China’s Increased Scrutiny Of Outbound Acquisitions Leads To M&A Slowdown

August 7, 2017, Financial Times - A Chinese property group’s acquisition of a US senior living business has stalled as regulators in China tighten their grip on outbound investments and banks re-calibrate their assessment of lending risks.  In June, Zhonghong Zhuoye Group was close to agreeing to buy New York-listed Brookdale, which owns and operates care facilities for older people in the US.

People familiar with the deal said the asset could fetch up to $4bn, making it one of the largest overseas acquisitions for a private Chinese company so far this year.  But since then, the talks between the two companies have stalled after Beijing-based Zhonghong ran into difficulties securing financing for the buyout, two people close to the process said.  For part of its financing, the company tapped a Chinese bank for offshore and onshore loans.  

While regulators approved the offshore loan, the onshore loan has been held up, one person familiar with the matter said.  The person said that Chinese regulators had not rejected the onshore loan.  However, the bank decided to put that part of the lending on hold because it now considers Zhonghong to be “high risk”.

Since June, Chinese regulators have increased the level of scrutiny on outbound acquisitions, leading to a slowdown in dealmaking.  Four aggressive Chinese conglomerates — HNA, Fosun, Dalian Wanda and Anbang Insurance — have been at the heart of the crackdown on China’s overseas deal spree.  The banking regulator has asked that banks assess their level of exposure to those companies and the foreign exchange watchdog has said that it is looking into the use of fake collateral for guaranteeing offshore loans.

Global banks have responded by reducing their exposure to some of these high profile groups.  Chinese banks, fearing a backlash from Beijing, have also been more conservative in their credit assessments.  Companies in recent weeks have made a point of showing that they are on message with Beijing’s policy.  Wanda, for example, has announced a major divestment from many of its Chinese property investments.  Fosun chairman Guo Guangchang penned an open letter last week praising the government crackdown on deals — albeit while inking deals in France and Brazil.

Anbang’s chairman Wu Xiaohui was detained by authorities in June and has not been seen since.  China is set to hold a sensitive political meeting at the end of 2017 in which the Communist party’s leadership will probably be unveiled for the next five years.  Bankers have suggested that many overseas deals are on hold until the conclusion of the meeting, which could be accompanied by new policy directives.  The Brookdale buyout was not Zhonghong’s first experience in global dealmaking.  

The company bought a 21 per cent stake in US theme park SeaWorld Entertainment earlier this year from Blackstone for $429m, and plans to bring the theme park to China.  The group started in the mid-1990s in the auto services industry, according to a state media profile of its chairman.  It later built petrol stations and moved into commercial property.  It is the developer behind at least one large Beijing commercial property project.  

Before taking the stake in SeaWorld, Zhonghong also bought U.S. luxury travel company Abercrombie & Kent last year.  Zhonghong could not be reached for comment on Monday.  Brookdale did not respond to a request for comment on the status of the deal.