Zoomlion Heavy Industry Science and Technology Co., Ltd.; Market Cap HK$17.24 bn (as of 19/02/2016)
Terex Corporation; Market Cap: US$2.4 bn (as of 19/02/2016)
Introduction
Zoomlion has made a US$3.3bn non-binding offer to buy US-based company Terex in hopes of foiling the proposed merger between Terex and Konecranes. Zoomlion’s unsolicited offer is currently under consideration according to Terex, although Terex’s board of directors has not altered their position on the proposed merger with Konecranes. Terex, which has 97 priority-rated contracts with the U.S. government and provides mobile harbour cranes in critical U.S. ports, would create a strong foothold for Zoomlion to enter the U.S. market.
Zoomlion is one of the many Chinese companies eager to make deals with foreign companies and invest abroad as China’s economy weakens; however, as Chinese investors’ foreign appetites increase concerns are increasing abroad. The case of Zoomlion is no exception. The Committee on Foreign Investment in the United States (CFIUS) may decide to block the deal citing national security threats as the reason (given Terex’s dealings with the U.S. government). Whether CFIUS’ concerns are valid or simply a new form of protectionist policy against Chinese investors is still up for debate.
Zoomlion Heavy Industry Science and Technology Co., Ltd
Zoomlion (1157.HK) is a Chinese based industrial company founded in 1992. It is mainly involved in developing and manufacturing high-tech equipment in the areas of agriculture, building, energy, environmental, and transport engineering. Essentially it makes everything from cranes to pile-drivers. It had revenues of almost US$4.2bn in 2014 and is the largest equipment manufacturing company in China and the sixth largest in the world. Zoomlion has subsidiaries in more than 40 countries around the world and particularly excels in concrete and hoistingmachinery. In 2013 they adjusted their development strategy from solely focusing on construction machinery to invest in four sectors simultaneously: construction machinery, agricultural machinery, environmental sanitation, and financial sectors.
Terex Corporation
Terex Corporation (TEX) is a lifting and material handling solutions company founded in 1925 in Connecticut, and built through a chain of acquisitions starting in the mid-1990s. It focuses on providing solutions for five key segments: aerial work platforms, construction, cranes, material handling and port solutions, and materials processing. Terex also provides financial products and services to help customers acquire equipment through Terex Financial ServicesTM. Though based in the U.S., Terex operates globally and has manufacturing facilities in North America, South America, Europe, Asia, and Australia. In 2014 Terex had revenues of US$7.3 bn.
Deal structure
Zoomlion has offered to pay Terex US$30 per share valuing the company at around UD$3.3bn; which represents a 41% premium over the current stock price of about UD$21.22, and a 100% premium over the closing price on the day before the announcement.
Zoomlion will finance the transaction with its own cash on hand and with bank debt, accounting respectively for 40% and 60% of the financing plan. Zoomlion’s investors, however, are not enthusiastic about the debt to take on for this acquisition – by September 2015, Zoomlion’s net debt had gravitated to 43 times its EBITDA, soaring from 7.4 times at the end of 2014. Zoomlion’s shares fell 7% in Hong Kong after the announcement.
At the same time, the all cash offer from Zoomlion generated positive market reaction for both Terex and Konecranes. After Terex made a statement about the offer its shares rose 36% and Konecranes shares rose by 9.1%. Accepting the offer would mean that Terex has to pay Konecranes a US$37m termination fee under the merger agreement.
Deal Rationale
Zoomlion has a successful track record in its sales of machinery and equipment, as the largest company in the sector in China, but it is encountering trouble when it comes to penetrating markets outside of its main geographical focus. Indeed, they have had a challenging time gaining more than a small presence in the U.S. over the past decade. The main barrier for Zoomlion, and other Chinese companies, is the lack of a dealer network for repairs and other services. This is a significant challenge for Zoomlion because customers cannot afford to wait for long periods of time for repairs. Creating a dealer network has proved challenging because most seasoned dealers are loyal to more established equipment suppliers like Caterpillar Inc.
In this context, Zoomlion eyed how Terex’s market – and its corresponding dealer network – is mainly concentrated in the United States and in the European markets, which would be complementary to Zoomlion’s presence in China and emerging markets. Zoomlion cites the potential to achieve a global footprint as a driver of the offer. At the same time, Terex and Zoomlion are complementary from an operational perspective: Terex can count on manufacturing expertise and technology, while Zoomlion can leverage its cost advantages and production capacity when it comes to manufacturing. Zoomlion believes that the merger could realize synergies from a production and cost perspective. The merged company would also feature a wider array of products, as well as a comprehensive product chain. As of now, Terex’s main products are aerial work platforms, cranes and material handling equipment, while Zoomlion’s main products include construction machinery, environmental equipment and agricultural machinery.
It is necessary to keep in mind that Terex was also looking at complementary geographies and corporate and operational synergies when agreeing to the all-stock merger with Konecranes. When the two companies announced their merger last August the goal was to create a company with a combined market value of US$5.7bn and annual revenues of more than US$10bn. Terex’s need for a partner comes from challenging economic conditions spurring after the 2008 recession: the number of skyscraper construction and major infrastructure projects drastically declined in Europe and the U.S. For example the S&P 1500 Industrial Index has dropped 8.4% in the past year. It is important to underline that the deal was structured as a tax inversion, since the combined company would have been domiciled in Finland, but that investors’ sentiment was not as favorable to their merger due to growing concerns on demand of industrial equipment.
Now with Zoomlion’s offer on the table the future of Terex is not as certain. While the board of directors still recommends the merger with Konecranes, Terex is conducting confidential talks with Zoomlion regarding the proposal. As far as the structure and the conclusion of this transaction are concerned, on one side the Chinese government’s “going out” strategy – encouraging to buy foreign assets and technology – might be the basis for speculation on the 100% premium in the proposal. On the other side, U.S. concerns on national security will be cause for thorough scrutiny of the transaction. These hurdles present another significant issue and could be considered a significant reason why at the end Terex might not end up agreeing to Zoomlion’s offer. The markets fear this and Terex’s shares are still trading well below the offer price of US$30.
Protectionism
Over the last decades China has built up significant reserves and claims on the rest of the world, due to its abundant, cheap labor, and artificially devalued currency. More recently however, a transition away from an export led economy to one based on domestic consumption has begun. One of the results of this transition is that capital flows have begun to reverse; with large Chinese investors beginning to exercise their claims abroad. In 2015 Chinese firms closed overseas deals worth $61 billion last year.
Many foreign nations have not taken too well to this new economic balance, and there has been a renewed wave of proposals for protectionist policies. Despite WTO regulations meant to block traditional protectionist policies such as tariffs, quotas, subsidies, embargoes and administrative barriers, there have been many alternative methods used to circumvent these blocks.
Several notable examples include the EU’s common agricultural policy that at times has led to farmers being paid not to cultivate land, or the banning of cheaper American beef on the grounds of GMO driven health concerns. Other examples would be Russia’s similar ban of certain European foods, or the UAE’s indirect subsidy to Emirates airlines through access to discounted fuel supplies.
The Zoomlion-Terex Case; a New breed of Protectionism
The security concerns raised by the potential acquisition of Terex Corp by Zoomlion are a good example of a new wave of protectionism: That of blocking key domestic firms from being acquired by foreign parties on the basis of national security.
In recent years, several high-profile strategic investments by Chinese companies have been blocked by the U.S. on national security grounds. These failed deals included, most recently, the controversial purchase by Huawei Technologies Co. of certain assets of 3Leaf Systems (“3Leaf”), a California-based server technology company.
Both Terex Corp and 3Leaf Systems deals were blocked by the powerful and opaque Committee on Foreign Investment in the United States (“CFIUS”).
The US, however has not been the only country engaging in such practices. Australia recently also blocked the entry of Huawei. Australia’s conservative government upheld a ban on Huawei Technologies Co Ltd from bidding for work on the country’s $38 billion National Broadband Network (NBN) out of concerns that the company with close ties to the People’s Liberation Army (PLA) was collaborating with the Chinese government to spy on foreign powers.
This M&A cold war of sorts has not been entirely one sided however, with the Chinese government protecting many of its industries from outside entrants such as in the tech space and in industrials and natural resources. The large presence of State owned enterprises (SOEs) has in itself been a method to provide cheap financing and to protect many infant industries from competition. In cases such as the Asian Tigers, the protection of infant industries has proved successful and a boon to their respective economies. Nevertheless, the situation is very different on the scale of the Chinese economy.
Despite the accumulation of tremendous financial capital, the Chinese might just find themselves out of luck: what good is all the money in the world if no one wants to sell to you?
Financial Advisors
Credit Suisse Securities (USA) LLC and Moelis & Company are serving as financial advisors to Terex, Zoomlion is advised by Goldman Sachs, according to a person familiar with the matter.
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