China Deals – a new perspective (English only) - PwC Belgium

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China deals
A fresh perspective
October 2012

Contents
Welcome 4
Foreword: China-Britain Business Council 6
China-Europe-China deal flow: a perspective on the trends 7
Getting to know... Ken Su 14
From deal-breakers to deal-makers 16
China and the UK: building on experience 22
Please get in touch 26
China deals 3

Welcome
Looking at the growing level of M&A
flows between China and Europe and
what they mean for the companies and
sectors involved.
Just over ten years since joining WTO
in 2001, China has overtaken
Germany and Japan to become the
world’s second largest economy. This
year China ousted the US from its
position as the world’s largest
manufacturer. In barely two decades,
Europe has become China’s biggest
export market and now attracts more
Chinese investment than any other
region. With strong growth and a
burgeoning middle class, China is
Europe’s second biggest export market
and a target for European companies.
Behind these statistics lays a rising
level of mergers and acquisitions
activity between Chinese and
European companies. Like a network
of veins and arteries, they are enabling
access to markets, technology and
expertise for Chinese and European
enterprises alike. Businesses in China
and Europe need to understand how
and why these deals are happening to
grasp their strategic impact –
and opportunities.
Though reports of billion Euro deals
between Chinese and European
companies regularly make headlines,
there is a bigger story. We look at the
growing number of smaller deals,
flowing in both directions and in a
range of sectors that are the lifeblood
of China and European trade ties. We
believe that these deals, big and small,
will be a source of growth, jobs and
innovation for years to come.
In this issue, we offer what will
become a regular update on China-
Europe-China deals: who is investing
and why, features on sectors and
countries, as well as looking at what
makes deals happen and how that
process can be improved. One article
looks at the publically available data
on deals over the past several years
and considers what it tells us about the
volume – and value - of M&A flows
between Europe and China and vice
versa. It shows that while conditions in
Europe may have affected Chinabound
investments, there is a ramping
up of investment by Chinese
companies across different sectors. It
also shows that most deal activity is in
sectors such as industrial products,
even if the headline-grabbing deals
have often been for energy, financial
or utility targets.
Though M&A activity is steadily
growing, both Chinese and European
M&A teams often face unfamiliar
hurdles. As the article on making M&A
transactions happen discusses, there is
a need for greater understanding of
approval processes, strategic rationale
and operational as well as cultural or
political concerns for bids to be
successful. Money may not be enough,
even for companies keen to buy or sell.
We look at how both parties can
increase the chance of a good
deal completed.
As competition intensifies among
European countries to attract
investment from China and to find
attractive Chinese targets, we consider
how the UK in particular can benefit
from its comparatively strong
performance in doing deals in - and
attracting investment from – China.
Though it has lost its lead for both
outbound and inbound Chinese M&A,
as a country it offers the skills and
industries for which Chinese investors
are looking. Both countries could gain
by strengthening their ties and
building on their mutual experience.
4 A fresh perspective

As a global network, the ties between
the PwC firms in the UK, Europe and
China are long established. Our
experienced deal teams in China and
the UK are well positioned to help
clients make the most of the growth
opportunities M&A can bring. For this
first edition of “China Deals” we were
privileged to be able to draw on their
experience and the support of the
China-British Business Council. As an
international business, our success
depends on ensuring finely tuned
connectivity between our clients,
partners and teams worldwide. For all
the regulatory and commercial
requirements, deal making is also
very much about connecting people at
the right time and with the right facts.
This publication supports our work
and that of our clients to get good
deals done. We hope that this report
provides you with some fresh
perspective, whether you are reading
it in Beijing or London – the distance
between the two is narrowing
all the time.
Nick Page
Partner
Transaction Services UK Emerging Markets leader
PwC UK
+44 (0) 20 7213 1442
nick.r.page@uk.pwc.com
Nick is a partner in Transaction Services in London and has a focus on
investment activity with emerging markets. He worked in Moscow in
the mid-1990s and has been active in M&A with emerging markets ever
since. He is also the head of the financial services team.
Philip Bloomfield
Partner
Transaction Services UK China team leader
PwC UK
+44 (0)20 7804 4904
philip.bloomfield@uk.pwc.com
Philip is a partner in our Transaction Services business, based in
London. He leads our UK Transactions team focused on China and
has worked with PwC China since 2008/09 when he led the firm's
work in support of Chinalco's proposed joint venture with Rio Tinto.
Philip has focused exclusively on the transactions market for over
fifteen years.
Allan Zhang
Director
Advisory
PwC UK
Tel: +44(0)207 804 5605
allan.x.zhang@uk.pwc.com
Allan is a director of PwC Beijing office. He worked at PwC China's
Transaction Services team for over six years and is currently on a
two-year secondment to PwC UK, focusing on outbound deals from
China. Allan also leads PwC China’s Sustainability and Climate Change
practice and is a member of Carbon Disclosure Project China Advisory
Council. He is a frequent speaker of major international and domestic
conferences as a subject matter expert of outbound deals
and sustainability.
China deals 5

Foreword: China-Britain Business Council
I was delighted to be invited to write a
foreword and support this exciting new
initiative of PwC.
The depth and breadth of economic
relations with China have grown
exponentially for the UK and Europe
over the past 30 years. Until recently,
this has largely been characterised by
ever-increasing Chinese exports to
Europe, a strong flow of European goods
and services to China, and a significant
number of European companies
investing in China.
One of the most exciting dimensions to
this business relationship is the increase
in recent years in Chinese outbound
investment. More Chinese companies
than ever before are seizing
opportunities abroad in order to reach
new markets and sales channels, develop
technology, brands and know-how, as
well as invest in a variety of assets and
raise capital. While demand for natural
resources was the driver for much of the
‘early’ Chinese investment overseas, the
imperative for Chinese firms to move up
the value chain has led to a growing
number of companies looking to Europe.
Greenfield investment remains
important, and Chinese companies
continue to set up sales offices along
with R&D centres. However, one of the
most exciting developments is the
burgeoning interest in M&A activity.
This is clear to us at CBBC through the
numerous conversations we have with
Chinese companies, investors, and
government figures. Individual
companies know that it is important for
the development of their own business,
and the Chinese government sees
overseas investment as an important
step for China’s increasingly
international role.
We have already seen a number of
high-profile acquisitions. However, it is
not just household names that are
involved. Chinese private companies and
State-Owned Enterprises ("SOEs") have
invested in smaller companies too.
Often the goal has been to acquire
technology and brands that the acquirer
believes will have good prospects back in
China, creating a new means for UK
innovations to make their way into the
Chinese market.
We are delighted to be working with
PwC again to support this important
piece of work to help better understand
the emerging trends, and what it means
for the UK and Europe’s relationship
with China. I found the articles in this
report both fascinating and informative,
dispelling some misconceptions through
evidence and analysis. As the report
highlights, the gap in deal flow between
Europe and China has already closed at
an impressive pace, and the better we
can understand what is happening, the
better UK firms will be placed to gain
from in the future.
Stephen Phillips
Chief Executive
China-Britain Business Council (CBBC)
+44 (0) 207 802 2001
stephen.phillips@cbbc.org
Stephen Phillips joined the China- Britain
Business Council as Chief Executive in
June 2006. Stephen has been actively
engaged in business in and with China
since 1989 and his experience spans a
number of sectors including aerospace,
oil, gas and petrochemicals, infrastructure,
ICT and financial services.
Stephen held senior investment banking
positions with Deutsche and BZW/
Barclays Capital in Asia for over 10 years,
6 A fresh perspective
where he specialised in structuring and
financing cross border investments totalling
in excess of £20 billion. In China, Stephen
worked with a wide range of multinational
and Chinese enterprises on major projects,
acquisitions and joint ventures.
Stephen was then Managing Director and
co-founder of iBridge Capital, a group of
companies providing IT solutions and
financial and business consulting services
throughout Asia and the Middle East.
Before joining CBBC Stephen was
International Trade Director, UK Trade &
Investment based in the South West
of England.
Prior to moving to Asia in 1989, Stephen
worked for the Barclays Group in the UK
and Botswana. He holds a BSc
in Chemistry and Law from the University
of Exeter.

China-Europe-China deal
flow: a perspective on
the trends
Executive summary
In this piece, we look at the number and size of M&A deals
flowing, in both directions, between mainland China and
Europe. Using publically available information on
transactions completed between 2006 and the close of the
first quarter of 2012 1 , we present some of the key trends in
M&A activity.
Rising M&A volume and value from mainland
China to Europe
The figures from the past years show a significant rise in
mainland Chinese M&A activity in Europe, in both volume
and value terms. If historically European investors have been
more acquisitive in China, the gap in deal flow between
Europe and China is narrowing. Moreover, though they may
have done fewer deals, Chinese companies have invested
more in European targets than vice versa. Most of the very
high value transactions have been in the Energy and
Financial services sectors, usually attracting a great deal of
media attention. However, a deeper look at the data
highlights several important facts. While billion Euro deals
are happening, a large proportion of all deals – in both
directions – actually fall under the €100m mark. The
Industrial Products sector is the one that sees the most M&A
activity- again in both directions, reflecting the fact that
mainland China is the world’s largest manufacturing nation.
For most sectors, where ownership restrictions do not apply,
both Chinese and European investors seem to prefer taking
stakes of 25% and above. Deal flow to Europe is primarily to
France, the UK and Germany but companies in other nations
are also benefitting and nearly all have seen an increase in
Chinese investment over the past years. From Europe,
Germany and the UK have been the biggest source of
Mainland China-bound investment, with Germany edging
ahead since 2010.
1 The data analysis in this piece covers publically announced M&A deals, as
reported by Mergermarket, Thomson Reuters and Dealogic. All the deals
included in the data were announced between 2006 and the first quarter of
2012 and have been completed or are expected to complete.
Finally, while Chinese SOEs may lead the way for many of
the bigger Europe-bound M&A transactions, the trends show
that there is still plenty of opportunity for privately owned
companies, Chinese and European, to access new markets
and know-how and to grow their business through deals.
Europe-mainland
Europe-mainland
China
China
(excluding
(excluding
Hong
Hong
Kong)
Kong)
outbound
outbound
and
Figure 1: to China – China to Europe: M&A by volume and inbound 2006 to Q1 2012
inbound
M&A by
M&A
deal
by
volume,
deal volume,
2006 -
2006
Q1 2012
- Q1 2012
200
150
Number
of deals
Number
of deals
100
50
0
2006 2007 2008 2009 2010 2011 Q1 2012
Europe to mainland China
Europe to HK
Mainland China to Europe
Source: PwC analysis of Mergermarket, Reuters and Dealogic data.
HK to Europe
Deal flow compared: closing the volume gap
Though in the past European investors have been more
active in investing in Chinese companies than vice versa,
the gap is narrowing. There has been a steady rise in the
number of Europe-bound deals by mainland Chinese
investors over the past years, from just 11 in 2006 to 61 in
2011. A comparison with deal flow in the opposite
direction, from Europe to China, shows that volume
declined from a peak of 163 deals in 2006, to a low of 85 in
2009, as European investors felt the effects of the credit
crunch, and the impending Eurozone crisis. While
international investors had limited access to lending and
had to focus on problems in their existing markets, Chinese
M&A flowed into the opportunities created by strong domestic
growth. Chinese private equity houses benefited particularly
from the relative absence of international investors.
Though a rise in the number of China-bound deals since
2009 suggests that European investors are pushing for
growth through deals in China’s faster growing market, it
has taken them some time to recover. From the Chinese
perspective, European targets may appear more open to
investment – and better value - after several difficult years.
China deals 7

2011 – 2012: M&A momentum returns
China-bound investment recovered some ground in 2011
with 125 deals by the year-end. In fact, 2011 proved to be a
good year for M&A deals in both directions. European
investors poured over €7 billion into mainland China.
Chinese investors reciprocated, investing over €11 billion
in European companies, with a number of big-ticket items
such as €2.9 billion for a 30% stake in GDF Suez and
€2.7billion for 21% of EDP. While the Energy, Utilities,
Manufacturing and Infrastructure (EUMI) sector produced
high value deals, the Industrial Products (IP) sector
generated most deals for both Europe-bound and Chinabound
M&A, accounting for around 30% of all transactions
between 2006 and Q1 2012.
Q1 2012 figures show 32 Chinese investments in Europe
and just 26 deals made by European companies in China.
This marks the first time that deal flow volume has been
greater to Europe than to China. However, with so little
growth coming from their European and the US markets,
there are signs that a number of large multinationals are
placing bigger bets on China and other high growth
economies and we expect to see some very large M&A
announcements in 2012.
Chinese SOEs active in European deals
With backing from Beijing, Chinese SOEs led the way in
China’s first wave of international M&A activity. The
nation’s Sovereign Wealth Funds (SWFs) have also played a
role as they diversify China’s vast foreign currency
reserves. Many of the very high value deals that have
boosted average Europe-bound deal value involved SOEs or
SWFs. In fact, from 2006 to Q1 2012, 90% of the top 20
Europe-bound M&A deals from mainland China were by
SOEs or SWFs. On average, the disclosed value of Chinese
acquisitions in Europe was significantly higher than
China-bound deal values for the period. In contrast, half of
the top 20 deals done by European investors in mainland
China were for privately owned companies. With an
established record of M&A activity, and as they mature,
China’s privately owned enterprises (POEs) are now also
looking to expand by acquiring businesses overseas and in
a range of sectors.
Europe To China: a billion
reasons to invest
With a rapidly emerging middle-class, relatively
competitive - though rapidly increasing - labour rates, and
state spending on infrastructure, China offers a range of
opportunities to European companies seeking growth. As
mentioned above, though fewer, the average value of
Chinese Europe-bound deals over the last years outstripped
that of European deal value in China. Figures for European
China-bound investment show that a high percentage of
disclosed deals are in the

FS values make headlines but IP leads on
M&A volume
Though nine out of the top 20 deals by value were in
Financial Services (FS), the highest numbers of European
deals in China since 2006 were in the Industrial Products
(IP) and Business Services (BS) sectors. These two sectors
have accounted for approximately half of all deals every
year since 2006. FS deals, though sizeable in Euro terms,
were all for minority stakes. Of the 64 deals done in
mainland China’s FS sector between 2006 and Q1 2012,
only 26 were for a stake of 25% or more. Most mainland
China FS targets are State-owned and foreign ownership is
restricted to a maximum of 25% of total shares. Despite
restrictions in some sectors, European banks see
substantial growth potential in China and several have
purchased successive stakes in mainland Chinese banks. In
late 2006, Spain’s Banco Bilbao Vizcaya Argentaria paid
€501m for a 5% stake in CITIC Bank Corporation and
invested a further €1,064m for an additional 4.9% stake in
December 2009. Deutsche Bank acquired 5.4% of Hua Xia
Bank in March 2008, followed by a further 7.5% in May 2010.
sector continued to attract a growing amount of European
investment up to the end of 2011. The FS dip is
understandable. While less exposed than their
international counterparts, Chinese banks were not
unscathed by the global financial crisis, which severely
affected the value of several of the large FS investments
they had made just prior to, or during the crisis. Deals such
as CIC’s investment in Morgan Stanley resulted in losses, in
some cases the first for Chinese SWFs. Though levels of
uncertainty remain high, Chinese investors are likely to
renew their global expansion in FS activities through M&A
when they see improved stability in the banking sector.
Figure 5: Sector volume and value varies year on year: only IP shows a
Europe steady rise* to mainland China M&A deal value* by sector, 2006
- Q1 2012
€ in billions
5
4
3
2
1
Figure 4: Europe to mainland China M&A by sector and stake 2006 – Q1 2012
Europe to mainland China sectors M&A by stake%, 2006 - Q1 2012
Industrial Products
-
FS
Retail &
Consumer
Industrial
Products
Telecoms,
Media &
Technology
EUMI
2006 2007 2008 2009 2010 2011 Q1-12
Business
Services
Business Services
Telecoms, Media & Technology
Retail & Consumer
Source: M&A from Europe to mainland China, PwC analysis of Mergermarket,
Reuters and Dealogic data.
Note*: Value is based on the disclosed M&A value in the source documents
EUMI
FS
- 50 100 150 200 250 300 350
Number of deals
Undisclosed 25% stake
Source: PwC analysis of Mergermarket, Reuters and Dealogic data.
European investors take bigger stakes in
non-FS sectors
With fewer ownership restrictions, most IP and BS deals
were for stakes of 25% or more. After IP and BS, the sectors
seeing the greatest volume, and for stakes above 25%, were
Telecoms, Media & Technology (TMT), Retail & Consumer
(R&C) and EUMI. The TMT sector is still subject to some
foreign-ownership restrictions, which if relaxed, would
undoubtedly attract a lot more M&A to this sector. Of the
top 20 deals in mainland China, half were for privately
owned companies and three of the top deals in the period
were joint ventures.
Different sectors have seen big deals in
different years
While IP and BS lead in terms of overall deal volume from
Europe to China, followed by TMT and R&C, several
sectors have seen large deals over the period. 2007 and
2010 saw strong deal flow in FS, while 2011 was a record
year for R&C deals with Nestlé paying €1,514m for a 60%
stake in a joint venture with Hsu Fu Chi International.
Though deal values in the R&C and FS sectors dipped in
2008 and 2009 respectively, other sectors held up. The IP
French and British companies doing most M&A
in mainland China
Together the UK, France and Germany accounted for well
over 50% of all China-bound M&A activity between 2006
and Q1 2012. Swiss, Swedish and Dutch investors are also
active but their level of M&A transactions varied quite
considerably from year to year during the period we
reviewed. While UK investors were the main deal drivers
up to and including 2010, France overtook the UK in 2011,
accounting for 26% and 35% of all M&A activity in 2011
and Q1 2012 respectively.
Figure Europe 6: to France mainland overtakes China M&A the UK deal as volume biggest proportion investor in by Q1 2012
country, 2006 - Q1 2012
100%
80%
60%
40%
20%
0%
2006 2007 2008 2009 2010 2011 Q1 2012
Other
Spain
Source: M&A from Europe to mainland China, PwC analysis of Mergermarket,
Reuters and Dealogic data.
Italy
Finland
Belgium
Austria
Netherlands
Sweden
Switzerland
Germany
United Kingdom
France
China deals 9

French acquisitions target mainland China and
stakes >25%
French investors have shown a liking for mainland China’s
Industrial Products and Business Services sectors.
Schneider Electric’s 2011 agreement to buy Beijing Leader
& Harvest Electric Technologies, a medium voltage drive
manufacturer for €448 million exemplifies the portfolio
approach. This acquisition not only gave Schneider a strong
position in the Chinese medium-voltage drive market, but
also complements its wider portfolio. The data supports the
prevalence of serial investor activity. Between 2006 and Q1
2012, 87% of total French Investment into mainland China
was for stakes of more than 25% in target companies.
French companies completed 42 such deals for IP targets
and 35 for Business Services providers. Mainland China’s
Telecoms, Media & Technology and Retail & Consumer
sectors also drew strong interest from French investors
looking for >25% stakes.
France Figure to 7: mainland French companies China M&A lead volume M&A by activity sector, in mainland 2006 - Q1 China
2012
40
China To Europe: deal
numbers rise despite
Eurozone malaise
If 2012 looks set to be another troubled year in Europe, the
Eurozone crisis does not seem to be deterring Chinese
investors. On the contrary, a relatively weak Euro and
declining valuations have proved fertile ground for Chinese
investors to find good deals. Mainland Chinese Europe-bound
deals surged in 2011 and early figures indicate that 2012 is on
track to exceed the record of 61 deals done in 2011.
Mainland Figure 9: China Mainland to Europe China Europe-bound M&A deal volume M&A by rising size, 2006 - Q1
2012
Number of deals
120
100
80
60
40
20
-
2006 2007 2008 2009 2010 2011 Q1 2012
Number of deals
30
20
10
Undisclosed €1bn
Source: M&A from mainland China to Europe, PwC analysis of Mergermarket,
Reuters and Dealogic data.
-
2006 2007 2008 2009 2010 2011 Q1 12
Industrial Products
Telecoms, Media & Technology
EUMI
Industrial Products
Business Services
Telecoms, Media & Technology
Retail & Consumer
EUMI
FS
Business Services
Retail & Consumer
Source: M&A from France to mainland China, PwC analysis of Mergermarket,
Reuters and Dealogic data.
France to mainland China sectors M&A volume by stake%,
Figure 2006 -8: Q1 French 2012 companies target mainland China IP and BS sectors
FS
- 10 20 30 40 50
Number of deals
Undisclosed 25% stake
The number and value of Europe-bound deals rose
substantially from between 2006 and 2011. The compound
annual growth rate for deals emanating from mainland
China was 41%. If Hong Kong had previously been the
driver in China’s Europe-bound M&A activity (see box), by
2010 two thirds of China’s Europe-bound deals were
coming from mainland China and one third from Hong
Kong. A rise in both the number and value of deals Europebound
deals from Hong Kong in 2011 brought that split
back to 60/40 for mainland China/Hong Kong. However,
Q1 2012 figures suggest that the trend for mainland China
increasing its share of European M&A is likely to continue.
Figure 10: Big ticket deals impact yearly value*
1. €2.9bn GDF Suez-Exploration
(30%);
1. € 9.0bn Rio Tinto Plc (12%);
2. €1.9bn Total SA (1.6%); 2. €2.7bn EDP (21%);
Mainland China to Europe M&A value* 2006 - Q1 2012
3. €1.6bn Awilco Offshore ASA;
18
4. €1.3bn BP Plc (1%)
3. €1.7bn Elkem AS;
4. €1.2bn BorsodChem Zrt (58%)
Source: M&A from France to mainland China, PwC analysis of Mergermarket,
Reuters and Dealogic data.
€ in billions
15
12
9
6
1. €2.1bn Barclays Plc
(3.1%);
2. €1.8bn Fortis SA
(4.2%)
1. €1.4bn Volvo Cars
Corporation
3
-
2006 2007 2008 2009 2010 2011 Q1 2012
Other Top deal4 Top deal3 Top deal2 Top deal1
Source: M&A from mainland China to Europe, PwC analysis of Mergermarket,
Reuters and Dealogic data.
Note*: Value is based on the disclosed M&A value in the source documents
10 A fresh perspective

The Hong Kong factor
For the purposes of this article, we are focusing on M&A
transactions between mainland China and Europe. However,
if we consider the data including figures for Hong Kong, we
can see another facet of China-Europe deal flow. For many
years, Hong Kong played a role as a platform for European
investment into China and Asia. It was also a key source of
China’s Europe-bound investment. While Europe to mainland
China M&A deals numbered 163 in 2006, there were 41 other
deals for Hong Kong-based targets. And, in addition to the 11
investments from mainland China to Europe in 2006, another
19 deals originated in Hong Kong. From 2006 to 2008 Hong
Kong garnered over a third of all China-bound European FS
investment (28 deals out of 77) and 28% of all BS (36 deals
out 128). It is probably not surprising that the difference is
greatest for these two sectors. Hong Kong’s role as a financial
hub is well established and its international commercial ties
may make a more attractive location for these sectors and for
European investment alike. Regulatory differences between
Hong Kong and mainland China also make foreign ownership
easier in certain sectors, such as FS and TMT. European
investors can acquire minority stakes in the Hong Kong listed
arms of SOEs via share purchases, a route used by Telefonica
for their €699m acquisitions of a 2.8% in China Unicom in
2009. Indeed, if we include the figures for Hong Kong M&A
flow to Europe with those of mainland China, then we see
while the IP sector still draws achieves the most volume, the
TMT sector and not the EUMI sector is the next largest by
volume. When it comes to targets, Hong Kong investors
continue to favour UK businesses over other European ones
with an average of 50% of Europe-bound deals occurring in
the UK over the past six years. In addition to the long-standing
Hong Kong-based companies, the city is now also home to a
growing number of investment vehicles used by Chinese and
international investors. These are used to effect investments to
and from Chinese SOEs and POEs. As we have discussed,
Chinese SOEs behave differently to the typical Chinese
outbound investor while Chinese POEs tend to operate in
similar ways, whether they work through Hong Kong or
mainland China based entities. In general, the data shows
Hong Kong to be in line with mainland China trends, with
M&A volumes rising and dipping in the same years. Despite a
longer track record of M&A deals with European companies,
Hong Kong is no longer powering the growth of Chinese
outbound and inbound investment. Involved in an increasing
number of deals in both directions, it is mainland China
investors who are now playing an ever greater role in China
– Europe M&A activity.
China deals 11

Most deals are in the €1bn deals
completed between 2006 and Q1 2012 were minority
interest purchases by mainland China SOEs.
Chinese SWFs: marrying strategic interest with
commercial goals
Of the 20 biggest Europe-bound M&A transactions from
mainland China, five were made by China’s Sovereign
Wealth Funds (SWFs). China has the advantage of immense
foreign currency reserves but also a real need to ensure
those reserves are diversified. As the world’s biggest
manufacturing economy, China also needs resources and
as financial investors, China’s SWFs tend to take small but
high value stakes in large companies. The EUMI sector,
with its large incumbents and focus on extraction, is a
source of attractive targets. Four of the top 20 mainland
China Europe-bound M&A transactions were for EUMI
targets made by SWFs, including CIC and SAFE 2 . These
included SAFE paying over €1.87bn for a 1% stake in Total,
a French Oil & Gas company, and nearly €1.3bn for a 1%
stake of the UK energy company, BP.
Buying into markets, brands and know-how
If China’s SWFs seek financial diversification and access to
resources, mainland China’s privately held companies are
using M&A to develop their operational advantages. As
China’s largest privately-owned carmaker, Zhejiang Geely’s
2010 100% acquisition of the Swedish car company Volvo,
for €1.4bn is an example of a deal bringing both access to
an established brand and European-standard technology.
Equally, Wanhua Industrial Group’s €1.2bn acquisition of a
controlling stake in Hungary-based Borsodchem brought it
access to Europe’s chemicals market. Five other 100% buy
outs by mainland China companies also feature among the
top 20 deals, reflecting their desire to acquire core
technology that they can leverage at home and overseas.
2 State Administration of Foreign Exchange (SAFE) primary role is as the
administrative body responsible for regulating foreign exchange market
activities and managing foreign exchange reserves. Its investment activities
are mainly exercised through its SWF arm, SAFE Capital.
EUMI attracts most Mainland Chinese
investment in Euro terms
Chinese M&A activity in Europe’s Energy, Utilities, Mining
and Infrastructure sector (EUMI) has created some
impressive deal values, often generating copious media
coverage. Between 2006 and Q1 2012, 12 out of the 20
largest deals done by mainland Chinese companies in
Europe were for EUMI targets, of which seven were deals of
between €1bn and over €8bn. Nearly two thirds of
investments in this area were for stakes of 25% or above.
2008 values were bolstered by a single €9bn deal by
Aluminum Corporation of China (Chinalco), a SOE, and
Alcoa Inc. for a joint 12% stake in Rio Tinto Plc. 2011 saw
two more major deals involving Chinese SOEs, including
China National BlueStar, a unit of state-owned ChemChina,
€1.7bn transaction for Orkla’s silicon business, Elkem.
Figure 11: Deal values vary greatly by sector and year*
15
单 位 1 0 亿 欧 元
12
9
6
3
-
能 源 、 工 业 产 品 金 融 服 务 商 务 服 务 零 售 和 消 费 电 信 媒 体 与 技 术
公 共 设 施 、
矿 业 和 基 础 设 施
2006 2007 2008 2009 2010 2011 2012 年 1 季 度
Source: M&A from mainland China to Europe, PwC analysis of Mergermarket,
Reuters and Dealogic data.
Note*: Value is based on the disclosed M&A value in the source documents
The IP sector also attracts the most deals by
Chinese investors
Though large EUMI deals are the most valuable, other
sectors are actually seeing a greater number of Europebound
M&A transactions. As is the case for European
investment into China, the Industrial Products sector
attracts the highest volume of Chinese Europe-bound
investment, followed by TMT and R&C. Europe-bound deal
volume in IP increased fourfold from 4 deals in 2006 to 16
by Q1 2012, with a record total of 26 deals in 2011. Indeed,
the IP sector, from Chemicals to Automotive, delivered the
most high value deals after the EUMI sector, with five deals
completed in Sweden, Hungary, Germany, the Netherlands
and France.
Figure 12: Chinese investors also show a strong appetite for the IP sector
Mainland China to Europe sectors M&A by stake%, 2006 - Q1 2012
Industrial Products
EUMI
Telecoms, Media & Technology
Business Services
Retail & Consumer
FS
- 10 20 30 40 50 60 70 80 90 100
Number of deals
Undisclosed 25% stake
Source: M&A from mainland China to Europe, PwC analysis of Mergermarket,
Reuters and Dealogic data.
12 A fresh perspective

Germany overtakes the UK as a target for
mainland China M&A
Though the UK led the way for some time other countries
have been increasing their share of Chinese investment.
Germany has seen a steady rise in mainland Chinese
investment in recent years, overtaking the UK in 2011 with
20% of all Chinese Europe-bound deal volume and
reaching 28% in Q1 2012. Since 2006, 39 of the 42 deals
completed by mainland Chinese investors in Germany have
been for stakes of 25% or more. Of the 21 deals completed
in the 2011 and Q1 2012, seven were in the automotive
sector, seven in Industrial Manufacturing and four were in
Engineering & Construction, proof that Germany’s
strengths in Industrial Manufacturing, Computer
Hardware and the automotive industry are attractive to
Chinese investors.
Figure Mainland 13: China Germany, to Europe the UK M&A and France deal volume attract proportion most Chinese by M&A transactions
country (2006-Q1 2012)
100%
80%
60%
40%
20%
0%
2006 2007 2008 2009 2010 2011 Q1 2012
Other
Austria
Sweden
Italy
France
Netherlands
United Kingdom
Germany
Conclusion
The period of 2006 to Q1 2012 probably covers one of the
most difficult global economic environments of our time.
Even with its vast reserves, China has had to navigate
uncertainties in its major export markets, while trying to
maintain pace of growth it needs. European companies
have had to face slower – or no - domestic growth, as well
as concerns about government debt levels and the stability
of European banks. M&A transactions are challenging
enough even in good times. However, it would seem from
the figures that the Eurozone uncertainties, and lower
growth and values, have offered opportunities to Chinese
investors and spurred European ones to turn to China.
Early figures for 2012 suggest that M&A activity will
continue to pick up, in both volume and value terms. We
will have to wait to see if some of the trends we identified
here are consolidated and future editions of this review
will provide updates. For certain sectors, China-Europe
investment flows have become familiar. For these sectors, it
will be interesting to see how the changes in ownership
and presence in new markets plays out for the companies
concerned. For other sectors, access and ownership
restrictions may evolve over time, opening even more
opportunities. We hope a look at these figures will provide
those involved in M&A, whether in Beijing, Birmingham or
Bonn, a better understanding of the trends in their industry
and others.
Source: M&A from mainland China to Europe, PwC analysis of Mergermarket,
Reuters and Dealogic data.
Germany and the UK are currently ahead of other
European countries when it comes to attracting Chinese
investment. France, the Netherlands and Italy have the
next highest deal volumes but their deal flows have varied
considerably over the past six years and as yet, none of
them has established a consistent trend.
Malcolm Macdonald
China Deals adviser
PwC UK
+ 44 (0) 207 804 1066
malcolm.x.macdonald@uk.pwc.com
Following nearly 20 years working for PwC in Hong Kong and
China, Malcolm is now working for PwC UK as an advisor to
identify and support inbound and outbound M&A transactions
between the UK and China. Malcolm will work closely with key
account and industry teams, as well as colleagues in PwC China.
While in our Beijing office, Malcolm led the China Outbound
initiative for PwC in China, overseeing the firm’s focus on Chinese
clients that are investing overseas.
Malcolm is a Fellow of the ICAEW and has a BEng (Hons) degree
in Civil and Structural Engineering.
Yan Lin
Senior Associate
Transaction Services
PwC UK
+ 44 (0) 118 938 3175
yan.z.lin@uk.pwc.com
Yan Lin joined PwC UK in 2008 and works in our Transaction
Services team in the South East region. Yan has assisted on
various M&A transactions, acting for corporate and private equity
clients across different sectors including Automotive and
Technology.
Yan is originally from Guangzhou and is a native speaker of
Mandarin and Cantonese. She is a qualified Chartered
Accountant with the ICAEW and holds a Master of Science
degree from the University of Oxford.
China deals 13

Getting to know... Ken Su
Ken Su moved from Shanghai to Beijing in 2004 to co-found PwC China’s Outbound Investment practice. Though he grew up in
Canada, he has re-established roots in China where he has lived and worked for the last decade. His background means he
brings a unique perspective to the market and his clients, whether they are Chinese companies doing business around the world
or multi-national companies operating in China. From his office in Beijing, he took a few moments to reflect on the changes he
has seen over the past decade.
How has your work with Chinese
companies evolved since the
start of the Outbound investment
practice?
The past eight years have been an
interesting journey. A lot of my role
entails working as a key advisor to
Chinese companies on their overseas
deals, conducting due diligence,
supporting them in negotiations, as
well as working with them on
valuations and deal structures. In
addition, we actively identify
attractive international investment
opportunities for our clients. From our
position in Beijing, we do a lot of work
with our PwC network firms around
the world to service our Chinese
clients here and their teams based
abroad. Keeping abreast of what is
happening in this fast moving market
is central to all of this, so the team’s
work includes market analysis and
thought leadership development
around key sectors of interest and
Chinese overseas investment trends.
What key trends have you seen
recently in deal flows between
China and Europe?
The big trend is the growing number
of sectors in which Chinese companies
want to invest. Where it used only to
be about buying access resources, now
companies are buying into more
industrial and consumer goods
companies. Equally, the buyer base
has expanded. In the past, the buyers
were almost all central SOEs, we then
saw the first provincial SOEs doing
outbound deals, followed by privately
owned Chinese companies. More
recently, Chinese Private Equity
companies have begun to invest
abroad, opening up a completely new
range of opportunities. From a
China-Europe perspective, there has
been a gradual increase in interest
linked to this broadening out of both
sector-interest and the buyer base. We
can see this in China-Europe deal flow
to the Automotive, Aerospace and
Industrial Products sectors in
particular. At the same time, the level
of sophistication of Chinese investors
has increased along with their ties to
European companies and agencies;
this in turn facilitates even more deals.
In my opinion, Europe has a lot to gain
from these trends, including injections
of capital, access to China’s markets
and possibly even fresh perspectives
on business.
What are the key driving factors
of a Chinese company's decision
to invest abroad?
Chinese companies continue to invest
abroad with the goal of acquiring key
strategic resources as well as
technology and brands. However, we
are beginning to see more companies
investing to acquire distribution
channels and to access markets and
we believe these drivers will increase
in importance over the coming years.
How does the M&A team of a
typical Chinese company compare
to their western counterparts?
It is difficult to generalize about M&A
teams in a 'typical' Chinese company,
as there are many kinds of Chinese
companies and many M&A
department models in operation. It is
probably fair to say that they tend to
differ in terms of their typical size,
how they function and how they fit in
with the rest of the organisation.
Eight years ago, when the outbound
investment wave was really beginning
to take off, it could have been said that
approaches to deals were less
structured but now more and more
companies have dedicated M&A teams
and even specific overseas investment
departments. We also see that Chinese
companies are evolving the way they
use external advisors during the M&A
process as they engage in more and
more overseas deals.
14 A fresh perspective

What do you consider the biggest
challenges for Chinese investors
doing deals in Europe?
Upfront, it can be difficult finding
deals that fit with the buyer’s strategy
and are feasible targets. Managing the
deal process effectively so that the
client can make a well- informed
decision demands a lot of work.
Settling valuation and price issues is
clearly critical but guiding the client
through the negotiation can be an
intensive process, given that the
parties usually have differing business
practices and, in many cases, are
focusing on longer-term strategic
goals, as opposed to commercial
returns, when negotiating pricing and
deal terms. We also work with the
client to handle all the regulatory
requirements both here in China and
in Europe to get the deal approved. In
addition, our work usually includes
resolving many of the post-deal issues.
What advice can you give
European companies
engaged in a deal process with
Chinese companies?
Because of the complexity and
differing procedures for deal approval,
European companies may need to
prepare for a lengthier deal process
and so they will need to be patient for
the deal to complete, which in some
cases can take years rather than
months. We often see deals take three
years to get done: a two-year deal
process is not uncommon and in
extreme cases it could be four or
five years.
What are your top three pieces of
advice for a potential Chinese
company looking to invest
in Europe?
It is hard to pin things down to just
three points for any situation but in
general, I would say first, ensure the
targeted deal ties in with the
company's short, medium and long
term strategies. Second, Chinese
investors should be prepared for a
sophisticated deal process involving
multiple advisors on both sides of the
deal. Finally, getting to a win-win
situation may involve some
compromise on the initial plans so
showing a little flexibility may go a
long way.
Ken Su
Partner
Transaction Services
PwC China
Tel: +86 (10) 6533 7290
ken.x.su@cn.pwc.com
Ken Su is a Partner in PwC China's
Transaction Services team and a founder
of the firm's China Outbound Investment
practice. He joined PwC Canada in 1993
and PwC China in 2004. Ken works with
many large Chinese companies including
CIC, PetroChina, CNOOC, China
Minmetals, Chinalco, AVIC, SDIC, Sinopec
and Shandong Gold. Ken is a fully
qualified CA (Canada), CPA (USA), and
CFA (International).
China deals 15

From deal-breakers
to deal-makers
Closing the valuations gap for more successful
China-Europe deals
Introduction
Anecdotes and copious press coverage
could give European businesses,
looking for buyers, the impression
that a raft of Chinese investors is
arriving, ready - and able - to pay
above the odds for acquisitions. The
reality is more nuanced. Although
about 30% of China’s outward
investment already flows towards
Europe, that amount actually
represents less than 0.2% of all
non-financial foreign investment
stock in Europe. As other articles in
this review highlight, overall dealflow
between China and Europe is
steadily increasing and now includes
a wider range of sectors than in the
past. We believe that increasing the
number of these deals, by privately
owned Chinese enterprises (POEs) as
well by Chinese State owned
enterprises (SOEs), represents a huge
opportunity for European and
Chinese business alike.
However, despite some success
stories, we sometimes hear of deals
falling through, even when the
prospective Chinese buyer is the
highest bidder.
Number and value of deals with Chinese (inc. HK) investors in Europe
Number and value of deals with Chinese (incl. HK) investors in Europe
Number of deals
120
100
80
60
40
20
-
In this section, we look behind the
headlines to understand why some
China-Europe deals never make it to
completion. In particular, we consider
the gap between buyers’ and sellers’
perspectives of valuations and the
deal-making process and suggest how
those differences can be resolved.
2006 2007 2008 2009 2010 2011 Q1 2012
Number of deals
Deal value (€m)
Average of 61 242 387 61 319 277 159
deal value (€m)
18,000
15,000
12,000
9,000
6,000
3,000
-
*Value of deals (€m)
Source: PwC analysis of Mergermarket, Reuters and Dealogic data.
Note*: Value is based on the disclosed M&A value in the source documents
16 A fresh perspective

Is there a Chinese price
when it comes
to valuations?
According to Dealogic 1 , Chinese
companies are paying greater
premiums for cross-border
acquisitions. Reports suggest that
Chinese companies pay a 28.8 per cent
premium on average, compared to the
US average of 25.6 per cent, the
Japanese average of 26.6 per cent, and
a broader Europe, Middle East and
Africa average of 25.6 per cent. 2
Media coverage of Chinese investor
deals seems to support these findings:
Recent examples include the China
Yangtze Three Gorges Development
Corporation’s winning bid in
December 2011 for a stake in Energias
de Portugal, for which they paid a
significant 53% premium3. China
Development Bank was the highest
bidder for RBS Aviation Capital in
January 2012, as was Bright Food in
the bid for Yoplait in February 2011,
although in both cases, they lost out to
lower bids. Chinese business leaders
have a reputation of being good
traders, able to strike a good deal, so
why is it in some cases with outbound
M&A that they seem to be paying a
higher premium? To understand why
this is often the case for China-Europe
deals, we need to understand what is
motivating both the buyers and
the sellers.
1 Measured by comparing the deal valuation with
the market capitalisation of the target one month
before deal announcement, when compared to
cross-border acquisitions made by companies
from other countries
2 “China Inc: record outbound M&A”, July 27, 2011,
FT.com
3 “Privatisation: Extensive sell-offs constitute
irreversible retreat by government”, April 10,
2012, FT.com
No deal without a seal of approval
All outbound investments are subject to approval by both
the Ministry of Commerce (MOFCOM) and the National
Development and Reform Commission (NDRC) or their
affiliated agencies at local levels, depending on the scale
and complexity of the deals. In addition, SOEs must obtain
approval from or report to the State-owned Assets
Supervision and Administration Commission (SASAC)
– which is effectively the State holding company for all
SOEs. All overseas deals in foreign currency also need State
Administration of Foreign Exchanges (SAFE) approval.
Both SOEs and POEs are more likely to receive State
support for deals considered beneficial for China, an
important consideration being their strategic fit with
prevailing State policies.
SOEs and POEs face
different hurdles
for funding
Though both SOEs and POEs need
regulatory approval for outbound M&A,
SOEs face a slightly more onerous
approval process (see above). However,
SOEs usually have better access than
POEs to funds from the State-backed
“policy” banks, such as the Export
Import Bank (Exim) or China
Development Bank. Having said this, it
would be wrong to assume that they
have access to loans by default. Foreign
companies must assume that a Chinese
lender to a Chinese bidder will demand
a commercial rate of return appropriate
to the risk of the investment, as would
an international lender.
At the same time, China is currently
the home of the world’s biggest foreign
exchange reserves (US$3.3 trillion) 4 , a
factor that ultimately supports the
lending power of State-backed banks.
Additionally, China’s State-backed
banks were less exposed to the global
financial crisis compared to their
western counterparts, leaving them in
a position to offer rates similar to
those pre-credit crunch 5 .
4 "China’s Forex Reserves Show First Decline in
Three Months", April 24, 2012, Bloomberg News
5 We note that the limited availability of data about
the rates obtained by companies borrowing in
China makes it difficult to judge the degree to
which they can borrow at cheaper rates
compared to western competitors
China deals 17

Why pay more?
Understanding Chinese
investors’ rationale for
strategic premium
While China’s SOEs may have easier
access to funds, POEs face less
favourable conditions without the
same State-backing. Nevertheless,
POEs have also demonstrated
themselves as ready to make high bids,
indicating that access to funding
cannot be the only factor at play.
Looking at a range of deals, we can
see a number of factors powering
Chinese investors’ rationale to offer a
strategic premium.
Hidden Dragons
There is strong evidence to suggest
that a premium may be justified
because Chinese investors can gain
greater benefits from the acquisition
by leveraging the potential of their
large domestic market and creating
synergies that are often not easily
accessible or visible to their western
competitors. One example is Bright
Foods Group’s search for a brand name
target culminating in the successful
bid for Weetabix in May 2012, to
capitalise from the growing taste for
western food in China.
The opportunity to acquire
established brands and intellectual
property may justify a higher
valuation, given the high growth
potential of the Chinese market.
Lenovo’s €511m acquisition of Medion,
a German consumer electronics
company will bring a 14% share of the
German market and a total market
share of 7.5% in Europe, as well as
expertise in marketing, sales and
distribution. Sany heavy industry
acquired Putzmeister, a world-class
German manufacturer of hi-tech
pumps, for €360m. This will allow
China’s largest construction
equipment manufacturer to gain
global exposure through the
Putzmeister brand, whilst
simultaneously taking its technology
to the Chinese market. China National
Bluestar’s €1.7bn acquisition of Elkem
brought it access to highly energy
efficient solar-grade silicon, giving
Bluestar an edge in the green energy
market. It could take many years for a
company to develop these advantages
organically. Chinese investors can
therefore often justify this premium,
even if not explicitly quantified, as
they can deploy their access to and
understanding of their home market
to much greater effect than their
international rivals.
A Chinese buyer may also seek to
prevent a Chinese competitor from
acquiring a desirable target. There
may be significant market gains to
being the first to take an acquisition to
China and, thus, establish first-mover
advantage against other Chinese
companies, who could leverage
similar synergies.
Another possible explanation is
that the Chinese investors making
acquisitions to date may have a
larger proportion of buyers with a
long-term, strategic view.
These investors may be more likely to
hold their investment for longer, have
a longer timeframe to realise the
benefits of an acquisition, and
consequently have a lower hurdle rate
for short-term returns. On the
contrary, a western private equity
buyer may enter a deal with
expectations of high returns from
shareholders to realise gains in the
short to medium term.
Easier access to funds and a robust
strategic rationale for a high bid
should place Chinese investors in a
strong bidding position. So why are
high bids from Chinese investors
not necessarily resulting in
successful deals? To understand
this phenomenon, we must look at
how sellers perceive bid risks and
how that influences their response
to Chinese valuations.
The seller’s perspective -
pricing in uncertainties
As the examples cited earlier show,
being willing and able to pay a
strategic premium for a deal is no
guarantee of success. We believe that a
combination of commercial, cultural
and political differences generates
uncertainties for sellers, with the
result that they may heavily discount
bids by Chinese investors. For
example, Chinese investors tend to be
more cautious about sharing their
strategic objectives for an acquisition
with other parties.
18 A fresh perspective

From the perspective of a seller, the
lack of an articulated rationale for
the higher bid can make sellers
mistrustful of the bidder’s intentions.
Uncertainties created by a lack of trust
on both sides can only be detrimental
to negotiations. A focus on improving
communications between the parties,
to close the expectations gap in
valuations and build trust, is critical if
a deal is to complete.
To European sellers the Chinese
deal approval process can
introduce uncertainty.
The seller will often lack a good
understanding of the details, or the
duration of the approval process from
the Chinese side. The Chinese deal
approval process also runs differently:
in the US or Europe sellers expect
buyers to be able to demonstrate key
facts, such as proof of funds, prior to
signing. It is the opposite in China.
The Chinese process requires buyers
to submit a request for approval once
key matters are agreed. This may leave
sellers feeling exposed and uncertain
about the ability of a Chinese bidder to
close the deal. This issue can be more
pronounced in auction situations,
where the auctioneer must have
confidence in the ability of the bidder
to deliver on their bid. One effective
solution could be for the Chinese
investor to secure a period of
exclusivity during a bid process within
which they can try to sort out
approvals, but this can be difficult to
achieve.
Uncertainties may also exist over a
Chinese investor’s ability to manage
the target business effectively.
This may be of particular concern for
the seller if the target has global
operations, demanding a high degree
of international experience combined
with local knowledge. It was reported
that Bright Foods Group lost out to a
lower rival bid from US General Mills
because of a perceived lack of global
operational and brand experience 6 .
There could also be concerns about
the preservation of corporate identity
and the retention of key management.
Beyond cultural differences in
commercial practice and
communication, large deals in any
territory by foreign investors can
trigger the risk of political
intervention in the target country. As
Chinese corporates are often under
the guidance of a State that many
countries consider a strategic
competitor, acquisitions that are too
high profile, or have overlaps with
strategically sensitive industries
such as defence, may also come with
political risks. The seller’s own
government may step in to request
assurances, even for non-defence
industries. In the current economic
climate, job protection and the
preservation of brands perceived as
“national” champions can provoke
press attention, if not actual political
intervention. Past examples include
the bid for 3Com by Huawei, the bid
for Unocal by CNOOC, and the bid for
Potash Corp by Sinochem. In highly
politicised situations, getting to a deal
can prove impossible, regardless of
how high a strategic premium Chinese
investors may be willing to pay.
6 "Shanghai's Bright Food loses battle for big
Western brand", March 18, 2011, FT.com
Discounting for
uncertainties – an
equation of unknowns
Uncertainties over the investor’s
ability to complete the deal, as well as
the buyer’s ability to preserve and
grow the value of the acquisition, may
lead to a discount being placed on the
investor’s bid. A seller will invariably
weigh up the pros and cons of a
Chinese bid to that of a rival bid with
greater certainty of outcome. A
Chinese buyer may not have
sufficiently priced in these risks to
their bid. In other words, the highest
valuation in absolute terms may not be
the highest bid after taking into
account the seller’s discount for risks
– perceived or otherwise.
Despite this expectations gap, we
note that Chinese SOEs and POEs
have found Europe to be a more
receptive market for investment
compared to North America, resulting
in increasing Chinese interest in
making European acquisitions. We
have also observed an increasing
willingness of the Chinese investors
to be flexible and more open towards
partnerships. Chinese buyers are
recognising the importance of
retaining local management, not just
in response to local concerns about
job retention but in optimising their
bids, the transfer of expertise to
China, and the future growth
potential of the acquisition.
China deals 19

Valuations – a summary of the factors behind the buyers’ and sellers’ rationale
Chinese strategic premium rationale
Strategic fit –Realisation of synergies in the Chinese market,
first-mover advantage, brand, technological know-how
Easier access to capital
Relatively longer-term view of investment - greater timeframe to
realise benefits from the acquisition, and less subject to shareholder
pressures for short-term returns
Seller’s discount rationale
Uncertainty about outcome of the deal approval process and the ability
of the buyer to complete the deal
Risk of political intervention
Concerns about access to capital (especially when dealing
with POEs)
Concerns about capacity to manage global operations/global brands
and retention of existing management and workforce
Conclusions
Although there have been some high profile Chinese
inbound acquisitions in Europe, the overall level of
investment is not huge, at least not yet. However, we expect
the number of collaborative partnerships and acquisitions
of European firms by Chinese investors to continue
increasing. A focus on technological know-how and
branded products that can be leveraged in China’s rapidly
growing middle-class consumer market will make
European companies increasingly attractive to
Chinese investors.
Chinese investors are learning quickly about investing in
Europe. While cultural and political barriers continue to
exist, Europe has been more open to Chinese investment
and European companies have much to gain in
understanding how Chinese investors set valuations.
The main driver behind the strategic premiums being paid by
Chinese investors is their ability to leverage the high growth
potential of their domestic market. Another, but in our view
less significant, driver is relative easier access to capital.
The key downside risks tend to revolve around
uncertainties and communication gaps between sellers and
buyers, mainly due to challenges that bidders have in
providing sufficient certainty of outcome. When combined
with a typical seller’s relative unfamiliarity in dealing
with Chinese bidders, the result can be a significant
discounting of the bid price, which is difficult for Chinese
buyers to factor in.
The key to a successful deal is to close the expectation gap
in valuation between the buyer and the seller. This can
only come about through better dialogue. Sellers can
improve their articulation of their concerns when
negotiating with a Chinese investor. Equally, Chinese
buyers can reciprocate by better explaining and
quantifying their deal rationale, and addressing
uncertainties around issues such as deal approval more
directly. Deal advisors with strong international and
local knowledge have a role to play in helping deal
participants understand such issues, and in steering the
dialogue so that the expectation gap can be narrowed. This
will allow sellers to understand and trust a Chinese
valuation offer, and Chinese buyers to complete more
deals successfully.
20 A fresh perspective

Simon Harris
Director
Valuations
PwC UK
+ 44 (0) 207 804 9413
simon.harris@uk.pwc.com
Simon leads PwC UK's Telecoms, Media
and Technology Valuation practice.
He has valued businesses and assets in
those sectors for 11 years, with a particular
specialism in intellectual property valuation
including assets such as telecoms
licences and media catalogues.
Simon has advised many clients on the
pricing of deals, including a significant
number of cross-border deals. He has also
worked with clients to assess the value of
acquired assets for financial reporting
purposes once the deal has completed.
Tetsuya Ogino
Senior Associate
Valuations
PwC UK
+ 44 (0)207 8040019
tetsuya.ogino@uk.pwc.com
Tetsuya joined PwC UK in London in 2007.
He has experience working on FTSE
audits, such as Shell and Rexam, as well
as managing carbon assurance projects,
such as the flagship project for the
Household of Their Royal Highnesses. He
also has experience on the Carbon
Disclosure Project.
Tetsuya has worked in the Valuations
practice since 2011, where he has built
experience in commercial and
dispute valuations.
He is a member of the Institute of Chartered
Accountants in England and Wales.
China deals 21

China and the UK: building
on experience
Figures for M&A activity between China and Europe for the
period 2006 to Q1 2012 show one country to the fore: the
UK. Deal flow between China and the UK has been a
two-way street for several years. In 2006 and 2007,
bidirectional UK-China deal volumes surpassed those
between China and any other European nation. The lion’s
share of UK bound investment from China came from Hong
Kong. However, as more mainland Chinese investors turn
to Europe for deal opportunities, they are also targeting UK
companies. Despite this trend, the UK’s share of Chinese
investment in Europe has fallen slightly over the last 15
months, as has its China-bound deal flow. In 2011,
Germany became the main European destination for
Chinese M&A transactions. China-bound investment by UK
companies has also slipped slightly. 2011 also saw France
overtake UK as the largest investor in Chinese M&A 1 .
The experience garnered from deals between UK and
Chinese companies is valuable but the competition for
Chinese investment – and for access to China’s growing
market – is clearly intensifying. Deal flows can and do vary
from year to year so there is no reason why UK companies
cannot regain their position as Europe’s premier
dealmakers in China – with some help. The current UK
government has stepped up its efforts to increase trade
with China, with the goal of bilateral trade reaching £62bn
per annum by 2012 2 . But while exports are essential,
getting investment flowing is equally important. China’s
government policies actively support Chinese companies’
outbound investments. The UK government could also
develop policies to attract Chinese investors to the UK and
to support UK companies wishing to invest in China. As
more Chinese companies seek to establish themselves in
Europe’s market and build their technological and
operational capacity through M&A, UK companies in many
sectors are attractive targets but they face more
competition from their continental counterparts than in
the past. China and the UK have strong ties and a track
record of mutually beneficial M&A transactions, it would
be a shame not to make a concerted effort to build on
that advantage.
1 All deal data is based on publically announced M&A deals as reported by
Mergermarket, Thomson Reuters and Dealogic.
2 “China signs £1.4bn in UK trade deals”, June 27, 2011, FT.com
UK Figure to mainland 1: UK to China: China M&A and by volume Hong Kong 2006 to Q1 2012
Number of deals
70
60
50
40
30
20
10
-
China offers a huge manufacturing
base, a less challenging funding
environment and the world’s fastest
growing consumer market. Chinese
companies and Chinese capital may be
more in demand than ever before.
There is a lot to motivate both
countries to maintain their head start.
UK M&A deal flow to China: getting back on track
During the period under review, UK outbound M&A deal
activities to China peaked at sixty five transactions in 2007.
After stalling during the global economic recession in 2009,
M&A activity from the UK to China has recovered some
ground, with 40 deals in 2011, up from 24 in 2009. Like
other European investors, UK companies have focused on
acquiring stakes of 25% or more of their Chinese targets.
Although the UK was the major outbound investor into
China and Hong Kong between 2006 and 2011, only one UK
M&A transaction ranked among the top 20 European M&A
deals in China. This the €647m paid by Diageo Plc for a
60.3% stake in the drinks distiller and distributor Sichuan
Swellfun Co Ltd. in 2010. With a very few exceptions the
bulk of UK China-bound deals were priced below €100m.
2006 2007 2008 2009 2010 2011 Q1 2012
UK to mainland China
UK to Hong Kong
Source: PwC analysis of Mergermarket, Reuters and Dealogic data.
22 A fresh perspective

UK investors target diverse sectors
Four of the top 10 UK outbound M&A deals in China were
by private equity investors. Three occurred between 2010
and 2011. This appears to be part of a wider trend for
increased demand from foreign private equity for M&A
targets in China. In mainland China (excluding Hong Kong)
9 out of the top 10 businesses targeted by UK investors were
privately-owned, five of which in the Retail & Consumer
sector. The fact that three of them were 100% acquisitions
suggests that UK see the sector benefiting from China’s
rising domestic consumption. Of the top UK China-bound
investments, two were minority interest transactions in
Financial Services. Other top value deals occurred in the
Professional Services, Automotive and Energy, Utilities,
Manufacturing and Infrastructure (EUMI) sectors. The
diversity of the businesses in the table of top deals by value
reflects the UK’s own diversity and that there are desirable
Chinese targets across a range of industries
UK to China (including Hong Kong) sectors M&A by stake%, 2006 -
Q1 2012
Figure 2: Most UK investment goes to BS and then to TMT in China (incl. HK)
Business Services
China investing into the UK: small stakes can be
a big deal
On average, between 2007 and 2009, 65% of M&A from
China to the UK was for stakes of 25% or above. In 2008,
that proportion dipped to 55% and if we exclude Hong
Kong only 14% of mainland China UK-bound deals were for
stakes of >25%. Though mainland China investors made
more minority-stake transactions that year, many were
very high value deals. Eight of them feature on the list of
the 10 biggest UK-bound M&A transactions from mainland
China. Topping that list for the period of 2006 to Q1 2012
are deals by Alcoa and Chinalco for 12% of Rio Tinto,
worth €8,971m, and by China Development Bank
Corporation for 3.1% of Barclays Plc.
From 2010 to 2011, a higher proportion of UK Inbound
M&A deals were for stakes of 25% or above. In 2011, all of
the UK inbound M&A from mainland China was for stakes
of >25%. However, despite the transactions being for
bigger stakes, 2011 produced the lowest total deal value for
UK M&A deals by Chinese investors since 2006.
Telecoms, Media & Technology
Retail & Consumer
FS
EUMI
Industrial Products
- 20 40 60 80 100
Number of deals
Undisclosed 25% stake
Figure 2 includes HK M&A
Source: PwC analysis of Mergermarket, Reuters and Dealogic data.
Figure 3: EUMI in mainland China is the second most attractive sector to
UK investors
mainland China sectors M&A by stake%, 2006 - Q1 2012)
Business Services
Figure 4 : Most China (incl. HK) M&A transactions are for 25% or above
China to UK M&A deal volume by stake%, 2006 - Q1 2012
Number of deals
25
20
15
10
5
-
2006 2007 2008 2009 2010 2011 Q1 2012
Undisclosed 25%
Figure 4 includes HK M&A
Source: PwC analysis of Mergermarket, Reuters and Dealogic data.
EUMI
Telecoms, Media & Technology
Retail & Consumer
Industrial Products
FS
Figure 3 mainland China only
- 20 40 60 80 100
Number of deals
Undisclosed 25% stake
Source: PwC analysis of Mergermarket, Reuters and Dealogic data.
UK-China M&A volume may down but value
is rising
Though UK China-bound deal volume is still not back to its
2007 peak, the total value of UK M&A transactions in
China reached a record of over €2bn in 2010. While 2011
values were lower, they still exceeded the 2007 level. A
sign perhaps that UK companies are prepared to pay more
for the targets because they are more confident about their
ability to make those investments work – or that it is the
right to invest in China.
Figure 5: Mainland China’s stake (excluding acquisitions Hong fluctuate Kong) to in UK the M&A UK deal
volume by stake%, 2006 - Q1 2012
Number of deals
25
20
15
10
5
-
2006 2007 2008 2009 2010 2011 Q1 2012
Figure 5 mainland China only
25%
Source: PwC analysis of Mergermarket, Reuters and Dealogic data.
China deals 23

China Figures (including 6 & 7: UK Hong EUMI Kong) sector UK attracts sectors most M&A Chinese by stake%, M&A 2006 – Hong - Kong-based investors favour the UK’s R&C sector
Q1 2012
Mainland China to UK sectors M&A by stake%, 2006 - Q1 2012
EUMI
EUMI
Retail & Consumer
Industrial Products
Business Services
Telecoms, Media & Technology
Industrial Products
FS
Telecoms, Media & Technology
- 5 10 15 20 25 30 35
Number of deals
Undisclosed 25% stake
Figure 6 includes HK M&A
Business Services
FS
Retail & Consumer
- 5 10 15 20 25 30 35
Number of deals
25% stake
Figure 7 mainland China only
Source: PwC analysis of Mergermarket, Reuters and Dealogic data.
Hong Kong not mainland China brings most
M&A volume to the UK
As is the case for the wider bidirectional deal flow between
China and Europe, the number of deals emanating from
China to the UK was less than from the UK to China. Even in
the peak year of 2007, there were only 23 publically
disclosed deals by Chinese investors in the UK. When we
exclude Hong Kong, we can see that in the period 2006 to
Q1 2012, only between a quarter and a third of Chinese
M&A transactions in the UK actually originate in mainland
China. For a UK company looking for investment, Hong
Kong remains an important port of call, in particular for
Retail & Consumer companies.
Chinese SOEs find strategic fit in UK targets
While Hong Kong may still generate a greater volume of
UK-bound M&A deals than mainland China, several of the
biggest deals over the last few years have come from
mainland China. Chinese State-owned enterprises (SOEs)
and China’s Sovereign Wealth Funds (SWFs) dominate the
list of the ten largest UK-bound M&A transactions. Aside
from the two biggest deals mentioned above, the State
Administration of Foreign Exchange (SAFE) and the China
Investment Corporation, both SWFs, undertook three other
large deals in 2008, 2010 and 2012. SAFE took a 1% stake
in BP for €1,296m, while China Investment Corporation
invested €707m in 2.3% of Apax Partners LLP, a private
equity partnership, and €602m for a 8.7% stake in Thames
Water Utilities. These large deals reflect the fact that
Chinese government can deploy its abundant foreign
reserves to support the expansion of SOEs overseas, a goal
they have communicated in their “going out” policy. Thus,
the prevalence of UK EUMI targets tallies with the desire of
Chinese investors to access natural resources, while FS
targets facilitate financial and currency diversification.
Figure 8: Mainland China drives most of the biggest UK-bound M&A deals
(mainland China)
China to UK M&A value* 2006 - Q1 2012
€ in billions
15
12
9
6
3
-
1. €2.1bn Barclays Plc
(3.1%) from China
Development Bank
(mainland China)
2006 2007 2008 2009 2010 2011 Q1 2012
Other Top deal4 Top deal3 Top deal2 Top deal1
Figure 8 includes HK M&A
Source: PwC analysis of Mergermarket, Reuters and Dealogic data.
Note*: Value is based on the disclosed M&A value in the source documents
Conclusion
1. € 8.9bn Rio Tinto Plc (12%)
from Chinalco (mainland
China) and Alcoa Inc;
2. €1.3bn BP Plc (1%) from SAFE
1. € 6.9bn EDF Energy-UK
Power Distribution
Business from Cheung
Kong Infrastructure
(Hong Kong)
1. € 3.4bn Northumbrian
Water from Cheung
Kong Infrastructure
(Hong Kong)
While M&A flows between the UK and China are off to
a good start, both nations need to continue to develop
their ties. While high value, headline-grabbing deals
are important, particularly in a gloomy economic
environment, increasing the number – and overall
value – of deals will strengthen commercial links and
experience - and thus generate even more
opportunities. The UK is one of the European nations
most open to Chinese investors. It has a strong
advanced manufacturing and R&D base, offers a
gateway to European markets, and is a leading
financial centre but it needs investment, and to create
jobs. China offers a huge manufacturing base, a less
challenging funding environment and the world’s
fastest growing consumer market. Chinese companies
and Chinese capital may be more in demand than ever
before. There is a lot to motivate both countries to build
on their track record.
24 A fresh perspective

China deals 25

Please get in touch
Nick Page
Partner
Transaction Services
UK Emerging Markets leader
Tel: +44 (0) 20 7213 1442
E: nick.r.page@uk.pwc.com
Malcolm Macdonald
China Deals adviser
PwC UK
Tel: + 44 (0) 207 804 1066
E: malcolm.x.macdonald@uk.pwc.com
Philip Bloomfield
Partner
Transaction Services
UK China team leader
Tel: +44 (0)20 7804 4904
E: philip.bloomfield@uk.pwc.com
Ken Su
Partner
Transaction Services
PwC China
Tel: +86 (10) 6533 7290
E: ken.x.su@cn.pwc.com
Allan Zhang
Director
Advisory
PwC UK
Tel: +44(0)207 804 5605
E: allan.x.zhang@uk.pwc.com
Sir Tom Troubridge
Chairman
China Business Group
Tel: +44 (0) 20 7804 4723
E: tom.troubridge@uk.pwc.com
Yan Lin
Senior Associate
Transaction Services
PwC UK
Tel: + 44 (0) 118 938 3175
E: yan.z.lin@uk.pwc.com
Suwei Jiang
Partner and Senior China Adviser
China Business Group
PwC UK
Tel: +44 (0) 20 7804 9248
E: suwei.jiang@uk.pwc.com
Chen Li
Manager
Transaction Services
PwC UK
Tel: +44 (0) 207 804 2731
E: chen.li@uk.pwc.com
Craig Stevenson
Partner
UK China Legal Team Leader
PwC Legal
Tel: +44 (0) 207 212 1612
E: craig.stevenson@pwclegal.co.uk
Shen Kan
Manager
Transaction Services
PwC UK
Tel: +44 (0) 207 213 8234
E: shen.kan@uk.pwc.com
Cynthia Chan
Senior Manager
UK China Markets Leader
PwC Legal
Tel: +44 (0) 207 212 1918
E: cynthia.chan@pwclegal.co.uk
26 A fresh perspective

Calum Davidson
Advisory Leader
PwC China and Hong Kong
Tel: +852 2289 2323
E: calum.davidson@hk.pwc.com
Frank Lyn
China Markets Leader, PwC China
Corporate Finance Leader
PwC China and Hong Kong
Tel: +86 (10) 6533 2388
E: frank.lyn@cn.pwc.com
David Brown
Transaction Services Leader
PwC China
Tel: + 852 2289 2400
E: d.brown@hk.pwc.com
Leon Qian
Transaction Services Leader
for Beijing
PwC China
Tel: +86 (10) 6533 2940
E: leon.qian@cn.pwc.com
Andrew Li
Transaction Services Leader
for Shanghai
PwC China
Tel: +86 (21) 2323 3437
E: andrew.li@cn.pwc.com
Edwin Wong
China Outbound Investment
Services Leader
PwC China
Tel: +86 (10) 6533 2100
E: edwin.wong@cn.pwc.com
China deals 27

www.pwc.co.uk/china
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