Wary Takeover Targets Wrest Fees, Guarantees From Chinese Suitors
May 23 2016 - 7:31PM
Dow Jones News
By Vipal Monga
U.S. computer distributor Ingram Micro Inc. got more than a
handshake in February when it signed a takeover deal with a Chinese
conglomerate.
It got money in the bank. Ingram received a $400 million deposit
in an escrow account located outside China. It will collect that
sum if the buyer, a unit of HNA Group, can't close the deal.
Reverse breakup fees, which buyers pay to sellers if they can't
complete an agreed-upon transaction, are common in mergers. But it
is unusual to demand that the buyer set the funds aside in a bank
account.
In the Ingram deal, HNA, which is based in Hainan province, put
the funds in an account with Deutsche Bank AG.
"You don't want to have to chase your breakup fee to China,"
said a person close to the deal.
Western companies are wary of suing for breach of contract in a
Chinese legal system they may not fully understand, this person
said.
Many American companies have been cautious toward Chinese buyers
after instances of botched bids, the buyer's failure to pony up,
and deals blocked by the U.S. government on national-security
grounds.
That is why companies targeted in recent Chinese takeovers have
asked for escrow accounts or letters of credit to guarantee deal
financing or breakup-fee payments. The fees they demand can be
twice as high as in other deals because of the perceived risks.
The fee HNA agreed to pay equals 6.7% of the Ingram deal's $6
billion value, compared with the 2% to 4% more common in
non-Chinese deals.
Chinese takeovers are on the rise. The global value of deals
announced by Chinese buyers of non-Chinese companies totaled a
record $119 billion as of Monday, more than the $107 billion for
all of 2015, according to Dealogic.
Recent deals include the largest-ever foreign takeover by a
Chinese buyer: the pending $43 billion purchase of Swiss seed and
pesticide company Syngenta AG by China National Chemical Corp.
Earlier this month, Chinese home-appliance maker Midea Group made
an unsolicited $5 billion offer for German robot maker Kuka AG.
"The deals are getting bigger and bolder," said Samson Lo, head
of Asia mergers and acquisitions for UBS Investment Bank.
Negotiators for printer maker Lexmark International Inc.
wrestled with questions of Chinese financing and regulatory
approval before moving ahead with a deal to sell the business for
$3.6 billion to a Chinese consortium, according to a securities
filing made last week. The Chinese group was led by
printer-component maker Apex Technology Co. and private-equity firm
PAG Asia Capital.
Central to the deal: a $150 million reverse breakup fee the
acquirers would have to pay if the deal doesn't pass muster with
Chinese authorities. The buyers would be on the hook for a $95
million payment if U.S. regulators blocked the deal. The payments
are secured by a letter of credit that Lexmark could cash at the
New York branch of the Bank of China.
"It's the equivalent of a security deposit," said a person
familiar with the transaction.
A Lexmark spokesman declined to comment. Apex didn't reply to a
request for comment.
Some Chinese buyers haven't followed through. In March, Anbang
Insurance Group Co. surprised Starwood Hotels & Resorts
Worldwide Inc. by walking away from its proposed $14 billion bid
for the hotel chain. The Chinese insurer never gave a full, public
explanation of why it abruptly dropped its pursuit after it sparked
a bidding war with Marriott International Inc. Marriott ended up
buying Starwood for $13.6 billion.
Anbang and Starwood declined to comment.
While such incidents are relatively rare, they can overshadow
successful deals, such as Anbang's $1.6 billion acquisition of
Fidelity & Guaranty Life, unveiled in November.
Regulatory scrutiny is another concern. Many Chinese deals are
reviewed by the Committee on Foreign Investment in the U.S., which
can block acquisitions that pose national-security concerns.
In January, CFIUS blocked Phillips NV from selling most of its
Lumileds LED light-bulb business to an investment fund led by
Chinese venture-capital firm GSR Ventures. The committee doesn't
explain its decisions.
Some Chinese companies are beginning to balk at paying reverse
breakup fees, in case CFIUS blocks their deals. In the auction of
Ingram Micro, two other Chinese bidders refused to pay a reverse
termination fee, which was partly why their bids didn't succeed,
according to a Securities and Exchange Commission filing.
Corporate boards should assess the risk that the U.S. will
derail their deals, said Mario Mancuso, head of law firm Kirkland
& Ellis LLP's international trade and national-security
practice. Mr. Mancuso sat on the CFIUS panel between 2007 and
2009.
"Boards can mitigate that risk and get compensated for it, or
they can avoid taking it altogether," he said.
(END) Dow Jones Newswires
May 23, 2016 20:16 ET (00:16 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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