Jefferies

Actionable Ideas for Companies and Sponsors

Mitigating Deal Risks Associated with Chinese Acquirors

Through August 2017, China outbound M&A volume was 50% lower than the record $181 billion seen through August of 2016. The major factors driving this slowdown are a series of capital constraints formally implemented by Chinese authorities designed to restrict capital movement out of China and stabilize their currency. The principal components of these regulations restrict foreign transactions which are: (i) greater than $1 billion outside the acquiror’s core industry or for the purchase of real estate, or (ii) any transaction greater than $10 billion. Compounding the uncertainties of China’s regulations is a heightened level of scrutiny from foreign governmental authorities for national security reasons, exemplified by the U.S. government in September 2017 blocking the $1.3 billion acquisition of Lattice Semiconductor by Canyon Bridge, a Silicon Valley private equity firm funded by the Chinese government.

Given this backdrop, sellers of businesses to Chinese acquirors should demand additional protections to address the internal and external headwinds Chinese buyers will continue to face including (i) demanding larger reverse break fees – there are current examples of reverse break fees as high as 10% of deal value compared to typical 3-5% reverse break fees, (ii) attaining escrow deposits at the signing of the transaction, (iii) shortening the seller’s time period to terminate e.g. the drop date, and (iv) conducting up-front due diligence on any Chinese buyer’s ability to fund a transaction, including requiring proof of access to funds.