FINANCE: Global Hotel, Chip Deals Highlight China’s Poor Credit

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Bottom line: Chinese buyers will lose out to world-class rivals in bidding for top global M&A targets over the next 5-10 years, and credit ratings for the second-tier assets they do acquire will fall after ownership changes.

Stats ChipPac, Starwood deals highlight China’s shaky credit

Two major new deals are showing why China’s credit remains low when it comes to global M&A, hobbled by factors like lack of experience, unknown brands and a growing reality that Beijing may not provide bail outs if their business runs into trouble. The first deal comes in the high-tech chip sector, and has seen the credit rating of Singaporean heavyweight Stats ChipPac (Singapore: STAT) take a hit after being purchased by a Chinese buyer. The second deal has leading Chinese hotelier Jin Jiang (HKEx: 2006; Shanghai: 600574) being snubbed in its bid for US giant Starwood (NYSE: HOT), operator of the Sheraton and Westin Brands.

Neither of these developments comes as a big surprise, but they do reflect the very real challenges that Chinese companies will face as they try to become players on the global M&A scene. Many of these Chinese names have access to big cash from their state-run connections, though converting that to foreign currency and getting necessary government approvals is sometimes challenging. More importantly, these companies have little or no track record at running a major global company, which makes creditors wary and other more experienced suitors often look more attractive.

Creditors are already feeling quite wary following the recent sale of Stats ChipPac, Southeast Asia’s leading chip assembler, to Jiangsu Changjiang Electronics Technology (JCET) (Shanghai: 600584). Stats ChipPac was previously owned by Singaporean sovereign wealth fund Temasek, which helped the company borrow money at very attractive rates due to its own stellar rating.

But media are reporting that following recent completion of the sale, which was first disclosed late last year (previous post), Stats ChipPac is certain to see its rating downgraded sharply as it tries to refinance $400 million of its current debt. (English article) Temasek’s exit after the sale closed last month has already triggered 2 downgrades to Stats ChipPac’s credit ratings by Standard & Poor’s, meaning it will have to pay significantly higher interest rates when it issues the new bonds.

Starwood Opts for Marriott

Next there’s Jin Jiang, which has been on a global buying spree over the last year and made its latest move on that front when media reported last month that it planned to bid for Starwood. (previous post) Jin Jiang was actually competing with Chinese sovereign wealth fund China Investment Corp (CIC) to bid for Starwood, since Beijing wanted to choose just one domestic company to avoid too much competition.

But the biggest competition didn’t come from other Chinese buyers, but instead from big global names that were also interested in Starwood, whose medium size was making it hard to compete with larger, better-run operators. Reports of Jin Jiang’s interest were quickly followed by others saying US operator Hyatt (NYSE: H) was also interested. Now Starwood has just announced a formal deal to sell itself to global giant Marriott (NYSE: MAR) for $12.2 billion, creating the world’s largest operator. (English article)

While Starwood certainly would have been a big bite to swallow, Jin Jiang does have some experience with major global M&A. Its biggest deal came about a year ago, when it paid 1.2 billion euros ($1.3 billion) for Louvre Hotels Group, Europe’s second largest hotel operator but clearly a second-tier player. Perhaps not coincidentally, Jin Jiang bought Louvre from Starwood-affiliate Starwood Capital Group, which probably established the relationships behind this latest bid for the US hotel operator.

At the end of the day, you really can’t blame investors in either of these instances. If I were lending money to Stats ChipPac a year ago, I would have felt far more secure about getting repaid knowing that the company was owned by Temasek rather than an obscure name like Jiangsu Changjiang Electronics. Likewise, a premier name like Marriott will be far more likely to help revive Starwood’s fading fortunes than an unknown name like Jin Jiang, even though Jin Jiang might have been prepared to pay more for the company.

This kind of credibility gap will continue to hamstring Chinese companies in the M&A market for premier global assets for at least the next 5-10 years, and only time and experience will improve their position. In the meantime, Chinese buyers will have to settle for second-tier assets like Louvre Hotels and Stats ChipPac, and in many cases the companies they acquire could lose credibility under their new Chinese buyers.

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