China’s industrial SOEs have been more cautious. SOEs must get numerous approvals from Chinese regulators to invest outside the country, but despite China’s general encouragement for its companies to “go global,” these approvals have not been easy to come by. The complications of managing overseas businesses, plus sluggish business conditions in Europe and the United States, are two of the main reasons.

Based in Zhuzhou, Hunan Province (near Changsha), TMT is a 27 percent-owned subsidiary of CSR, one of China’s largest manufacturers of railway equipment. TMT is a leading provider of noise, vibration and harshness (“NVH”) components and polymer composite materials for the railway, automotive, construction and wind power industries. TMT said it aims to expand into the global automotive NVH market by making BOGE, the ZF Rubber & Plastics Business Unit that it is acquiring, its primary automotive platform globally. In 2012, TMT had revenues of approximately $590.4 million.

BOGE mainly manufactures NVH related components for autos in 10 plants around the globe, supplying to manufacturers of chassis and power-train systems. BOGE generated approximately $962.7 million in sales with about 3,300 employees in its ten locations in Europe, North and South America, Asia and Australia.

The TMT acquisition of BOGE is noteworthy for several reasons.

First, it underscores the fact that, despite its large growth in recent years, China’s automotive business offers continued growth opportunities and is seen as an attractive industry in which to expand. China’s passenger car market is growing by over 15 percent this year, and even heavy duty truck sales are rebounding after a decline in 2012. China will produce over 20 million trucks, buses and passenger cars in 2013, and large cities like Changsha are actively wooing automotive assemblers and components manufacturers. TMT wants to diversify its business and take advantage of China’s continuing boom in automotive.

Second, the BOGE deal highlights the strong desire of companies like TMT to upgrade their technology and move to higher value added products. Dr. Jun Yang, CEO of TMT, is proud of the smart, young engineering staff that has been assembled at the company, and the many accomplishments that the staff has made in China. However, Dr. Yang realizes that an acquisition like BOGE can help TMT to leapfrog his other competitors.

Third, the BOGE acquisition is large relative to TMT. BOGE’s revenues and assets are 160 percent larger than those of its acquirer. In order to finance the acquisition, TMT will rely heavily on its parent and outside funding sources. Loans provided by the Export-Import Bank of China will account for 70 percent of the total consideration, and CSR has committed to fund the rest via capital injection or a shareholder loan to TMT.

Fourth, the BOGE acquisition demonstrates that Chinese companies like TMT may be the only viable potential purchasers of large, industrial assets in mature economies. According to Morgan Stanley, BOGE is losing money everywhere except the United States and China, and the company is unprofitable overall. Given a poor profit picture in a mature industry, private equity firms are unlikely buyers, and not many global strategic buyers are actively looking for large automotive acquisitions. With its ability to further BOGE’s expansion in China’s large and growing auto market, TMT is one of a handful of potential buyers of the asset. Torsten Bremer, head of BOGE, said as much when he commented that “TMT’s future strong investment support for our rubber and plastics activities certainly provides us with enhanced opportunities for global business development.”

The deal is subject to shareholder approval as well as the regulatory approvals in China and Europe. It is expected to close in the first half of 2014.

For the reasons given above, an increase in cross border mergers and acquisitions out of China may be an important trend in 2014.

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