The Next Big Seller Are Chinese Firms, Looking To Offload Western Companies

Before the next recession strikes and valuations reset, who around the world will be the next bagholder? The Chinese have understood in the last several years, it could be them. Their recent acquisitions of foreign companies were paid at hefty premiums, and now, it seems that with an imminent global trade recession, these folks are ready to dump.

Bloomberg outlines a significant problem. Since the Chinese overpaid for many foreign companies in the last several years, volatile markets across the world have made it impossible at the moment to sell for the right price.

Since the ability to offload some of these companies through public markets has shut in 2019, one needs to look at the IPO implosion in the US, as these companies are now trying to reduce their debt piles, which is an acknowledgment that bad times are ahead.

Ferretti SpA, an Italian superyacht maker, owned by China's SHIG–Weichai Group, shelved its IPO last week. Ferretti blamed macroeconomic headwinds for the dealy, as the IPO was seen as a way for SHIG–Weichai Group's to cash out of its position in the company.

Since the trade war began a little over 15 months ago between the US and China, the Chinese have been selling assets across the world to build liquidity as domestic capital controls become tighter.

The global IPO and M&A markets are slowing, something we recently highlighted, has made it much more difficult for Chinese firms to sell foreign companies and assets in 2H19.

"It's a big process of adjustment," Mark Webster, managing director at BDA Partners in Shanghai, told Bloomberg in a phone interview. "Some Chinese companies made overseas acquisitions at the top of the cycle and ended up overpaying for assets that did not make a lot of strategic sense. They are now finding it challenging to offload those businesses at fair values."

Another example of Chinese firms attempting to liquidate companies is PizzaExpress Ltd., a UK casual dining chain acquired by Chinese private equity firm Hony Capital in 2014.

Sources told Bloomberg that PizzaExpress had hired a financial adviser to prepare debt talks with creditors. There's also a possibility that advisors are preparing the company for a sale.

China's HNA Group Co. recently attempted to dump its stake in Avolon Holdings Ltd. for $8.5 billion, a deal that has yet to close.

Data compiled by Bloomberg shows the volume of Chinese outbound deals dropped to $59 billion so far this year, down 13% over last year, and well off 2016 high.

It's only a matter of time before Chinese firms become forced sellers of Western companies, only to realize that there will be no buyers at the valuations they paid several years ago, as forced selling will then crush valuations.