AFTER 11 months of often painful negotiations, China Oilfield Services, a subsidiary of China National Offshore Oil Corp (CNOOC), finally announced on July 7th that it had agreed to buy Awilco, a publicly listed Norwegian oil-services company, for $2.5 billion. The importance of the deal lies not in the underlying business logic (both companies own oil rigs), the possible synergies (Awilco has deep-water experience China lacks, whereas China Oilfield Services has access to cheap funds) or even the price, which is modest in the grand scheme of things. It lies, instead, in the fact that the deal got done at all.
Chinese firms are in an odd situation. Their increasing wealth means they can afford to make acquisitions. But they are increasingly regarded as unpalatable buyers. Since 2005, when CNOOC was blocked by the American government from acquiring Unocal, an American oil firm, many of China’s state-owned giants have been wary of bidding for Western firms. Instead, they have preferred to do deals in places like Africa, where asset sellers and the government work together (and often overlap), and high prices overcome objections, at least in the short term.
To deflect concern, Chinese government and business officials (who also often overlap) have also sought to team up with Western partners when bidding for foreign companies; a mirror image, in short, of the way deals are done in China. But the demise in March of Huawei’s effort to acquire 3Com, an American technology firm, in the company of Bain Capital, a private-equity group, because of American concerns about technology transfer has discredited this strategy and reduced the perceived value of Western partners. Many similarly structured deals are in the works, but others have been dropped.
Yet another approach has been to make minority investments, in finance in particular. ICBC, a giant state-owned bank, bought 20% of South Africa’s Standard Bank last year; Ping An Insurance has bought 4% of Fortis, and half its asset-management business. Various Chinese state investment funds have bought chunks of Blackstone, Morgan Stanley and Barclays. But these non-controlling stakes are messy, with little strategic value — and, when financial markets are falling, unprofitable.
Reservations about Chinese investment are particularly acute in Australia, which is packed with the raw materials Chinese industry craves. Sinosteel, a state-owned trading company based in Beijing, won permission in April to acquire Midwest, an Australian iron-ore company, but it may be a one-off; later applications have stalled. An estimated $40 billion of potential Chinese purchases are floating in and out of Australia’s Foreign Investment Review Board, waiting for approval.
The reviews are supposed to be transparent: applicants submit requests and get a decision within 30 days. In fact, it is less clear-cut than that. The applications are private and the decisions are public. If a buyer gets wind of a rejection, it can withdraw its request and resubmit it again and again with no disclosure. Insiders reckon that dozens of applications are caught in this loop, and that informal diplomatic signals have been sent to discourage any more — at least for the time being.
If one company epitomises the concern of Australian regulators, it is CNOOC itself. Its core business of domestic oil exploration is closed to foreign competition, and it is part of a government-controlled domestic oligopoly that may violate Western countries’ antitrust rules. Australia is also worried about CNOOC’s vertical integration, fearing that it might place an artificially low value on the resources it extracts from Australia and thus deprive the government of tax revenues.
No doubt aware of these concerns, CNOOC and its subsidiary chose the Norwegian deal carefully. Much time and effort was spent shepherding it past China’s regulators, and then ensuring it would not trigger howls in Oslo, where Awilco is listed, says Amy Lo, a lawyer at Clifford Chance who was part of the negotiations. It helped that Awilco was not a household name, so there were few headlines. Norway has not had any recent spats with China, and has plenty of oil of its own in the North Sea, so it was unlikely to kick up much of a fuss. But finding similar candidates will not be easy.
Brian Gu, head of the Greater China merger-advisory unit of JPMorgan, an investment bank, and an adviser to China Oilfield Services on the recent deal, says he has never been busier. In recent months he helped arrange acquisitions for WuXi PharmaTech and Mindray, both medical companies. It was surely no coincidence, however, that the targets were tiny and in highly competitive industries — so the deals failed to trouble regulators or xenophobes. For the time being, those may be the only sorts of deals that Chinese firms can do.