May 21, 2020 By LegalMiner
During 2019, a total of 125 cross-border M&A transactions were publicly disclosed by Chinese A-share listed companies (hereinafter referred to as “analyzed companies”), with a total transaction value around USD 10.629 billion. The number declined significantly by 43.2% and 23.78% respectively from 220 in 2018 and 164 in 2017. Since the second half of 2018, the global M&A market has been cooling down. The number of cross-border M&A transactions by Chinese A-share listed companies in 2019 has been on the decline, with an average monthly transaction volume of just over 30 and a total transaction value less than half of that of the same period last year. Under the downward pressure of the domestic economy, the deterioration of fundamentals has made enterprises more reluctant to conclude cross-border M&A deals, and at the same time the increasing global economic uncertainty has led to the further cooling- down of the M&A environment.
Of the above cross-border M&A transactions, a total of 7 transactions constitute major asset restructuring.
In 2019, about 37.6% of cross-border M&A transactions of A-share listed companies took place in the manufacturing industry, followed by the medical industry with about 16.8% and the mining industry. Other major targeted industries include wholesale & retail and transportation, warehousing and postal services. Compared with 2018, as the manufacturing industry is still the main field where M&A transactions take place, the medical industry becomes more and more popular while the interest in mining industry remains stable. It is obvious that M&A transactions as a whole is further changing from resource cooperation-oriented to technology introduction and market expansion-oriented pattern, aiming to push forward industrial upgrading and compete for the global market.
In 2019, the geographic distribution of cross-border M&A targets of Chinese A-share listed companies was diversified. Most of the investments took place in Europe, accounting for nearly one third of the total. This is followed by North America with 19 investments accounting for 15% or so, and then Southeast Asia and South Asia. Western European countries generally have profound background of technology and a sound market economy environment, especially the world’s leading industries in automobile manufacturing, electronics, machinery and equipment manufacturing, chemistry and renewable energy. The United States, on the other hand, possesses a large number of core technologies in IT, biopharmaceuticals, high-end equipment and other sectors. At present, European countries have not yet completely recovered from the European debt crisis. Many enterprises there with high and new technologies and mature brands now have a lower valuation. Chinese enterprises may acquire high- quality assets through cross-border M&A transactions as well as excellent talents and technologies by establishing local research and development centers, etc.
We have only seen a handful of cases where Chinese A-share listed companies acquire overseas public companies in cross-border M&A, only accounting for 13.4% of the total for 2019. When choosing the target for M&A, many enterprises focused on its regulatory environment. In addition to such environmental factor, the nature of target also brought certain difficulties which affected the decision- making of acquirers. Compared with acquisition of non-public companies, to acquire a foreign public company will face more stringent regulatory oversight, more complex procedures and higher transaction costs. Moreover, the stock price of a public company is prone to market fluctuations, which probably makes a transaction fall apart. Therefore, to acquire a foreign public company is still challenging for Chinese A-share listed companies, and each year such transactions only account for 10-15% of the total volume.
In 2019, the vast majority of cross-border M&A transactions by Chinese A-share listed companies are still core business M&A, accounting for about 95%. Cross-border M&A transactions will continue to be dominated by core business M&A, which is consistent with the direction of China’s national economic development.
Jiangxi Copper Corporation Limited (USD 1.116 billion): Jiangxi Copper (Hong Kong) Investment Company Limited (hereinafter referred to as JCCI), a wholly-owned subsidiary of Jiangxi Copper Corporation Limited, planned to acquire 100% shares of PIM Cupric Holdings Limited from its sole owner Pangaea Investment Management Ltd. (hereinafter referred to as PIM), a company which indirectly holds shares of JCCI, for a consideration of USD 1.1159 billion. Upon completion of this acquisition, JCCI will indirectly hold, via its wholly-owned subsidiary, 124,198,371 shares (or18.015% of the total issued shares) of First Quantum Minerals Ltd. (hereinafter referred to as FQM), a company listed on the Toronto Stock Exchange of Canada. FQM has 9 copper mining projects in 8 countries including Zambia, Panama and Peru, among which FQM has 3 world-class mines that have been put into production in Zambia and Panama and 2 mines to be exploited in Argentina and Peru. Through this transaction, the company will become the single largest investor-shareholder of FQM in the same industry, which can facilitate the globalization of company resources. (In progress)
Zijin Mining Group Co., Ltd. (USD 1.0 billion): The company, through a subsidiary of its wholly- owned overseas subsidiary Gold Mountains (H.K.) International Mining Co., Ltd., proposed an acquisition arrangement to acquire all the 203,172,441 issued shares and shares to be diluted of Continental Gold Inc. in cash at a price of CAD 5.50 per share. The transaction value is about CAD 1.33 billion after deducting the exercise price of relevant equity instruments, or USD 1.0 billion. The core asset of Continental Gold Inc. is the 100% equity in the Buriticá gold mine project located in Antioquia, Colombia. This transaction can increase the company’s reserves of gold and silver resources and generate high profits and cash flows due to the imminent commissioning of the gold mine project. (In progress)
Joyvio Agriculture Development Co., Ltd. (USD 833 million): The company intended, via its wholly-owned subsidiary Beijing Joyvio Zhencheng Technology Co., Ltd., to jointly invest and hold 100% shares of the Chilean holding company Australis Seafoods S.A. together with Cangyuan Investment through acquisition or establishing a new entity, in which Joyvio Agriculture Development Co., Ltd. held a controlling stake. The company has a wholly-owned Chilean subsidiary - Chilean Acquisition Company, which is the offeror of this tender offer. The Chilean Acquisition Company is indirectly held by Beijing Joyvio Zhencheng Technology Co., Ltd. and Cangyuan Investment. It intended to acquire at least 95.26% and up to 100% of the issued shares of the target with cash via a general tender offer. On 1 August 2019, upon the final acceptance of the offer by the target’s shareholders, the consideration for acquiring their shares of the target has been paid. The total number of shares held by the target’s shareholders who accepted this tender offer was 6,814,640,680, accounting for 99.838% of the total share capital of the target. With years of experience in seafood business, the listed company has achieved a leading position in sales of Arctic sweet shrimp and narrow cod. Upon completion of this acquisition, the seafood business operated by the listed company will incorporate salmon, one of the most valuable and important seafood in the world, which helps to bring new resource support and profit growth for the company. (Completed)
China Merchants Expressway Network & Technology Holdings Co., Ltd. / Anhui Expressway Company Limited / Sichuan Expressway Company Limited / Jiangsu Expressway Company Limited (USD 689 million): The company planned to jointly invest with the consortium of CMU, Zhejiang Expressway Co., Ltd., Jiangsu Expressway Company Limited, Sichuan Expressway Company Limited and Anhui Expressway Company Limited via their respective SPVs in Hong Kong to establish a consortium of Hong Kong SPV. It intended to acquire, via this consortium of Hong Kong SPV or other SPV owned by this consortium, 51% shares of ICA IC İÇTAŞ ASTALDI Üçüncü Boğaz Köprüsü ve Kuzey Marmara Otoyolu Yatırım ve İşletme A.Ş. (hereinafter referred to as “ICA”, i.e., the road & bridge target company ) in turkey, 51% shareholder loans of ICA’s former shareholders, and 51% shares of Eurasia Motorway Maintenance and Operations Limited (hereinafter referred to as “Eurasia OpCo”, i.e., the target company operating maintenance) in Hong Kong. ICA undertakes the financing, design, construction, operation, maintenance and repair of the Odayeri-Paşaköy part of the North Marmara Expressway in Istanbul, Turkey (including the Bosporus Third Bridge). The acquisition of the target assets helps the company to optimize its allocation of resources, improve its strategic layout and promote its status in the industry as well as its market influence. It is a strategic measure to achieve the purpose of building a “world-class leading domestic” company, and it also helps to enhance the company’s status in the industry as well as its market influence. (In progress)
Suning.com Co., Ltd. (USD 680 million):On 22 June 2019, Suning International Group Co., Limited (hereinafter referred to as Suning International), a wholly-owned subsidiary of Suning.com Co., Ltd., acquired Carrefour China Holdings N.V (hereinafter referred to as Carrefour China) from Carrefour Nederland B.V and Carrefour S.A (Carrefour Group) for RMB 4.8 billion in cash. Suning.com Co., Ltd. will integrate with Carrefour China in the business fields of store network, commodity supply chain, logistics, warehousing and delivery. With the combination and development of the business, the synergy of such integration is expected to come into play, which will facilitate the development of the company’s fast-moving consumer products, enrich the company’s member ecology, enhance the user value and establish the infrastructure of the national storage and supply chain for fast-moving consumer products. (Completed)
China Molybdenum Co., Ltd. (USD 470 million): The company planned to acquire 100% of shares in BHR from the transferor through its wholly-owned subsidiary CMOC BHR Limited at a consideration of USD 470 million, thus obtaining a 24% equity in TFM indirectly held by BHR through BHR DRC. The Tenke Fungurume mining area owned by TFM is one of the largest and finest copper and cobalt mines in production around the world. It maintains a sound profit level and has great potential for future development. By acquiring 24% of the equity in TFM through this transaction, the company can have a greater say and control in this mining area and further improve its profitability and anti-risk ability. (Completed)
Sinotrans Limited (USD 440 million): The company agreed to the overall plan for the acquisition of shares in the subsidiary of KLG Holding in Europe. The plan is to establish wholly-owned subsidiaries SPV1, SPV2 and SPV3 in Netherlands and conduct two-step acquisition of 100% shares of seven logistics target companies in the Netherlands, Romania and the UK from KLG Holding and its subsidiary under its actual control. The targets have a high-density and stable network of European land transportation, as well as a unique mode of groupage and LTL freight transport. The acquisition price for this transaction is expected to be no higher than EUR 385,693,735. This acquisition can extend the Chinese shipping business to EU regions and help the company to provide end-to-end international logistics services. (In progress)
Guangdong Wencan Die Casting Co., Ltd. (USD 280 million): On 8 December 2019 CST, the company acquired 100% shares of Le Bélier S.A. for EUR 251.3 million with Philippe Galland and Philippe Dizier, two natural person shareholders of Le Bélier S.A., and an institutional shareholder Copernic S.A.S. The core products of Le Bélier S.A. include precision aluminum alloy castings in the fields of automotive brake systems, air intake systems, chassis and body structural components. The company has 12 manufacturing bases in France, Hungary, Serbia, China, Mexico and other parts of the world. This acquisition will help to realize the company’s global layout and enhance the global market share and brand awareness of its products. (In progress)
Zijin Mining (USD240 million): The company acquired 72% of class B shares of CuAu International Holdings (BVI) Ltd. held by Freeport-McMoRan Exploration Corporation at an initial purchase price of USD 240 million, thereby acquiring Freeport-McMoRan Exploration Corporation's indirect interest in the lower belt of Timok copper and gold mine and the exploration right held by Rakita Exploration d.o.o. Upon the completion of the transaction, the company would hold 100% of all the interests in the mineral resources of the upper and lower belts of the Timok mine, which would be conducive to unified planning, construction and operation of the upper and lower belts of the Timok mine. (Completed)
KFMI (USD 231 million): in this transaction, Konfoong Materials International Co., Ltd (“KFMI”) intends to purchase 100% equity of Silverac Stella, the target company held by the counterparty Gongchuanglianying, for USD 230,917,819 in stock and cash. Upon completion of this transaction, Silverac Stella will become a wholly-owned subsidiary of KFMI. KFMI will indirectly holds 100% equity of the ultimate target company Soleras Holdco through Silverac Stella, and ultimately holds 100% equity of Soleras BVBA, Soleras US and Soleras Jiangyin. Both KFMI and the ultimate target company are professional sputtering target material suppliers. Through this transaction, KFMI will diversify its target material products, optimize the product structure, develop the business layout, and improve its anti-risk ability. (In progress)
Two of the cross-border M&A projects in 2019 have failed, because one of the transactions was not suitable to proceed due to the influence of market factors3, and the other failed to meet the payment terms agreed by both parties4. The details are as follows
Goertek Inc. (USD 134.6 million): Hong Kong Goertek plans to purchase a 51% stake held by MACOM Cayman in MACOM HK for a total of USD134.6 million of its own capital. The reason for the termination of the agreement: Hong Kong Goertek has been actively proceeding with the deal since the planning of this equity purchase, however, affected by the market environment, after full communication and friendly negotiation, the parties to the agreement decided to terminate the implementation of this equity purchase.
Yifan Xinfu Pharmaceutical (USD 50 million): Hangzhou Xinfu Science & Technology Co., Ltd. (hereinafter referred to as "Hangzhou Xinfu"), a wholly-owned subsidiary of Yifan Xinfu Pharmaceutical, and Amyris,Inc (hereinafter referred to as "Amyris") agreed that on any date agreed by both parties after the entry into force of the Agreement or before15 March 2019, subject to the fulfilment of the prerequisites, Hangzhou Xinfu should acquire from Amyris the product sharing interest received from DSM Nutritional Products AG (hereinafter referred to as “DSM”) for USD 50 million. The reason for the termination of the agreement: according to the assignment agreement, some of the payment conditions had not been met, and by mutual agreement, the two parties agreed to terminate the assignment agreement without compensation to each other.
Of all the cross-border M&A transactions of A-share listed companies in 2019, a total of 7 projects constitute major asset restructuring. Among them, the restructuring projects of Haozhi Industrials, Wencan Die Casting Co., Ltd. and Healthcare are under way, while the other four projects have completed the restructuring.
The specific transaction models and transaction terms are analyzed as follows:
Currently, there are mainly two ways of cross-border M&A transactions in the world, i.e. one-on-one negotiation and public bidding. Five of the seven restructurings above were conducted through one-on- one negotiation (in the Healthcare project, the company made a tender offer to 30 shareholders holding shares of the Target Company and Richard Haux, Jr.), while the restructurings of Joyvio Group and Sinomine Resource were conducted through public bidding.
Considerations for cross-border M&A by a listed company are commonly paid by: cash, share issuance, share plus cash, or assets.
In the seven restructuring projects above, all the companies analyzed pay in cash, mainly because the seller's motivation for selling the assets is often to obtain cash and exit the relevant business.
For cross-border M&A transactions involving cash payment, in addition to making full use of their own funds, the commonly used financing methods of the companies analyzed also include debt financing and equity financing.
(1) Shareholder borrowings + non-public offering of shares to raise funds + co-investors' self- raised funds: Joyvio Group proposed to issue no more than 26.8 million shares in a non-public offering and was expected to raise a total of no more than RMB 1 billion.
1) Haozhi Industrials negotiated M&A financing loans with China Minsheng Bank, China CITIC Bank and China Merchants Bank, and in order to improve the financing efficiency, the company's controlling shareholders and actual controller promise to provide guarantees for the financing of listed companies. (The loan plan includes: ①A loan credit of RMB 200 million with a term of five years; ②A loan credit of RMB 100 million with a term of seven years; ③A loan credit of CHF 20 million with a term of five years.)
2) Sinomine Resource received a USD 66 million 5-year M&A loan from the London branch of China Merchants Bank. In addition, the company applied for a letter of guarantee with the Shuangyushu branch of Bank of Beijing to provide guarantee for the loan of USD 63 million. The company also provided a counter-guarantee with Sinomine Tianjin, Jiangxi Dongpeng and the legal representative Wang Pingwei, used some of its real estate and land use rights as counter-guarantee mortgage, and pledged 100% shares of Jiangxi Dongpeng held by it.
3) Hamaton: The Yuhang branch of Bank of China issued a loan confirmation letter for Hamaton, planning to provide it with a loan of no more than EUR 27.5 million, which is proposed to be divided into three specific sub-loans with a term of six years at a lending rate of EURIBOR (European interbank offered rate) plus a certain interest spread. The spread is determined by agreement between the lender and the borrower. The equity pledge of the target company of this transaction is required to be completed within 12 months after the completion of the acquisition, and additional land and plant mortgage guarantee of the listed company, part of the equity pledge held by Vantone Holdings, the controlling shareholder of the listed company, and the joint and several liability guarantee of Vantone Holdings and the actual controller Zhang Jianer shall be added.
In cross-border M & A agreements, in order to enhance the certainty of the buyer's performance of the agreement, the seller sometimes will require a specific performance guarantee mechanism, often in the form of performance bond, letter of guarantee / letter of credit, or shareholder guarantee.
Two of the seven restructuring transactions under this analysis have a performance guarantee mechanism, including deposit and performance bond terms. To be specific:
(1) Deposit terms (financing margin terms): In order to improve the certainty of the transaction, smoothly advance the restructuring transaction and express the cooperation sincerity of Hamaton, both parties to the transaction agreed to include deposit terms into the Equity and Asset Purchase Agreement through negotiation. Hamaton provides the seller with a deposit of EUR 2.5 million with the function of performance guarantee. If the Equity and Asset Purchase Agreement with Hamaton is terminated, the deposit will belong to the seller. If all the delivery conditions, including the approval of this transaction by the general meeting of shareholders of the listed company, are normally performed and realized in accordance with the Equity and Asset Purchase Agreement, the above-mentioned deposit will be taken as part of payment for this restructuring transaction, offsetting part of the final transaction consideration.
(2) Financing margin: Before or on the day of signing the offer by Haozhi Industrials, the buyer shall pay the seller CHF 1.7 million to demonstrate its commitment to obtain the external funds needed to complete the transaction. If all the conditions for signing the SPA have been met, the parties have signed the SPA, and have obtained all regulatory approvals from competent authorities required to complete the transaction, but the buyer fails to obtain external financing to complete the transaction, the seller shall have the right to retain the financing margin. If the closing has not been completed before the termination date, but the buyer has obtained financing to complete the transaction on or before the termination date to the satisfaction of the seller (including the payment of the purchase price and the transfer of the seller's bank liabilities), the seller shall immediately repay the full financing margin to the buyer.
The clause of breakup fee/reverse breakup fee is designed to ensure the smooth completion of a transaction between two parties without terminating the transaction willfully by either party. Of the seven restructuring projects analyzed, four involves clauses of both breakup fee and reverse breakup fee.
(1) For Sinomine Resource, both parties to the transaction have agreed on a termination penalty of USD 5 million, which is equivalent to 4% of the transaction price, as liquidated damages for either party's inability to complete the transaction in the agreed manner.
(2) For Joyvio Agriculture, both parties to the transaction have agreed on: common liquidated damages for payment and delivery obligations (USD 44 million) and performance of obligations under the prohibition of solicitation or non-competition (USD 18 million); and USD 36 million of liquidated damages paid by the buyer to the seller if the buyer fails to go through the examination and approval procedures in China in accordance with the agreement.
(3) For Haozhi Industrials, both parties to the transaction have agreed that: both parties use the CHF 500,000 delivered by them respectively as collateral. If the buyer fails to deliver the transaction for any reason, the seller has the right to charge the buyer a termination fee (in addition to recovering its own termination fee); if the seller fails to deliver the transaction for any reason, the buyer has the right to charge the seller a termination fee (in addition to recovering its own termination fee).
(4) For Wencan Die Casting Co., Ltd., both parties to the transaction have agreed on:
a）Breakup fee of the buyer: If the transaction fails to be completed due to the failure to pass the
foreign investment review in France or the antitrust review in Germany or Slovakia, the company needs to pay 1% of
the transaction price to the counterparty as a break-up fee. If the transaction fails to be completed or the company
fails to carry out the transaction when the delivery conditions are met due to the failure of completing
filing of China's foreign investment or the lack of approval by shareholders' meeting, the company needs to pay 5% of
the transaction price to the counterparty as a breakup fee. (If the company
needs to pay both of the two kinds of breakup fee, only 5% of the transaction price should be paid as the breakup fee.)
b）Breakup fee of the seller: If the closing conditions are satisfied but the counterparty does not conduct the transaction (unless it is caused by the death or incapacity of the natural person counterparty), the counterparty is required to pay 5% of the transaction price to the company as the breakup fee.
In the process of cross-border M&A, there are escrow account clauses for the benefit of the seller, the buyer or dual-use. Only one of the seven restructurings above involves a dual-use escrow account: in the case of Haozhi Industrials, to prove the commitment of the parties to deliver the transaction, the parties agreed to deposit CHF 500,000 into an escrow account held by the escrow agent, which will be held by the custodian as collateral to ensure a commitment to deliver the transaction. (i) If the buyer fails to deliver the transaction for any reason, the seller has the right to charge the buyer a termination fee (in addition to recovering its own termination fee) and (ii) if the seller fails to deliver the transaction for any reason, the buyer has the right to charge the seller a termination fee (in addition to recovering its own termination fee). If the transaction fails to be delivered or closed due to the failure to obtain any regulatory approval from any competent authority (other than the approval of the Chinese Government) or the seller's failure to comply with any of the provisions of “3. Due diligence”, “7. Seller's commitment" and “9. Supervisory committee" in this Agreement, the parties shall recover its own termination fee in accordance with mutual instructions from both parties, and the terms of the binding offer agreed by the parties shall be terminated automatically.
Of the seven restructurings, only Joyvio Group obtained the Overseas Investment Project Filing Notification issued by the National Development and Reform Commission, while the remaining six put their transactions on records with the corresponding provincial development and reform department. As the buyer of each of the above M&A projects is not a central enterprise, and the M&A targets do not involve sensitive countries, regions or industries, the relevant restructurings are just reported to the competent provincial department of commerce for the record.
In accordance with applicable laws in different jurisdictions, if an M&A transaction involves a change of control of the M&A target and in the meantime the transaction size or the turnover of the relevant party to the transaction reaches a certain threshold, such transaction may be subject to antitrust review in the relevant jurisdiction. None of the seven restructurings involve domestic antitrust review, while two of them involve overseas antitrust review: one is the antitrust review in Chile, Brazil, Russia and the United States, where the M&A targets of Joyvio Group are located; and the other is the antitrust review in Germany and Slovakia, where the M&A targets of Wencan Die Casting Co., Ltd. are located.
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