M&A

Deal faces dead end

Regulators drag their feet on funeral business acquisition

Death continues to be big business in China. As the locals lined up to pay their respects to the dead during last week’s Qingming festival, US radio programme Marketplace reported on the filial scenes as families burned money by the graves of their ancestors. The notes looked like $100 bills, except it was a portrait of Confucius, rather than Benjamin Franklin, that featured.

The notes weren’t the only items going up in smoke. Families were also incinerating cardboard iPhones and iPads in the belief that they would be transferred to loved ones in the afterlife. Others were even more ambitious. “If we burn enough money, mum and dad will be able to open a factory in heaven,” one dutiful son told Marketplace.

The note burning is just one facet of the huge commercial opportunity that the dead represent in modern China. Frenzied speculation has been driving up the price of cemeterary space, so much so that people now mourn that they can’t afford to die (see WiC10). Funeral services can also be extremely expensive for the general public.

One key reason for the high price of these services: the government sets high regulatory barriers for firms keen to enter the sector. There was a reminder of this recently after reports that the largest attempted takeover in China’s funeral business is still going nowhere after nearly three years of legal tussles.

In August 2010 Hong Kong-listed China HealthCare announced that it had agreed to acquire Shanghai Fushoyuan Group in a HK$3.4 billion ($437 million) cash-and-share offer. Shanghai Fushoyuan is one of the biggest funeral home operators in China, owning five cemeteries with an area of 2.35 million square metres in Shanghai, as well as further plots in the provinces of Shandong, Anhui and Henan. The purchase’s attraction: Shanghai Fushoyuan enjoys a 40% return on net assets (with nationwide funeral takings growing 18.9% annually).

The deal even attracted the interests of Carlyle Group, the US private equity firm, which lent $100 million to China HealthCare via convertible notes. Investors were excited and China HealthCare’s shares reached 2.5 times Carlyle’s conversion price.

But the good times were fleeting. The closing of the deal – scheduled for April 2011 – was repeatedly postponed. China HealthCare blames Shanghai Fushoyuan for the delays but both parties have been busy burying each other in a series of lawsuits. “The core issue is that Shanghai Fushoyuan is yet to obtain the clearance of the Ministry of Commerce,” CBN reports. Meanwhile another Hong Kong-listed firm, China Boon has run into similar trouble with a HK$2 billion deal agreed in 2010 for a Shanghai funeral home business owned by the parent firm of Shanghai Fushoyuan. It too is waiting for regulatory approval.

Citing a senior official of Shanghai Fushoyuan, CBN said regulators have been cautious as there is no precedent for a major state-owned funeral firm going public. Shanghai Fushoyuan and China HealthCare are now looking at an out-of-court settlement, the official said.

It also seems likely that other new entrants to the undertaking industry will be discouraged, and existing operators barred from going public. That’s because the Ministry of Civil Service Affairs regards the funeral business as a “special industry” that serves the general public and shouldn’t be run by profit-making institutions.

The irony, according to Hong Kong newspaper Wen Wei Po, is that these rules result in exactly what they set out to prevent, especially high prices and shoddy service. Most funeral service firms are monopolies in their respective cities and make fat profits: “It is the existing vested interests that really prevent the entrance of new competitors,” Wen Wei Po complains. Shanghai Securities News agrees, suggesting that takeover attempts by China HealthCare and China Boon show that that the monopoly in the industry isn’t likely to be broken any time soon.


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