Minority Rule

Minority Rule-China’s new approach to
cross-border M & A

Once again this week China and specifically it’s intentions and relationship with Africa has again been on centre stage as a result of the pledges and discussions at the China – Africa Summit held in Egypt. Wen Jiabao, China's premier, pledged $10bn in new low-cost loans to Africa over the next three years and defended China's engagement against accusations it is "plundering" the continent's oil and minerals.

Mr Wen told a press conference: "There have been allegations for a long time that China has come to Africa to plunder its resources and practice neo-colonialism. This allegation in my view is totally untenable."

Closer inspection of China’s M & A record in Africa however tells a different story. The only successful acquisition Chinese oil companies have had in Africa this year involves the $7.2 billion purchase of Addax by Sinopec. In 2008, Addax blocks produced 108,000 barrels per day (bpd) in Nigeria, 100,000 bpd in Gabon, and 2,100 bpd in Cameroon. It also has access to joint exploration blocks in the Gulf of Guinea, which is believed to hold some of the largest undeveloped reserves in the world. The important tactical point for Chinese oil companies is that Addax gives them access to the offshore technology and blocks that they have been lacking.

After completing only one major deal in Africa -- Addax -- in a year that seemed tailored for Chinese success, it has become clear to Beijing that it must adopt a new strategy in order to compete with Western IOCs. The way forward may be to abandon China's past resource acquisition strategy of being the only investor in a project or holding the majority share, to now accepting minority stakes in projects with Western companies in order to gain access to the capabilities they lack. CNOOC is relatively inexperienced in offshore oil extraction and none of the Chinese oil majors are competent in deep-water drilling -- where nearly all untapped African oil patches are located.

There are signs this is the tactic China is pursuing. On Nov. 3 China National Petroleum Corporation signed a deal with BP in Iraq for a minority stake, and on Nov. 5 CNOOC bought minority stakes in four Gulf of Mexico oilfields from Statoil. The Chinese oil majors have yet to strike a minority-share deal in Africa, but if they continue with this approach, they stand to gain technology and expertise that may eventually translate into the ability to challenge Western IOCs for more difficult offshore projects. China will continue to bid for less attractive projects, but have found through their inability to strike deals in Africa during favorable conditions that their oil majors must start developing new capabilities in order to stay competitive on resource acquisitions in the long run -- even if it means becoming a minority stakeholder to garner that expertise.

Next Steps...

Generally speaking, in China the State leads the way and private companies will follow. China has spent millions of dollars during the last few years in engaging international PR firms as it attempts to take the politics out of M & A. However the basic questions and areas if distrust in the west still remain, particularly in the field of natural resources; is China making and attempting to make these acquisitions with a long term investment plan or is the country simply making purchases to gain long term supply at lower than market values? China and Chinese companies have a disappointing record in cross border M & A deals and part of the problem comes from the sometimes hysterical western press and business reaction to these large deals which puts pressure on Governments to block deals.

So is China warming to the concept of a minority share as opposed to total ownership, it is interesting to note that in the last two weeks both China National Petroleum Corporation and CNOOC have completed deals for minority shareholding in oil fields in Iraq and the Gulf of Mexico. The concept of ownership in China though is a difficult one, anyone who has conducted due diligence on privately owned Chinese company will tell you that ownership will often be rather ambiguous. Whilst I think these are interesting moves by China to be more successful in cross border M & A deals there are clear strategic goals that can be achieved in the field of natural resources. These strategic goals do not necessarily transfer to other sectors so I don’t expect to see large numbers of these deals happening. The move does though indicate another step as China continues to compete on the global stage.

The question of ‘taking politics out of M&A’ is an interesting one which I will cover in my next update next week. I also plan to explore some more technical issues around taxation and the regulatory framework for anyone investing into China.

The China group is a growing group within the M & A Association but I would encourage anyone involved in China or with just an interest in the issues to join the group and contribute to the debates.

Jon Ellenor