If the prospect of lower Chinese demand for raw materials is making commodities traders nervous, the sentiment has not trickled down to Chinese buyers of producing assets in Latin America.
A consortium comprised of China Minmetals-controlled MMG, Guojxin International and CITIC Metal agreed the $5.85 billion purchase of Glencore’s Las Bambas copper mine in Peru in April 2014 while China National Petroleum Corporation (CNPC) closed its $2.6 billion acquisition of Petrobras’ Peruvian operations in the same year. More recently, China Molybdenum narrowly missed out in the closely-watched bidding for Barrick Gold’s Zaldívar copper mine, also in Peru.
At the time of announcement, the Las Bambas acquisition looked like one of the largest outbound Chinese acquisitions ever, but it grew further. The buyers had promised to compensate Glencore for capital expenditure at the mine since the start of 2014, bringing the deal to $7.005 billion.
The MMG-led consortium was rumored to have faced stiff competition for the asset from Chinese state-backed aluminum producer Chinalco. The Chinese commerce ministry had made the sale of the mine a condition of agreeing to the merger of Glencore and Xstrata, leading most market observers to surmise that Glencore would favor a Chinese buyer. But as the sale process dragged out from its June 2013 start, Glencore’s insistence on realizing a rich valuation for a prized copper asset did not waver.
The Las Bambas transaction on its own accounted for around 14% of the $50 billion in outbound Chinese mergers and acquisitions activity that Deloitte estimated took place in 2014. MMG already controlled the Galeno copper project nearby and the deal built on an existing Chinese presence in Latin America that is spreading beyond natural resources.
“There has been a shift in Chinese interest in the region away from acquiring commodities to meet supply requirements,” says Eduardo Centola, managing partner and head of investment banking at Banco Modal in São Paulo.
Until recently, Chinese involvement in Latin America had much in common with its approach in Africa, where the country’s lenders, including China Development Bank and the Export-Import Bank of China, would make loans to host governments in support of domestic contractors.
But as the Peruvian examples show, the utility of the African model in Latin America is limited. In countries with more mature natural resource sectors that can privately finance infrastructure, Chinese contractors have had to take a more subtle approach.
“I’m not sure that Chinese developers have come to the region to compete with local contractors,” says Alberto Pandolfi, head of investment banking coverage and M&A for Latin America at Citigroup. “But there are opportunities all over Latin America in infrastructure. What will hold the region back during the next upturn is infrastructure investment.”
China’s ambitions globally have grown to encompass the acquisition of equity stakes in mature assets in developed markets, including China Investment Corporation’s purchases of 8.68% of UK utility Thames Water and 10% of Heathrow Airport in 2012.
The 2009 agreement by China Investment Corporation to buy of 15% of US utility and power producer AES gave the sovereign wealth fund indirect exposure to 8 million Latin American electricity customers — and over 14,420MW of generating capacity in Central and South America and the Caribbean, about 40% of AES’ entire fleet.
China’s other major foothold in LatAm’s power sector came when China Three Gorges Corporation paid €2.69 billion ($3.51 billion) to buy a 21% stake in Energias de Portugal from Portugal’s government in 2011. The acquisition made Three Gorges the largest single shareholder in EDP, which in turn owns 51% of Novo Mercado-listed electric utility Energias do Brasil.
Three Gorges has used this strategic partnership with EDP to build on what was initially an indirect exposure to Brazil. EDP’s renewable energy unit, EDP Renováveis, agreed to sell 49% of a 321MW portfolio of wind farms in Brazil to Three Gorges in 2014.
“Chinese investors have been active in general, and seem to have shifted from policy-based investing towards more commercially-driven approaches,” says Bosworth Monck, head of client relations at the International Finance Corporation’s Asset Management Company in Washington DC. “They remain very interested in Latin America, but are trying to promote stronger trade ties.”
The acquisitions serve China’s strategic goals of gaining exposure to renewable technologies, electricity markets, and operational expertise. They also allow China to create national champions that can compete with global utilities for assets, and not just construction contracts.
“The Chinese authorities are working hard to promote value-added industries,” says Euan Rellie, managing partner of advisory firm BDA Partners in New York. “Chinese demand for raw materials is inexorably decreasing, and the government is encouraging the private sector leaders to become global players and to invest in consumer-focused businesses abroad.”
Looking for an entry
Brazil offers a huge, and unprecedented, opportunity to Chinese investors, Banco Modal’s Centola said. The corruption scandals surrounding the country’s largest construction firms have left these companies with weakened balance sheets, and in many cases barred them from receiving government contracts or financing.
“For many years, Brazil had a defined and very stable landscape, with a handful of established major construction companies that benefited from high barriers to entry. Those companies are now caught up in corruption investigations,” notes Centola. Interest from US and European infrastructure developers is scant, and listed developers will struggle to justify an expansion into a market with huge potential risks.
“China is acting as a white knight for Brazil,” BDA’s Rellie says.
“The challenge in executing acquisitions will be working out how to define the residual liabilities attached to some of these targets, but Chinese buyers are no more or less sensitive to these risks than any other buyer,” says Centola.
Brazil’s government said in June that it wanted to attract 198.4 billion reais ($58 billion) in infrastructure spending. But this latest plan followed a 2012 initiative to attract 210 billion reais in infrastructure spending that barely hit 20% of its target, during the much more buoyant construction and financing market that preceded the Petrobras scandal.
“This government plan is very aggressive and is likely to reduce the availability of local financing, so the plan will have to be funded from abroad. Asia is the most obvious source,” says Centola.
Modal formed a joint venture with Macquarie and China Communication Construction Company (CCCC) to invest in development-stage infrastructure projects in Latin America. The new venture, Macquarie Development Corporation, is funded with the three institutions’ own capital and will likely sell any projects at, or shortly after, financial close.
“CCCC wants to acquire information about key countries, among them Brazil, find out about early stage opportunities, and understand these markets better,” says Modal’s Centola. The venture would provide the Chinese investor with knowledge transfer, contracting opportunities and valuable assets.
The developers of early-stage infrastructure projects in Latin America have struggled to raise cost-effective financing to take them through the protracted permitting and contracting process. This inefficiency, Centola says, creates an opportunity.
Earlier attempts to harness the interest of Chinese funding in Latin America have had mixed success. The IFC’s pilot phase of its managed co-lending partnerships program attracted a $3 billion commitment from China’s State Administration for Foreign Exchange (SAFE). The People’s Bank of China, SAFE’s parent, has committed $2 billion to the China Co-financing Fund for Latin America and the Caribbean under the Inter-American Development Bank (IDB).
The IDB launched three equity funds in 2012 — the Macquarie-managed LAC-China Infrastructure Fund, the Darby-managed LAC-China Mid Cap Corporate Fund, and the EMP/SinoLatin Capital-managed LAC-China Natural Resources Fund. But these funds have yet to begin operating, and a spokesperson for the IDB says “the investment platform for equity investments in various sectors in Latin America has been undergoing some design changes and is not yet active. The IDB continues to work with its Chinese counterparts in the effort to set it up.”
Chinese investors are present in funds with a wider remit looking at the region, LatinFinance understands. The IFC Global Infrastructure Fund was among a group of investors that paid $320 million for 43% of Pacific Rubiales’ power transmission and oil pipeline unit in Colombia, Pacific Midstream. Some of its equity funding is understood to come from Asia.
But BDA’s Rellie suggests that Chinese banks are better vehicles for Chinese investors. “Investments through multilateral-sponsored funds, such as the IDB, are subject to political, financial, and environmental requirements, rendering them less attractive to Chinese buyers.”
The funds managed by AMC typically feature commitments from sovereign wealth funds and large institutional investors. Monck argues that the thoroughness of the IFC’s due diligence processes give investors comfort, and may encourage them to look at a greater range of asset types as a result.
Broadening the spectrum
Haitong Securities’ acquisition of Novo Banco’s BESI points to a new way for Chinese corporates to finance their activities in Latin America.
Novo Banco, the successor to stricken Portuguese bank Espírito Santo, agreed to sell its investment banking unit, BESI, to the Chinese brokerage for €379 million ($465 million) in December 2014. The acquisition, which requires approval from multiple regulators, was still waiting to close in August.
Haitong, a state-owned firm and the second-largest broker in its home market, had no presence outside China before the BESI purchase. The acquisition would give Haitong control of existing investment banking operations in London, New York and Lisbon, as well as 80% of BES Investimento do Brasil. Haitong said in June that it wants to triple BESI’s capital, and promised to inject €1.1 billion ($1.2 billion) into the operation.
Chinese firms acquiring commodities assets with dollar revenues will not lack support from banks at home. But any construction firms looking to acquire infrastructure assets with local currency revenues may need to cultivate new sources of debt financing and the combination of Haitong and BESI would be in a position to open up those markets.
BESI, by being able to offer capital markets products, would allow Chinese investors to supplement their relationships with Chinese banks, which tend to avoid making local currency loans. According to one adviser active in LatAm M&A, however, Chinese banks are primarily interested in building a local presence to facilitate Chinese exports.
The looming Haitong acquisition has not slowed BESI’s activities in Brazilian infrastructure. It was mandated lead arranger on a 90 million reais bridge financing for a hospital in Manaus this year.
But the only work connecting Chinese corporates to international sources of capital that BESI has pointed to is a single bookrunning spot on a $670 million issue of 3.5% five-year bonds in April — for its parent-to-be Haitong International Securities.
Any acquisitions of financial services firms, at least in Brazil, are likely to be secondary to Chinese investors’ interest in infrastructure Modal’s Centola says. He notes that recent acquisitions have been focused on mid-sized firms, and that Chinese corporates show little interest in engaging in the broader economies of Latin America, for instance by buying consumer goods firms.
Still, China Construction Bank’s 2014 purchase of 72% of Brazil’s Banco Industrial e Comercial (BicBanco) and Bank of Communications’ $173 million May 2015 acquisition of 80% of BBM, another Brazilian bank, point to consistent interest in the financial services sector. Both banks are mid-sized, lend to small- and medium-sized corporates, and specialize in trade finance.
According to Citi’s Pandolfi, who advised on both transactions, the deals will help facilitate trade between China and Brazil. While they will assist Chinese corporates in investing in the region, they are unlikely to help them financing big-ticket infrastructure projects. “Given the constraints that Basel III places on local lenders going beyond ten years, BNDES is still key here.”
BDA’s Rellie cautions against expectations of more financial services acquisitions. “There would be interest from other Chinese banks in matching those deals, but there seem be a limited number of remaining opportunities. The strategic rationale is to gain a local platform to serve large Chinese corporate clients doing business in LatAm. Retail banking doesn’t seem an appealing business there.”
The next big M&A test
For all the potential that Chinese corporates have to make their mark in infrastructure and financial services, commodities still offer the most immediate opportunities. Chinese producers are comfortable with the region’s operating environment, and are dealing with motivated sellers and accommodating host governments.
But the most recent test of Chinese appetite for hard assets in Latin commodities did not end with a Chinese buyer on top. In July, Barrick Gold agreed to sell a 50% stake in its Zaldívar copper mine in Chile to Antofagasta. Antofagasta, which is listed in London but controlled 65% by Chile’s Luksic family, agreed to pay $980 million upfront, and $25 million over the next five years for the stake, and will become Zaldívar’s operator.
Antofagasta was one of the names linked to the bidding, along with X2, the new mining investment vehicle of Xstrata’s former chief executive, Mick Davis, Canadian-listed Hudbay Minerals and BHP Billiton, which owns 57.5% of Zaldívar’s neighbor, Escondida.
But by mid-July, market rumor suggested that China Molybdenum, was leading the bidding for Zaldívar, after the company said it had submitted a binding bid of up to $2.15 billion “to acquire certain overseas mining assets from an international mining company. The project has matured operations and generates stable profits and cash flow.”
China Molybdenum confirmed some of the speculation, if not the optimism about its chances, when it said, two days after the Antofagasta announcement, that it “did not win the bid for the project due to intensive competition during the bidding process”.
But Chinese interest is no longer purely about commodities, and the country’s investors are willing to work through the investment channels, particularly for infrastructure, that Latin American governments have created. These involve transparent bidding and long-term involvement with assets. “It is likely that they are using a variety of approaches to manage risk and potentially improve long-run returns,” says AMC’s Monck. LF