Year of the flip

M&A's big innovation in 2014: The "Chinese flip"

The "Chinese flip" could be the M&A innovation of 2014. Mainland companies like producer Shuanghui International and Bright Food have funded overseas acquisitions with aggressive leverage. The next step is to refinance by listing on the stock market. Enthusiastic demand for stocks that tap into Chinese consumer demand may make flipping recent purchases all the more lucrative.

Shuanghui only completed the $4.7-billion acquisition of Smithfield Foods in September. But the Chinese pork producer is already planning an initial public offering which will combine the US group with its Shenzhen-listed subsidiary, according to a person close to the situation. Shanghai's Bright Food also wants to list recent overseas acquisitions, including British cereal maker Weetabix.

Meanwhile, Dalian-based Wanda has just listed AMC Entertainment little more than a year after it bought the US cinema chain.

Chinese consumer companies are going abroad to buy what they lack at home: big brands, marketing capabilities, and retail know-how. Foreign companies' higher food safety standards also appeal to the Chinese public. With plenty of cheap debt available, outbound M&A from the Middle Kingdom totaled $58 billion in 2013 in the year to December 12, almost double the 2007 figure.

In normal circumstances a quick flip would not create value. After all, companies tend to pay a premium for control when buying while offering investors a discount in an initial public offering. Given the short time between the two transactions, the owner will have had little chance to make any improvements to the business.

However, the frenzy of interest in stocks that tap into mainland consumer demand opens up a valuation arbitrage. Shuanghui bought Smithfield for around 9.6 times its forecast Ebitda, according to Eikon. It will hope the enlarged entity achieves a valuation closer to that of its mainland subsidiary, which currently trades on 11 times forecast 2013 Ebitda.

Bright Food may also hope to convince investors that its famous acquired brands are worth more under the ownership of a Chinese parent than as standalone entities. As long as the valuation gap persists, the "Chinese flip" will be part of the M&A toolkit.