Chinese pitch big M&A break-up fees, small stakes to allay US regulatory fears

[HONG KONG] Chinese companies are offering to pay record break-up fees and are willing to settle for minority stakes in US mergers and acquisitions in an attempt to assuage concerns of potential overseas partners about regulatory snags scuttling the deals.

The unprecedented concessions come as China pursues record M&As abroad to offset slowing economic growth at home and a weakening currency. They also come as US scrutiny of Chinese-initiated M&A remains high, making its partners uneasy and forcing several deals to be abandoned.

"These are unusual behaviors and just show that the Chinese want to get the deals done," said one Hong Kong-based technology banker, who declined to be identified because the person was not authorised to speak to the media.

The stakes for China are particularly high in the technology sector as Beijing seeks to become a global semiconductor powerhouse, relying mainly on offshore M&As to achieve its goal.

The biggest concerns are about the Committee on Foreign Investment in the United States (CFIUS), an interagency panel that scrutinises deals for national security concerns. CFIUS, which comprises 16 US government departments or agencies, does not publish its decisions or its reasoning for them.

Reflecting CFIUS worries, China's HNA agreed last month to a hefty US$400 million in reverse termination fees for its US$6 billion purchase of electronics distributor Ingram Micro. This was the first time any material break-up fee was introduced in a US deal covering CFIUS, bankers familiar with the matter said.

The usual break-up fee is about 1-1.5 per cent of a deal's value, but HNA agreed to pay 6.6 per cent. And China Resources Microelectronics and Hua Capital agreed to pay a total of US$200 million in termination fees, or 8 per cent of the deal value, to buy Fairchild Semiconductor International.

The previous largest CFIUS-related termination fee was US$30 million when commodity trader Glencore offered US$6.2 billion to buy Viterra in 2012.

PULLED DEALS

China's goal to become a global semiconductor powerhouse has meant prized US tech assets are a focus of its overseas deals.

The value of China's announced outbound M&A into the United States has already hit a record US$23 billion this year, more than double that of the whole of 2015, according to Thomson Reuters data.

But in a sober reminder of the US regulatory hurdles, deals worth US$10 billion involving US targets have been pulled just this year alone. That includes China's Unisplendour Corp's US$3.78 billion investment in US hard-disk maker Western Digital Corp.

And, for a third straight year in 2014, China was the country whose planned US acquisitions and investments were the most scrutinised by US regulators for security implications, according to a report by CFIUS.

To mitigate the extra scrutiny, Chinese companies are seeking joint ventures as opposed to an outright purchase, bankers said.

"People are definitely talking about doing more non-control deals," said James Lidbury, a partner with law firm Ropes & Gray. "A minority stake buy is still doable, but a board seat is problematic. It would also help if you are privately owned, but still there will be a lot of questions from CFIUS in the course of the review," he added.

Yet another way to sidestep the added scrutiny is to aim for mid-sized deals and focus on sectors which are less sensitive, M&A bankers said.

The recent US$640 million deal by China's Suzhou Dongshan Precision Manufacturing Co to buy printed circuit board maker Multi-Fineline Electronix is a case in point, they said.

"You want to avoid the headline grabbing tech deals this year. I would think anything between US$1 billion and US$3 billion can still be done," said a senior Hong Kong-based M&A banker, who was not authorised to speak to the media.

REUTERS