Gazing West

With a new year afoot, it seems to be a good time for retrospection and to ponder what the future holds for M&A deals ahead. Looking back at the record level of China merger and acquisition activity in 2016, an activity reasonably sustained for certain sectors in 2017. Amounting to $158.1 billion in foreign mergers and acquisitions despite a 30% decline in comparison with 2016. We now start to contemplate how this might not have been an isolated spike but rather a new norm setting in.

 Earlier in July of this year, a Chinese private equity consortium scored the winning bid of $11.6 billion for Singapore listed Global Logistic Properties, the largest warehouse operator in Asia engaged in the provision of logistics facilities and services, making it de facto Asia’s largest private equity buyout.

The acquisition represented a unique opportunity for the consortium to invest in a corporation with a leading platform and expand its leadership position in the modern logistics market space. The privatization was approved on November 30th with an overwhelming shareholder support, aligned with the generous premium of 8% over the all-time high closing price of the shares on November 15th, 2013 ($3.38 in cash).

Excitingly, the just-acquired company announced on October 2nd having agreed to acquire Gazeley Limited from Brookfield Property Partners L.P. and Brookfield Asset Management Inc. for a consideration of approximately $2.80 billion. Gazeley, the UK-based company, develops, owns and operates logistics warehouses and distribution parks. Arguably a well-thought acquirement as it provides GLP with Gazeley’s imposing assets in Europe which include a 32 million square feet portfolio which is spread on Europe’s key logistics markets, namely the UK (57%), Germany (25%), France (14%) and the Netherlands (4%). The deal embodies GLP’s first steps into Europe and success in underscoring consolidation in its core business. The acquisition provides a primary operational and development platform for GLP in Europe since it intends to retain Gazeley’s current experienced local team and brand.

Gazeley, with properties in the four strongest logistics markets in Europe, has acquired leading capabilities across the entire value chain including Investment, Development, Asset Management and Leasing. Noticeably, this business model is really similar to that of GLP; while the operation is the foundation of its business model it generates significant value through development to meet market demand and serve customer’s needs. GLP also leverages its fund management platform to recycle capital from mature, stabilized properties and uses the proceeds to fund new developments.

This also seems aligned with the precedent successful market penetrations, such as the acquisition of 13 million square feet of assets in the main logistics markets of Sao Paulo and Rio de Janeiro for $1.45 billion in 2014 and the acquisition of two US portfolios for $13 billion in 2015. By achieving dominant market positions in China, Japan, US and Brazil, the coverage of GLP’s platform generates a powerful “Network Effect”, which leads to worthy visibility on demand, and strong customer retention.

The network effect occurs because the value of GLP’s service increases for both new and existing users. Gazeley’s asset and products complement GLP existing products and assets, thereby creating synergies.

We can expect more similar acquisitions in order to either reinforce or diversify their portfolios to maintain their edge over the competition.

Chinese Companies’ Deal Drivers

Chinese companies (or consortiums) usually target overseas companies to diversify their assets, while state-owned or large companies see the opportunity to acquire technology or to establish a global presence in strategic activities.

This naturally follows China’s fundamental transformation. The shift from an export and public investment model toa consumption one.

China’s two decades of hasty growth have created a large surplus, and some of that surplus is invested in Europe and the US. Like it was particularly the case for GLP which has achieved highest-ever earnings of $794 million in 2017 and $1.8 billion cash profit from asset sales over the last five years. Illustrating China’s effort to acquire the brands and technology central to transition to a ‘new’ economy driven by domestic consumption.

This growth directly stems from China’s leadership growth goals (including doubling China’s 2010 GDP level by 2020) supported by a special interest on industries such as advanced manufacturing, services and networked information and digital technology. Where Chinese companies are encouraged to acquire expertise and market access overseas.

It is interesting to note that many of the sectors (including logistics) stated as critical to future growth by the government are already witnessing an increased outbound M&A activity.

The Dark Side

 At the end of – the record year –2016, Chinese regulators passed laws increasing the inspection of outbound deals to implement stricter rules on any overseas investment above $10 billion, and on any companies investing more than $1 billion in noncore businesses. However, strategic acquisitions in nature and within specific industries were still stimulated. The new regulation is expected to be particularly tough on overseas real estate purchases.

This uncertainty might have prompted GLP’s acquisition of Gazeley in Europe to capitalize on a rather short opportunity window.

Intriguingly enough, China’s economy remains much less open to overseas direct investors — particularly in M&A — than EU and the US are to their Chinese counterpart.

Hopefully, governments and businesses start to watch beyond deals data and realise how the risk to US and EU companies, like the leading European actor of prime logistics real estate Gazeley, comes not only from the expanding technological disruptions but also from the competitive risks of the pace and scale of the transformations underway in China.

There are already signs of a shift in the balance of power. It is likely that, at current rates of growth, China by 2026 will surpass the US in terms of GDP.

The European Commission is currently crafting new laws to protect the EU’s most strategic companies from Chinese takeovers, especially if the Chinese offeror is backed by subsidies, or if it is making the acquisition based on China’s political agenda.

Similarly, many Chinese investments are subject to review by the Committee on Foreign Investment (CFIUS), which defines whether a deal with an alien corporation, especially government-owned ones, raise national security issues. While China only accounts for a few percent of these investments in the US, it comprises nearly a quarter of the CFIUS cases.

These sources of tension, if not balanced by skilful diplomacy, could exasperate geopolitical competition as China slowly dislodges the US as the world’s most powerful nation. This deeply contrasts with the ‘America first, America first’ of the Trump administration. 2018 will certainly be an eventful year…

By: Charles-Anthony Heleine