LONDON, Oct 18 (Reuters) - European dealmakers who sell companies and real estate to Chinese investors are increasingly asking them to pay deposits upfront, after China clamped down on capital outflows, according to bankers and lawyers.
Wary that Chinese buyers will have to pull out of a deal because they can’t send funds overseas, European sellers are asking for non-refundable deposits, often around 10 percent, before the deal can go forward, industry insiders say.
Such deposits are common in the United States, where the federal government’s Committee on Foreign Investment reviews acquisitions by foreign entities for their national security implications, leading to more deals falling through . Increasingly, European sellers are following suit.
China’s government began restricting foreign deals late last year, culminating in rules in August of this year to curb “irrational” investment overseas. It wanted to keep outflows of funds from destabilising its currency.
Since then, overseas dealmaking has waned. Acquisitions of European companies by buyers from Hong Kong and China has fallen nearly 40 percent so far this year, according to Thomson Reuters data. The decline has been even greater in the Unites States, though, so overseas dealmaking has largely focused on Europe.
According to corporate filings, CC Land put down 40 million pounds ($52.7 million) before agreeing to buy the Cheesegrater skyscraper in London for 1.15 billion pounds .
Zhengzhou Coal Mining Machinery, which produces auto components and coal-mining machinery, paid a 54.5 million-euro ($64 million) deposit when it agreed to agree to buy Robert Bosch’s starters and generators business for 10 times as much. The transaction has yet to close.
China’s ZTE paid a $10 million deposit before its acquisition of a 48 percent shareholding in Turkey’s Netas Telekomunikasyon for $101 million.
“Everybody I know is demanding this for Chinese bidders, because there’s uncertainty about them being able to extract funds from China,” said Tom Whelan, global head of private equity at law firm Hogan Lovells.
In Europe, interested parties are rarely asked for deposits in mergers and acquisitions. Sellers worry such demands would deter interest and be seen as discriminatory. Buyers from countries with developed legal systems are not required to pay deposits because break-fee clauses - which pay the seller if a deal falls through - are considered more reliable.
Dealmakers expect the volume and size of Chinese overseas mergers and acquisitions to pick up soon as a strengthening economy makes capital controls less necessary.
Bankers are looking to China’s 19th Party Congress, which opened on Wednesday, to clarify government policy on outbound investment. They expect restrictions on overseas M&A to ease. But the uncertainty of China’s regulatory regime means deposit requests are unlikely to disappear anytime soon, bankers say.
“To see a change in this trend, either the Chinese authorities have to explicitly raise some of the restrictions, or even if the rules haven’t changed, we have to see a more open approach from the Chinese banks which have applied more stringent criteria than the regulation,” said Andrew Huntley, senior managing director at cross-border investment banking firm BDA Partners. ($1 = 0.7595 pounds) ($1 = 0.8514 euros)
Reporting by Dasha Afanasieva, editing by Larry King