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In April, John Zhao learned through investment bankers that London-based Pizza Express (Restaurants) was for sale. Zhao, CEO of Beijing-based private equity firm Hony Capital, loved to go out for deep-dish pizza while he was studying for his MBA at Northwestern University’s Kellogg School of Management in the mid-’90s, and he felt there was money to be made in bringing the U.K.’s largest pizza chain to China. After all, the country’s burgeoning middle class had developed a healthy appetite for Western food, making China the biggest overseas market for Yum! Brands’ Pizza Hut chain.

Within a week of hearing the news, Zhao was on a plane to meet the top executives of Cinven, the British buyout firm that owned Pizza Express. In the ensuing weeks his firm outbid three rivals, including Chinese financial conglomerate CITIC Group, and took over the restaurant chain in June. The £900 million ($1.54 billion) investment was the largest ever for $7 billion-in-assets Hony Capital, a ten-year-old firm backed by Legend Holdings Corp., parent company of computer maker Lenovo Group.

“Pizza Express may have more than 50 years of history and more than 500 stores in the U.K., but it entered Hong Kong and Shanghai just a few years ago,” Zhao says. “It only has 12 stores in Hong Kong and nine stores in Shanghai. I see many new stores opening in China in the coming few years. We also see many Pizza Express stores opening in emerging markets all over the world in the coming years.”

The growing appetite of Chinese consumers has propelled the country’s companies to the top ranks of the global league tables for mergers and acquisitions. In 2013, Chinese firms completed 367 overseas deals worth a total of $68 billion, ranking second globally behind U.S. firms, which completed 1,693 deals worth $200 billion, according to data provider Dealogic. Corporate China’s demand for overseas assets continued to grow this year, reaching $51.1 billion as of August 26, but that was good for only sixth place in the M&A league tables, as deal making picked up in Canada, the U.K., Switzerland and France. Chinese companies are acquiring a wide range of assets, however, ranging from minerals, energy and natural resources to agriculture and technology companies, and consumer brands such as Pizza Express.



“We are seeing Chinese companies that a few years ago were just domestic players becoming global players,” says George Davidson, HSBC Holdings’ Hong Kong–based vice chairman of Asia-Pacific M&A. “We are seeing not only state-owned enterprises but, increasingly, Chinese private enterprises seeking ever-bigger acquisitions globally.”

Lenovo is a prime example. Earlier this year the technology company agreed to acquire Google’s Motorola Mobility business for $2.9 billion and IBM Corp.’s x86 server business for $2.3 billion. Both deals are waiting for regulatory approval. If they go through, the purchases would make Beijing- and Morrisville, North Carolina–­based Lenovo the world’s third-largest smartphone maker and the leading supplier of general-purpose servers. They would also eclipse any previous tech takeover by a Chinese company, including the $1.75 billion that Lenovo shelled out for IBM’s struggling laptop business in 2005.

Other major deals this year include the $7 billion buyout of Glencore’s Las Bambas copper mine in Peru by an arm of China Minmetals Corp. and the $1.5 billion purchase of a 51 percent stake in grain producer Noble Agri, a unit of Hong Kong commodities company Noble Group, by China National Cereals, Oils and Foodstuffs Corp. and Hopu Investment Management Co., a private equity firm led by former Goldman Sachs Group rainmaker Fang Fenglei.

The Pizza Express deal marked another milestone in that it was the largest offshore acquisition ever by a Chinese private equity firm; the sector has traditionally focused on mainland targets.

Li Zhiyong, deputy secretary general of the Beijing-based China Venture Capital and Private Equity Association, says many of the organization’s 1,000 or so members are looking to emulate Hony Capital’s bold move. “Many of our members have zero experience making acquisitions overseas, but they are now all looking offshore for deals,” says Li, whose group operates under the supervision of the National Development and Reform Commission (NDRC), China’s economic planning ministry. “The Chinese government is pushing renminbi internationalization. That means not only Chinese corporates will be aggressively seeking acquisitions overseas; it means Chinese private equity funds also will be going offshore.”

When China began its economic reforms in the early 1980s, the country was cash-strapped and relied heavily on foreign direct investment to drive growth. Companies from the U.S., Europe and developed Asia poured in billions of dollars to establish factories, helping China become the world’s preeminent manufacturing hub by the late 1990s, especially for labor-intensive products. The economy boomed, with growth averaging more than 10 percent a year for the past 30 years.

But the country can’t continue to thrive by being a low-end producer. As Chinese companies mature, they are seeking to move higher up the value chain. The fastest way to achieve that goal, says HSBC’s Davidson, is through offshore investments and acquisitions — buying resources, technology, brands and technical expertise.

Direct overseas investment by Chinese entities hit an all-time high of $90 billion in 2013, with more than two thirds of the total coming in the form of corporate acquisitions of foreign assets. That represents more than 33-fold growth over 2002, when China first entered the World Trade Organization, and triple the volume of 2010.

That number seems certain to grow. China’s $9.4 trillion economy represents 12 percent of global output, yet the country accounts for only 6 percent of the world’s total $1.46 trillion in overseas direct investments, according to a recent HSBC research report, “Riding China’s Investment Wave.” China has ample resources for a spending spree: It owns the world’s biggest pool of foreign exchange reserves, topping $3.95 billion as of July 1.

“China’s outbound investment could easily double,” says Peter Sullivan, head of equity strategy for Europe at HSBC and a co-author of the report. “We would be very, very surprised if it stops here.”

In other words, China may someday dominate the M&A league tables just as the U.S. does today. That day is still some ways off, however. According to Dealogic, U.S. companies spent more than $1.6 trillion in the past decade, or an average of $183 billion annually, on offshore M&A. Chinese companies, by comparison, spent only $383 billion in the past decade, or an average of $42 billion a year.

President Xi Jinping and Premier Li Keqiang are actively encouraging Chinese enterprises to go offshore. In May the NDRC began to liberalize its approval process for offshore acquisitions: Those that fall below $1 billion no longer need regulatory approval.

“For the smaller deals all you need to do from now on is to file your acquisition with the commission,” says Samson Lo, Hong Kong–based head of greater China M&A at UBS. “You would think this would accelerate more outbound M&A.”

The new guidelines will help streamline China’s regulatory process, which can involve multiple agencies and hold up a deal for months, scaring off potential sellers of foreign assets. “Many European private equity funds that we deal with, for instance, want certainty that regulatory approval is forthcoming before they are even willing to actively engage with potential Chinese buyers,” Lo says.

The new reforms will be particularly helpful to private enterprises, many of which do not have the financial firepower of their state-owned counterparts. The reforms are part of the new leadership’s efforts to open up the economy, including large portions of the state-owned-enterprise sector, to ownership by private entities.

Under the leadership of Xi and Li, who took up their posts in early 2013, the government has become more aggressive in acting on behalf of Chinese enterprises, using an antitrust law that favors Chinese corporations in their quest for global resources. Swiss-based mining and metals groups Glencore International and Xstrata had to get clearance from a number of global antitrust regulators before they were allowed to merge in May 2013. China’s Ministry of Commerce said it would endorse the merger only if Glencore sold its $5.2 billion Las Bambas copper mine. Although Chinese regulators never said the asset had to be sold to a Chinese buyer, the condition they set in effect laid the path for various Chinese companies to seek a buyout of Las Bambas. On June 30 a consortium led by Hong Kong–listed MMG, which is majority-owned by China Minmetals, the largest state-owned metals conglomerate, beat out three rivals, including another Chinese consortium, to acquire Las Bambas. The deal was the largest offshore mineral acquisition by a Chinese buyer.

“The clear indication under the new leadership is that major offshore acquisitions will continue to happen,” says John Tivey, Hong Kong–based global head of mining and metals at law firm White & Case, which advised MMG on the transaction. “This was a $7 billion deal, the biggest that occurred so far under the new government. This was a China Inc.–backed deal.”

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