China Resource M&A Set to Slow 中国海外资源并购或将放慢脚步
I previously predicted that 2012 could be a landmark year for Chinese firms to buy global energy and resource assets (previous post), and now the latest signs indicate the buying binge could quickly fizzle in 2013. The reason is simple: After ordering big state-run energy and mining companies to buy global assets to feed China’s expanding economy, Beijing is quickly realizing that rapidly falling prices for commodities like coal, oil and iron ore could render many of those overseas purchases as uneconomical in the very near future.
That realization seems the most likely explanation behind 2 recent pieces of news involving Hanlong, a Chinese mining company that announced earlier this week that its purchase of Australia’s Sundance Resources had finally been approved by China’s powerful state planner after a lengthy delay. (English article) That announcement was followed just a day later by another report saying Hanlong wanted to lower the price it previously negotiated for Sundance, arguing falling commodity and stock prices meant the company was less valuable than when the original deal was signed. (English article)
My interpretation of this somewhat strange sequence of events is that Beijing’s state planner was reluctant to approve the deal, perhaps due to falling global commodity prices, and Hanlong could only get the green light by promising to renegotiate the purchase price to a lower level. If that’s the case, I could easily see this deal ultimately collapsing, since Sundance may not want to significantly lower the previously agreed price.
Such a collapse could quickly have a domino effect, since many of the biggest Chinese overseas purchases from the last year have yet to formally close. The biggest of those deals came just last week, when oil major CNOOC (HKEx: 883; NYSE: CEO) announced plans to buy Canada’s Nexen (Toronto: NXY) for $15 billion, a record amount for a resource acquisition in North America.
I predicted that deal could run into trouble quickly as it meets with resistance from US politicians, since Nexen’s ownership of assets in US waters means both the US and Canada must approve the deal. But even if the US ultimately approves the deal, the global economy could ultimately kill it if global oil prices tumble in the next year — a possibility that looks increasingly likely as China’s economy slows and the economic recoveries in Europe and the US are weaker than expected.
At the end of day, I would expect to still see Chinese resource firms continue to pursue big global M&A through the end of this year, with perhaps another 2-3 big deals announced by the end of December. But in 2013, we could easily see many of the major deals announced in 2011 and 2012 ultimately collapse if commodity prices remain weak, as Beijing balks at paying the high prices negotiated for many of these deals when commodity prices were still high. If that’s the case, shareholders of all of these firms need to remain alert, as shares of acquisition targets will take a big hit when deals collapse, and the Chinese acquirers like CNOOC will also suffer when they are forced to pay big break-up fees for failing to complete the deals.
Bottom line: New events show Beijing may be worried about overpayment in many recent Chinese global resource purchases, which could lead many pending deals to collapse.
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