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Conscious decoupling: Chinese divestments in Europe are rising

On the surface of it, the growing wedge between China and the West hardly screams opportunity. But even if bilateral deals are in the doldrums, M&A advisers are rubbing their hands in anticipation.

Is this an opportunity for European corporates and financial sponsors to pick off local assets that are no longer a good fit for Chinese firms? And if so, what should they keep in mind when hatching their strategic buying plans?

1/ It’s all about timing—while M&A takes off around the world, China is divesting

In 2016 and 2017, Chinese buyers took over 251 European companies worth a total €103.7 billion, and 213 worth a total €43.1 billion, respectively, according to Dealogic data.

So far in 2021, however, they have spent a paltry €7.6 billion on 51 European companies. And that meagre showing comes amid a veritable global M&A boom.

On the divestment side, the deals just keep on coming. Of the 21 made so far this year, eight have come in the past two months. Total transaction value of €5.1 billion is also approaching the value of new deals, with China Tianying’s sale of Spain-based utility firm Urbaser to Platinum for €4.3 billion topping the ranking.

2/ Know your sectors

Investors looking to seize upon this opportunity should know that the most popular sectors for disposal activity in 2021 have been utilities, and computers and electronics, with six apiece.

The latter of these two could soon see another addition: Shagang has hired UBS to explore the sale of Global Switch, which carries an enterprise value of some US$11 billion. The sector mash-up of a steelmaker (Shagang) and a UK data centre operator (Global Switch) says everything about the freewheeling M&A activity pursued by Chinese firms in Europe in recent years.

3/ Politics may put deals on pause

The pandemic has raised the protectionist stakes. Both the EU and the UK have grown wary of foreign investment, particularly where China is concerned. In the EU, a Europe-China investment deal is on hold due to concerns over alleged human rights abuses in Xinjiang. And with the Chinese Communist Party aligning itself with the Taliban regime following America's hasty retreat from Afghanistan, geopolitical relations have frayed even further.

This could be the year that Chinese divestments in Europe outmatch their investments, as diverse holdings are unwound, but potential buyers will need to watch their footing.