China Enters the Vineyard

Would you like to have a nice glass of Bordeaux with your meal in Beijing or Hong Kong? You’re not alone. More and more Chinese are acquiring a taste for fine French wines, and Bordeaux sales are climbing as a result. So much so that China surpassed the U.K. and Germany to become the top export market for Bordeaux in 2010.

That’s not all the Chinese are acquiring. In early January, COFCO, the large, Chinese state-owned agribusiness conglomerate, announced that it had acquired Château Viaud, a 20-hectare Lalande-de-Pomerol estate in Bordeaux. It was the fourth major purchase by a Chinese company of a wine property in the famed Bordeaux grape region since 2008. In their relentless search for raw materials to fuel the rapidly growing Chinese economy, Chinese companies are snapping up natural resource companies in Australia, Canada, Africa and wherever else in the world they can be found. But, why French vineyards?

That’s what Louise Lucas, a Lex Column writer for The Financial Times, wanted to know when she e-mailed me over the Spring Festival holiday. My comments and those from the other sources mentioned in her article, on the subject, made the following points.

First, COFCO is in the wine business and has national distribution in China with its Great Wall brand. It’s natural that the company might want to round out its product line and leverage this system.

Second, Chinese like to own hard, tangible assets such as agricultural land, and COFCO probably got a good deal. Due to their high land component, vineyards tend to be low cash-return businesses and are generally more difficult to sell than other types of assets. This is particularly true in difficult financial times when cash is king. According to Louise’s article, COFCO began its negotiations with the owner of Château Viaud shortly after the collapse of Lehman Brothers in 2008, which sent all asset prices reeling.

The third, and perhaps most compelling reason of all, was to gain know-how. The French have been in the business of growing grapes and making wine for a long time, and the Chinese are new at it. Owning a French vineyard will give COFCO access to that know-how in a way that would not otherwise be possible.

Philippe Raoux, the seller of Château Viaud, told The Financial Times that the Chinese, in acquiring the chateau, were also buying Bordeaux culture and expertise. “They want to understand how we make wine in Bordeaux and to defend it in China – they are thirsty for our wine culture.” The fact that Mr. Raoux’s son will spend a year working for COFCO in Beijing supports his point.

In our last two posts, MTD discussed the many ways in which Western companies can take their know-how and technology to China. Part I reviewed the various methods that do not require the investment of capital, while Part II covered those methods that do. COFCO’s acquisition of Château Viaud is an example of yet another — sell your company to a Chinese buyer.

In the past, Chinese companies did not have cash. Therefore, if a Western company had products, technology or know-how that it wanted to take to China to take advantage of the market’s growth, it had no choice but to assume the risk of investing in some way in the country. Sellers of corporate assets are now finding that Chinese companies, eager to buy overseas technology and flush with cash, may be the most attractive buyers of their companies.

Chinese companies want to buy and now have the financial wherewithal to do so, and foreign owners are increasingly willing to sell to them. For these reasons, cross border M&A between China and the rest of the world will be one of the big stories in the coming years.

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