China Inc not letting politics get in way of M&A

July 24, 2012

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

China Inc isn’t letting politics get in the way of M&A. The upcoming conclave of China’s Communist Party, a once-a-decade changing of the guard, was supposed to hold back the global ambitions of state enterprises, at least temporarily. But CNOOC’s $15.1 billion bid for Canada’s Nexen suggests that’s not happening.

The 18th party congress is expected to convene in the fall to select new leadership. Seven of the nine seats on the all-powerful standing committee of the politburo are up for grabs. The two continuing members, Xi Jinping and Li Keqiang, are widely presumed to replace Hu Jintao and Wen Jiabao as China’s president and premier, respectively. Xi is also likely to become general secretary of the Communist Party.
 
The next-most powerful body, the politburo, will see many of its two dozen members rotate. Ditto the central committee, which includes over 300 full and alternate members. All these changes will mean new people manning the red phones that connect party leaders to the heads of China’s most important ministries, regulatory agencies and state-owned enterprises.

Bankers and investors have, as a result, been bracing for a slowdown in Chinese deal-making. The logic is that an ambitious executive would be foolhardy to propose a risky transaction that might soon be frowned upon by new masters somewhere up the chain of the country’s inscrutable power structure.

CNOOC’s agreement to buy Calgary-based Nexen goes against that rationale. While smaller than the company’s eventually withdrawn bid for U.S. oil group Unocal a few years ago, it will be the largest ever full-blown foreign takeover by a Chinese company if it’s approved. Perhaps learning from the controversy over its Unocal effort, CNOOC is making big efforts to pitch the benefits of the deal to Canadian authorities, too.

In the run-up to a possibly tumultuous transition of power, such a big deal is a bold move. It brings China’s outbound announced M&A volume to $38 billion so far this year, 72 percent more than last year, according to Thomson Reuters. Though other sectors feature in much smaller deals, the bulk of that is in energy. China’s oil and gas champions are on the hunt for resources everywhere. Maybe, at least as seen from Beijing, even in a political season there’s no such thing as a bad energy deal.

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