China eyes more deals after $5b Canadian bid

SINGAPORE: China’s plan to buy Canadian mining giant Noranda Inc. for some $5 billion is just the beginning of an overseas acquisition march fuelled by swollen foreign exchange reserves and a need to secure natural resources.

But bureaucratic state ownership and a lack of experience in running foreign firms could slow the pace of China’s venture overseas, analysts said.

“You will see more and more overseas investment by Chinese enterprises in the form of corporate takeovers or others. The momentum is getting strong,” said Chen Jiulin, the head of Beijing-run China Aviation Oil (Singapore) Corp. Ltd, which is buying a stake in a Singaporean refining company.

“But challenges are many. For one, China lacks its own human resources to run businesses overseas. There are few who really know how to handle international businesses,” said Chen, who is also president of an association of Chinese companies operating in Singapore.

Chinese companies have to date invested more than $12 billion overseas, Chen said, citing official data. Much of that was invested in individual assets rather than entire companies. The main Chinese investors have been oil and gas producers, and appliance makers such as Haier Group and TCL that are trying to become global brands.

New stage: State-owned China Minmetals Corp. is taking the game to a new stage. It is in exclusive talks to buy all of Canada’s Noranda, the world’s number-three zinc and number-nine copper producer, in a mostly cash deal to be worth more than $4.7 billion, the companies said on Friday.

The acquisition, which would be China’s largest ever takeover of a foreign company, is driven by China’s insatiable hunger for raw materials to fuel its economic growth. It is backed by surging foreign exchange reserves, which rose 20 percent in the first seven months of 2004 to hit $483 billion, the second highest in Asia.

Similar deals are likely to follow, analysts say, with firms involved in the natural resources sectors remaining the most acquisitive. “We are going to see more resources and commodities firms with strong balance sheets buying overseas assets to support the booming economy,” said Yang Liu, fund manager at Atlantis Investment, which overseas $1.8 billion of funds in Asia.

Chinese state oil trader Sinochem Corp. signed a deal on Friday to buy South Korea’s smallest refiner, Inchon Oil, for $549 million — China’s first takeover of a foreign oil company.

State oil firms have spent $5 billion on overseas oil and gas fields in the past 10 years to support flagging domestic production. They are hoping a more acquisitive strategy will boost oil and gas reserves at a faster pace, industry sources say.

China is the world’s second-biggest oil consumer after the United States. Cash-rich companies such as China National Petroleum Corp — parent of the country’s dominant oil producer, PetroChina — and CNOOC have put several foreign oil and gas producers on their radar screens, sources familiar with the situation have said.

Big oil deals: Chinese firms have enough cash to win over rivals worth $10 billion, enough to buy a company such as Woodside Petroleum Ltd. , Australia’s largest listed oil-and-gas firm, and Unocal Corp. and Devon Energy Corp. of the United States, sources have said.

PetroChina is looking at the oil assets owned by top Canadian oil and gas exploration firm EnCana Corp. in Ecuador. The assets, by some estimate, are worth more than $1.5 billion. Money is not a problem for PetroChina, which earned $8.5 billion last year and had a conservative net debt to equity ratio of 5 percent. To gear up the ratio to 30 percent, PetroChina could raise $12 billion in debt, according to CSFB.

“As long as PetroChina can find opportunities, it has the capacity to grow,” said CSFB in a recent report. But politics are barring Chinese oil firms from entering big-oil countries such as Russia. And surging oil prices are making bargains elusive. —Reuters

Home | Business