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Pandemic Slows China’s Global Deal Making in 2020

The global coronavirus pandemic has so far not triggered a Chinese buying spree of distressed assets but further slowed the pace of outbound acquisitions by Chinese companies in 2020.

According to Baker McKenzie’s 7th annual analysis of Chinese outbound investment trends, conducted in partnership with Rhodium Group, completed Chinese outbound M&A totalled just $29 billion in 2020, down almost half from $53 billion in 2019 and a record high of $139 billion in 2017. This is the lowest figure since 2008. Worldwide, only completed Chinese acquisitions in Latin America in 2020 kept pace with the previous year.

Adding greenfield investment to completed M&A, North America and Europe attracted a combined total of $15.2 billion of Chinese FDI. Completed investment in North America outpaced completed investment in Europe for the first time in five years, fuelled by the completion of several billion-dollar transactions. Investment in Europe was more fragmented and consisted of smaller transactions spread across geographies and industries.

All other regions of the world also saw declines in Chinese M&A activity in 2020 compared to 2019, except for Latin America where completion of a number of energy and utilities acquisitions announced in 2019 in Brazil, Chile, and Peru kept year-over-year activity flat compared to the previous year. Acquisitions in Asia fell by a third to $7.1 billion.

After the hurricane

China’s reintroduction of outbound investment controls, increasing regulatory scrutiny in many parts of the world over Chinese investment, geopolitical tensions, and the COVID-19 pandemic have all created headwinds for investment in recent years. But improving political and macroeconomic conditions seem likely to change this downward trend for Chinese investors in this year. The M&A pipeline remains low in early 2021 but China’s favourable macroeconomic conditions, a more predictable regulatory setup abroad and a less contentious geopolitical environment could help increase deal appetite and support a rebound in Chinese deal making globally, as well as continued growth in investment into China.

The drop in completed Chinese outbound M&A in 2020 stands in contrast to M&A flows in the other direction. Foreign M&A into China rebounded strongly in 2H 2020 and reached full-year levels similar to 2019. China’s relatively early and rapid recovery from the impacts of COVID-19 have made it an attractive target for foreign investors looking for near- and intermediate-term economic growth.

“We think 2020 is likely the low point for Chinese outbound investment if political and macroeconomic headwinds moderate,” said Michael DeFranco, global head of M&A at Baker McKenzie. “The commercial incentives for Chinese companies to invest in European and North America markets remain strong, and several variables – including higher sustained levels of investment by Western companies into China – are moving in a direction that is supportive of greater deal making in both directions in 2021.”

North America: investment edges up

In 2020, Chinese investors completed $7.7 billion worth of deals in the United States and Canada, up from $5.5 billion completed in 2019. This came even as regulatory scrutiny and tensions with China were elevated in both countries. California, Ontario, Delaware, North Carolina, and Massachusetts were the North American regions seeing the most Chinese investment.

Entertainment, health and biotech, and natural resources were the top sectors in North America. Billion dollar deals like Tencent’s stake in Universal Music and Zijin’s stake in Canada’s Continental Resources drove high industry concentration in North America in 2020.

Canada accounted for a larger share of total Chinese FDI in North America than in previous years (17%), reflecting momentum in mining deals and persistently low US investment.

Chinese companies continued to make major asset divestitures in North America in 2020. For example, Platinum Equity agreed to acquire Ingram Micro from HNA for $7.2 billion in December 2020. And in September, PetroChina dissolved its Alberta shale gas joint venture project with Ovintiv after outing up $2.2 billion for a 49.9% stake in the project in 2012.

The United States attracted more greenfield investment from China in 2020 than Canada. However, total Chinese greenfield investment in the United States was still modest at around $700 million. The biggest greenfield deals in the US included expansions of existing US footprints for companies like Haier-owned GE Appliances, Fuyao Glass, and Geely-owned Terrafugia.

Chinese companies nearly halve investment in Europe

Completed Chinese FDI in Europe continued its downward trajectory in 2020 to $7.5 billion from $13.4 billion in 2019, registering a lower total than in North America for the first time since 2016. Compared to North America, Chinese M&A transactions in Europe targeted medium-sized targets across a broader spectrum of industries. Chinese greenfield activity in Europe in 2020 was more robust than in North America, with nearly $1 billion in completed investment during the year. There were more midsized transactions in Europe dispersed across industries such as real estate and hospitality, automotive, and energy.

As with investment in North America, outbound capital controls and increased scrutiny of Chinese investment in host countries presented headwinds, as did the coronavirus pandemic. For example, FAW Group discontinued talks to acquire Italian truck maker Iveco for €3 billion during the year, with FAW citing the pandemic as a factor in its decision.

Germany ($2.0 billion), France ($1.0 billion), Poland ($780 million), Sweden ($719 million), and the United Kingdom ($427 million) received the most investment. Investment levels in Germany reverted to the roughly $2 billion normal range typical before 2019. Chinese investment in France mounted a comeback in 2020 after falling precipitously in 2019 thanks to a few major completed acquisitions. Investment in Poland focused on a single major warehouse portfolio acquisition, while in Sweden there continues to be sustained Chinese investment above historical averages.

With the uncertainty of Brexit, persistent Chinese restrictions on outbound transactions in real estate and other service sectors, and increasing tensions with China, the United Kingdom fell to the fifth among European countries this year with only about $427 million of investment through a few smaller completed M&A deals like Jingye Group/British Steel. But a major billion-dollar Huawei greenfield R&D investment announced in June suggests Chinese firms are still interested in the UK and will bolster future totals if it comes to fruition. Levels of Chinese investment in Italy, Ireland and the Netherlands also fell to very low levels.

Compared to North America, Chinese M&A transactions in Europe targeted medium-sized companies across a broader spectrum of industries. The top deals by investment size included targets like a warehouse network in Poland and a few other Central European nations (GLP, $1.1 billion), Germany’s Steigenberger Hotels AG (Huazhu Group, $780 million), France’s Asteelflash (Universal Scientific Industrial, $422 million), National Electric Vehicle Sweden (Evergrande, $380 million), and France’s Maxeon Solar Technologies (Tianjin Zhonghuan Semiconductor, $300 million).

There were also large multi-year greenfield projects announced during the year such as SVolt Energy Technology’s announced $2.4 billion battery plant in Germany slated to open in late 2023.

EU-China Investment Deal

The proposed CAI Deal will facilitate minor additional opening of the EU market to Chinese investors. The European market was already very open to Chinese and other foreign capital. The CAI commits the EU to further open its energy sector, with the focus on retail and wholesale, but excluding trading platforms.

The CAI will not limit EU member states in deploying defensive measures including FDI screening, legislation to address subsidy distortions in the Single Market, the adoption of a more restrictive procurement regime and its push to reduce risks related to 5G.

“While regulatory and political headwinds for Chinese investors in the EU will persist and the Comprehensive Agreement on Investment is not an instant game-changer, it does send a strong signal that Chinese investment is welcome in Europe, which is likely to positively impact investor psychology,” said Thomas Gilles, chair of Baker McKenzie’s EMEA-China Group. “That, combined with potential political encouragement by Beijing, could help revive Chinese FDI in Europe and reverse the downward trend since 2017.”

Outlook brightening?

“Recent signals – most importantly the transition to a new US administration and a successful conclusion of the CAI – point toward a more constructive global environment for Chinese companies compared to the previous four years, which could help improve investor sentiment and risk appetite,” said Tracy Wut, Baker McKenzie’s head of M&A for Hong Kong and China.

Additionally, China’s current account surplus ballooned in 2020 as global travel halted Chinese overseas tourism spending while Chinese exports recovered before many other nations impacted by the coronavirus pandemic. This has put appreciating pressure on the renminbi and is creating an opportunity for China to allow more capital outflows, including outbound M&A.

Finally, Chinese investors will have more transparency on ‘red lines’ in overseas jurisdictions as new investment screening regimes are settling: “Tougher investment screening rules and related policies have substantially increased regulatory risks and uncertainty for Chinese investors, especially in data, technology, infrastructure, and related areas in recent years,” says Sylwia Lis, an international trade partner in Baker McKenzie’s Washington, DC office. “Additional uncertainties came through ad-hoc tightening of review criteria in many jurisdictions during the height of the pandemic. Looking ahead, while foreign investment review rules and practices will undoubtedly continue to evolve, some of the uncertainty around new regulatory regimes is easing as legislation has been implemented and regimes become functional.”

Eversheds Sutherland advises Element Markets in recent acquisition

Eversheds Sutherland is pleased to announce that it represented client Element Markets, the leading independent marketer of renewable natural gas (“RNG”) and environmental commodities in North America, in a majority interest sale to The Rise Fund, a global impact investing platform managed by alternative asset firm TPG.

The acquisition of Element Markets represents The Rise Fund’s second investment in the climate transformation and renewable energy space within the past six months.

“We would like to thank Ram and the entire Eversheds Sutherland team for helping us navigate this highly complex, transformative transaction and for consistently providing excellent service throughout the fast-paced process,” said Randall Lack, Founder & Co-President of Element Markets.

Partner Ram C. Sunkara led the Eversheds Sutherland team with assistance from Partners Vlad M. Bulkin, Peter A. Fozzard, Michael A. Hepburn, M. Hill Jeffries, Susan G. Lafferty, Lance J. Phillips, Amish M. Shah, William E. Sheumaker, Michael J. Voynich, Scott Wright, Counsel Jackson M. Allen, Ronnie Dabbasi, Graham R. Green and Associates Maximillian R. Licona, Michael M. Petrov, and Kathryn V. Wymer.

Founded in 2005, Houston-based Element Markets uses differentiated environmental and market expertise to play a leading role in markets for low carbon fuel standard (“LCFS”) credits, renewable identification numbers (“RINs”), emission credits, and carbon credits.

Element Markets is a leading provider of greenhouse gas reductions via offsets and renewable natural gas to several Fortune 100 companies. The company has transacted over 50,000,000 tonnes of greenhouse gas credits and represents over 20% of the North American RNG to transportation market and is the primary cellulosic (D3) RIN supplier to two of the largest US refiners. By working with clients to find a cost-effective approach to environmental compliance, Element Markets has also become the largest regional marketer of emission credits in the United States.

Projects, energy and infrastructure teams recognised at IJGlobal Awards

Global law firm Norton Rose Fulbright received Global Legal Adviser of the Year, Asia Pacific Legal Adviser of the Year and North America Legal Adviser of the Year accolades on July 13, 2020 at the IJGlobal Awards 2019, which recognised the best energy, infrastructure and mining deals and firms from around the world over the past year.

A leading publication for the energy and infrastructure market, IJGlobal also honoured the firm with 13 Deal of the Year awards for transactions completed in Asia Pacific, Europe & Africa, Middle East & North Africa and North America.

Nick Merritt, Norton Rose Fulbright’s Global Head of Infrastructure, Mining and Commodities, commented: “These accolades affirm our position as a market leader for project finance work in the infrastructure and energy sectors. We would like to congratulate all of our clients on their wins, and we are pleased to have been able to make a positive contribution to each and every of the named projects. We have had a strong year advising on many first-of-its-kind type projects and are grateful for the industry recognition from our peer group which continues to recognise our global scope and knowledge in the development and financing of ever more complex projects around the world.”

Anne Lapierre, Norton Rose Fulbright’s Global Head of Energy, said: “Being recognised for our involvement in a wide range of highly complex projects in oil, gas and renewables is a testament to the strength of our global team. While this year may present challenges to our clients, we remain committed to helping them achieve their objectives related to global projects.”

The firm advised on 13 award-winning transactions at the IJGlobal Awards 2019:

Asia Pacific

  • Asia Pacific Telecoms Deal of the Year – Kacific-1 Satellite
  • Advised Kacific Broadband Satellites Group on credit facilities totalling US$160 million to finance the construction, launch, ground system and initial operation for Kacific-1, a Boeing-built next-generation high-throughput Ka-band satellite. Led by Nick Merritt.
  • Asia Pacific Hydro Deal of the Year – Tina River Hydro
  • Advised Korea Water Resources Corporation and Hyundai Engineering Company Ltd as sponsors on the 15-MW Tina River Hydro Development Project. The deal marks the first large-scale infrastructure P3 project in the Solomon Islands. Led by Nick Merritt.
  • Asia Pacific Waste Deal of the Year – East Rockingham EfW
  • Advised a group of five senior financiers on the East Rockingham EfW project, which will be the second waste-to-energy facility in Western Australia aimed at addressing Australia’s growing waste crisis. The project was developed by a consortium led by Tribe Infrastructure Group, New Energy Corporation and Hitachi Zosen Inova. Led by Jo Crew.

Europe and Africa

  • European Portfolio Refinancing Deal of the Year – Project Keane Refinancing
  • Advised Brookfield Renewable Energy Partners on the Refinancing of an entire portfolio of onshore wind assets, which includes 17 360-MW projects in Ireland. Led by Rob Marsh.
  • European Refinancing Deal of the Year – Beatrice Offshore Wind
  • Advised a consortium of lenders on the senior debt refinancing of the Beatrice offshore wind project in Scotland. The consortium comprises 29 commercial and institutional lenders and 24 hedging banks. Led by Rob Marsh.
  • European Restructuring Deal of the Year – Irish Schools Bundle 5
  • Advised DIF infra 4 Limited as shareholder of Inspiredspaces Bundle 5 (Ireland) Limited on the restructuring and financing of completion works in relation to the Irish Schools Bundle 5 PPP project. Led by Mark Berry.
  • African Refinancing Deal of the Year – Société Ivorienne de Raffinage
  • Advised Africa Finance Corporation on the debt financing of Société Ivoirienne de Raffinage under a multi-currency long-term credit agreement for approximately US$675 million. Led by Anne Lapierre.
  • African Power Deal of the Year – Bridge Power
  • Advised the lenders to the Bridge Power Project in Ghana, sponsored by General Electric, Endeavour Energy and the Quantum Group. The project is a fast-deployment dual-fuelled LPG and natural gas power project, comprising approximately 400 MW of combined cycle power generation technology. Co-led by Martin McCann, Charles Whitney, Dan Metcalfe and Dan Giemajner.

Middle East and North Africa

  • MENA Water Deal of the Year – Taweelah IWP
  • Advised lenders, including Natixis, Siemens Bank and Mizuho Bank, to the successful bidding consortium, led by ACWA Power, on the US$1.2 billion Taweelah desalination independent water project (IWP) in Abu Dhabi. Led by Jo Emerson-Taqi and Paul Mansouri.

North America

  • North America Battery Storage Deal of the Year – Lāwa’i Solar and Energy Storage
  • Advised Societe Generale as lenders on the financing of the combined 20 MW solar PV and 20 MW/100 MWh AES Lāwa’i Solar and Energy Storage Project in Kauai, Hawaii – the largest operational solar and storage system in the world. Co-led by Ben Koenigsberg and Jim Berger.
  • North America Utility Deal of the Year – ESAP Modernisation Project
  • Advised the Department of Justice in providing procurement advice and transaction support services to Public Services and Procurement Canada for the Energy Services Acquisition Program’s Energy Service Modernisation P3 project. Led by John Naccarato.
  • North America Wind Deal of the Year – Clearway Repowering
  • Advised Clearway Energy on the US$381 million repowering of two Texas wind farms – the 161 MW Wildorado wind farm in Oldham County and 121.9 MW Elbow Creek wind farm in Howard County. Co-led by Rob Eberhardt and Jim Berger.
  • Latin America Water Deal of the Year – BRK Ambiental
  • Advised sponsor BRK Ambiental Participações S.A in relation to the BRL denominated IDB financing provided in respect of BRK’s wastewater infrastructure project in Recife and Goiana in northeast Brazil. Led by Charlie Johnson.
  • At last year’s awards, IJGlobal recognised Norton Rose Fulbright as Legal Adviser of the Year – North America (private sector) and the firm advised on 18 Deals of the Year. The year prior, Norton Rose Fulbright was named Global Law Firm of the Year and Europe and Africa Law Firm of the Year, while advising on 15 Deals of the Year.

Baker Tilly named Great Place to Work® for 4th Consecutive Year

The Great Place to Work® organisation recertified leading accounting and advisory firm Baker Tilly Virchow Krause LLP (Baker Tilly) as a great workplace.

The Great Place to Work designation is the gold standard in workplace recognition and is a special achievement determined by responses and opinions that randomly selected employees provide in a comprehensive, anonymous survey.

“Validation from our team members is an especially high honour and reflects our dedication to creating an extraordinary culture,” Baker Tilly Chairman and CEO Alan D. Whitman said. “People are the underpinning of our entire strategy as we create the advisory CPA firm of the future, today.”

Baker Tilly team members scored the firm positively with the following top survey statements:

  • 99 percent – this is a safe place to work
  • 96 percent – people are treated fairly regardless of race or sexual orientation
  • 95 percent – management is honest and ethical
  • 94 percent – people are given a lot of responsibility
  • 94 percent – our clients would rate our service as “excellent”
  • 93 percent – you feel welcome when you join the firm

A full 89 percent of Baker Tilly employees said taking everything into account that the firm is a great workplace, according to the survey. That ranking is similar to that of the country’s most respected employers.

“We’re humbled to again be nationally recognised as a Great Place to Work,” said Todd Stokes, managing partner – people. “Our team members bring our culture to life. This honour belongs to them.”

About Baker Tilly Virchow Krause LLP

Baker Tilly Virchow Krause, LLP (Baker Tilly) is a leading advisory, tax and assurance firm whose specialised professionals guide clients through an ever-changing business world, helping them win now and anticipate tomorrow. Headquartered in Chicago, Baker Tilly, and its affiliated entities, have operations in North America, South America, Europe, Asia and Australia. Baker Tilly is an independent member of Baker Tilly International, a worldwide network of independent accounting and business advisory firms in 145 territories, with 34,700 professionals. The combined worldwide revenue of independent member firms is $3.6 billion. Visit bakertilly.com or join the conversation on LinkedIn, Facebook and Twitter.

Baker Tilly Virchow Krause, LLP is a member of the Baker Tilly International network, the members of which are separate and independent legal entities. Baker Tilly refers to the global network of accounting firms of Baker Tilly International Limited. Each member firm is a separate legal entity. Baker Tilly International Limited does not provide services to clients.