Midea-Kuka

A blueprint for Chinese outbound investment

The acquisition of Kuka, a listed German robotics manufacturer, by the Midea Group, a Chinese-listed home appliances company, presented multiple obstacles, not least concerns about the sale of a national champion to China.

Freshfields’ advice helped Midea to complete this €4.5bn deal – the largest ever by a Chinese bidder. 

Political friction between the two countries was the deal’s main obstacle, with the potential to spark significant anger among German investors and government officials.

The issue of foreign acquisitions of German companies has long been a concern. In 2016, Chinese companies announced or completed purchases of German firms collectively worth €11.3bn. The potential involvement of some Chinese government programmes in these acquisitions, particularly those of hi-tech companies, has generated criticism and calls for China to provide greater market access to German investors.

Opposition from Kuka’s management and supervisory board, as well as shareholders and politicians, could have scuppered the deal entirely. 

We mapped out a strategy that gave Midea’s board the confidence to proceed with the deal. At the first stage we advised them on a stakebuilding strategy to build up their ownership in Kuka. This highly-regulated approach keeps the tender offer price down and tests target, market and internal reaction to the transaction. Critically for us, it encouraged a dialogue between the two businesses, creating trust and a sound economic basis for engagement.

This, in turn, saw the constructive negotiation of an investment agreement that overcame opposition from Kuka’s management and supervisory board, certain shareholders and German politicians. The agreement included commitments to keep the company’s management and financing independent, maintaining Kuka’s HQ and employee base in Germany, and not delisting the business.

Going against the tendency of many Chinese investors to get closely involved in the running of their acquisitions, we also advised Midea to limit its intervention in Kuka, which was well-run and succeeding in its core markets. As populist politicians seek to turn public opinion against such transactions, this carefully considered approach encouraged Midea to be more thoughtful in its acquisition strategy, which helped to prevent the deal from being blocked.

Freshfields structured and executed an innovative offshore financing structure which significantly reduced the Chinese regulatory approvals required for the transaction. We achieved an extremely borrower friendly (‘covenant-lite’) financing package on a highly accelerated (three-business-day) execution period, which is unprecedented in the acquisition financing market.

The deal also had a strong US aspect: we advised Midea extensively on CFIUS issues and related approval processes in Washington. Kuka had a US subsidiary engaged in highly sensitive US defence-related activities, which was International Traffic in Arms Regulations (ITAR) registered. Pursuant to sanctions imposed on China after the Tiananmen Square incident, there is a prohibition on Chinese ownership of ITAR-registered companies.

We also handled regulatory approval in China, completing in two weeks a German-, English- and Mandarin-language material asset restructuring process that usually takes two months. This allowed the bid to proceed with only minimal regulatory approvals outstanding.

Freshfields engaged in a process to divest the subsidiary as a condition to settlement of the tender offer. As part of this process, we helped to develop an innovative trust-based warehousing mechanism as a fall-back if the divestiture did not execute by the tender offer settlement deadline.

Our strategy fulfilled all participants’ competing objectives. Midea obtained access to cutting-edge robotics, Kuka’s shareholders obtained a significant premium, and Kuka itself remained independent and obtained access to Chinese markets.

More generally, it proved that – with the right advice – Chinese investors can be ambitious in transforming China away from low-cost, labour-intensive manufacturing towards ‘Industry 4.0’. The deal, described by the SCMP as ‘a defining moment in the evolution of China’s manufacturing sector’, is regarded by many market participants as the blueprint for a successful Chinese outbound acquisition.