M&A

Taming a T-rex

Will America accept Zoomlion’s Terex takeover?

A Zoomlion company logo is seen next to its excavators at an exhibition in Shanghai

Breaking up is hard to do

It has been called China’s Caterpillar. But if its proposed acquisition of Terex Corp goes through, Zoomlion may end up being known as the ‘Lion King’ as its Chinese name means roaring lion and Terex was coined from the two Latin words terra (earth) and rex (king).

China’s second largest construction equipment manufacturer made a bid for its Connecticut-based competitor last week. The $3.2 billion all-cash offer represents the Shenzhen- and Hong Kong-listed company’s first prospective US acquisition. If it is successful it will break up an all-share merger of equals that Terex and Finland’s Konecranes agreed last August.

Hunan-based Zoomlion says it has tabled the bid as part of its globalisation strategy and believes there are plenty of synergies with Terex, particularly in aerial work platforms, where the latter holds the number one position in the US.

However, the deal has largely been given the thumbs down by investors. The share price of Zoomlion has climbed only marginally since the bid was announced on January 26 and is still almost one third of the level it reached last June. Terex, meanwhile, has risen from $15 just before the announcement to $21.96 on Thursday, some way below Zoomlion’s $30 per share bid.

“In this desperate bid Zoomlion is trying to buy a larger company in order to secure its future amid declining domestic market conditions,” Seeking Alpha observes.

Meanwhile, Terex says it has rejected Zoomlion’s first offer but has entered into confidential negotiations. That’s because the alternative Konecranes bid only values Terex at $18 per share.

One question mark is how the Chinese firm will fund the takeover. Zoomlion’s operating cash flow has been on an improving trend, moving from a negative figure in 2014 into positive territory.

The company has about Rmb21.8 billion in cash, according to an HSBC analyst report, and a gearing level of around 50%, which means it has room to take on more debt. A Zoomlion executive tells CBN it has enough financial support from the banks, since it has Rmb120 billion in outstanding credit lines (obtained back in 2012) and has received all the necessary Chinese government sign-offs for the bid.

The biggest hurdle, as many Chinese firms with M&A experience in the US will attest, is whether Zoomlion will hit an American regulatory wall. There are already concerns that the Committee on Foreign Investment in the US (CFIUS) may block the bid because of Terex’s strategic importance to American port operations. In fact, Zoomlion should be no stranger to political resistance. Its domestic rival Sany tried to acquire a wind farm in Oregon but even that $20 million deal was scuppered by American regulators on national security concerns. The high profile case saw Sany take President Barack Obama to court (see WiC170).

Zoomlion remains optimistic, with its executive telling CBN: “The number of Chinese companies receiving CFIUS approval is increasing. We’re one of China’s largest equipment manufacturers and none of our business segments are aligned with the military.”

The executive also points out that while Hunan Sasac (a state asset manager) is still its largest individual shareholder, it only holds a 16% stake.

Zoomlion wants an overseas acquisition to negate its problems in China, where declining fixed asset investment is hurting the entire construction sector. During 2015, for example, Zoomlion saw tower crane sales halve from Rmb5 billion to Rmb2.5 billion.

This led the company to issue a profit warning late last week. It says 2015 net profit is likely to decline 80% to 90% to between Rmb50 million and Rmb100 million.

Ironically, the news came as a pleasant surprise to many investors who had been expecting a net loss. HSBC concludes that Zoomlion was able to turn a small profit thanks to increasing government subsidies and lower than expected bad debt provisions.

Nevertheless others believe Zoomlion’s bid is misconceived. Instead of buying a company in a similar market sector, many ask why it is not concentrating its buying power on its newer agricultural and environmental equipment businesses. Both are doing well thanks to the mechanisation of Chinese agriculture and the government’s strategic initiatives to combat pollution.


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