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27 Jul 2012

Week in China: You got pandas, we got oil

China's emperors began handing out pandas as gifts to smooth diplomatic relations 1,300 years ago. In the 1950s, the government of the People's Republic of China revived the tradition in more modern times. So it came as no surprise when it was announced earlier this year that China was lending two bears to two Canadian zoos. The backdrop? Commercial ties between the two countries have been deepening, with Canada more welcoming to Chinese investment than many others.

Week in China

In fact, Chinese bids for Canadian companies have continued apace this month, with state-owned oil giant CNOOC's USD15.1 billion offer for Nexen, the Calgary-based oil sands producer, the most attention-grabbing.

The deal has already been approved by Nexen's board so the focus now is on the Canadian regulators, who have said they are studying the proposal. The geographic diversity of Nexen's assets means other regulators from other countries will also have a say, which is a complicating factor. But analysts are widely tipping the deal to go through.

Seven years ago, CNOOC failed in another major bid – its USD18.5 billion offer for US oil group Unocal – after political opposition from Washington. But it seems that the Canadians are more at ease with Chinese interest in their oil companies, judging from a spate of deals that have been approved recently.

Earlier this year, PetroChina finalised a two-stage deal for Athabasca Oil Sands worth USD2.5 billion. Sinopec, another Chinese company, paid USD4.65 billion in 2010 for a nine per cent stake in Syncrude, which runs Alberta's largest tar-sands mine. And just this week Sinopec agreed to pay USD1.5 billion for a 49 per cent stake in the North Sea operations of Canadian-listed Talisman Energy.

Once again, however, the deal suggested the acquisition of know-how – indicating China is serious about moving its industries up the value curve

CNOOC is offering a 61 per cent premium over Nexen's closing share price at the end of last week. That's a high price for a company whose operations haven't performed well of late.

Last year, Nexen's profits fell 37 per cent (year-on-year) to USD697 million.

Still, not everyone in Canada is happy about the deal – which promises to be the biggest cross-border acquisition to emanate from non-Japan Asia.

In an opinion piece in the Calgary Sun, the paper's so-called 'voice of the people' columnist Michael Platt warned that the bid should trigger a 'red alert', going so far as to call it a 'deal with the devil'.

Platt admitted that Chinese development of Canadian oil resources will bring jobs, but he queried whether national assets should be sold to a government that practices 'forced abortions' and the 'brutal and oppressive treatment of citizens'.

The sale of the company also gives away valuable know-how, Platt suggested, "With China's pending purchase of a major Alberta oil firm, a totalitarian regime that's previously dabbled in small oil sands deals can now claim to be a full-fledged bitumen player."

Nor is China only interested in the nation's oil and gas, as another deal made evident. Once again, however, the deal suggested the acquisition of know-how – indicating China is serious about moving its industries up the value curve.

The Canadian firm in question this time is Toronto-listed Wescast Industries, the largest global producer of exhaust manifolds for cars and light trucks.

It has been purchased by the Sichuan Bohong Group for a price of USD240 million. Although dwarfed in size by the CNOOC bid for Nexen, the takeover of Wescast, which also manufactures turbocharger casings, highlights the growing Chinese presence in the global auto parts supply chain.

And unlike the oil transaction, this is a done deal.

How many more of China's future acquisitions will come from Canada remains to be seen

Wescast boasts General Motors, Ford, Volkswagen, BMW and Honeywell among its customers, according to a Shanghai Hotline report. Its products command 40 per cent of the American market and 13 per cent of Europe's.

Privately owned Bohong, with 2,300 employees, said it will continue to operate all of Wescast's existing foundries, but will also invest RMB2.35 billion (USD370 million) to build new facilities in Sichuan province in China's south west. According to Dong Ping, the company's chief executive officer, the new foundry will manufacture the full range of Wescast products.

Chinese carmakers have relied in the past on foreign parts makers, with companies like Wescast, Delphi Automotive and South Korea's Mando keeping a tight grip on the market for middle- and high-end components.

Bohong's move reduces some of that dependency. "By getting advanced technology from overseas, we can immediately enter the international supply chain," Dong told CBN. "It takes too long if we try to develop that technology from scratch."

Bohong is not only focusing on the North American market. In April, it came to an agreement with Eisenwerk Bruhl GmbH, a German maker of cylinder blocks, to invest RMB1.7 billion in a business that is set to make machine parts for the third-generation Audi EA888.

Bohong will hold an 80 per cent stake in the joint venture.

Of course, the global auto industry has been through a turbulent time since 2008, with a series of bankruptcies and government bailouts. That's created buying opportunities for the Chinese players. Negotiations to buy Wescast had been ongoing for a while and, according to reports, Bohong paid less than originally budgeted because Wescast's performance deteriorated during the drawn-out deal talks. In 2011, it posted a net loss of USD4.5 million, compared to a profit of USD18.8 million in 2010.

Evidently the Chinese party thinks it can reverse this earnings trend.

Previously, Chinese bidders have focused on auto brands: SAIC absorbed MG Rover and Geely bought Volvo from Ford. But the Wescast takeover could be the first of a string of Chinese takeovers of parts makers, the CBN report adds.

How many more of China's future acquisitions will come from Canada remains to be seen. Across the border to the south, the warning is that the Canadians need to be wary – and that there is an impact on the USA too. The Republican congressman for Nebraska, Lee Terry, told the Calgary Post that deals of this type are 'a serious wake-up call for Americans'. He added, "The fact they can just come in and buy up your oil is very concerning."

Perhaps a panda delivery to Nebraska's zoo is in order …

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