China Buys Europe Cheaply, Pirelli Edition

♠ Posted by Emmanuel in , at 3/30/2015 01:30:00 AM
Presumably, ChemChina will get the risque Pirelli calendar too*
 [*NOTE: The IPE Zone being a family-oriented blog, pictures from the 2015 calendar aren't included here, though you can view them yourselves, of course.] The weak euro currency has meant that many things in the eurozone are dirt cheap in comparison to what they were just a year ago. It goes without saying that some of Europe's prestige brands can be had for a song, one of them being the Italian tire manufacturer Pirelli. The firm certainly needs no introduction. It has been the sole supplier of tires in Formula One for the last five years, bolstering its famous name in the performance segment of the automotive supplier industry.

And of course, we all know who the prospective buyers are: the cash-laden Chinese. Sure the PRC economy is slowing down, but they've had plenty of rich years before the last two or so. It is thus something of a mystery to me why the Chinese haven't bought more European names with cachet, like dorky-sounding Geely buying Volvo. That is, if you can't conquer world markets because your product names sound borderline, er, laughable, why not buy those with global standing already? Enter state-owned firm ChemChina mooting its purchase of Pirelli for a seemingly measly $7.7B:
After years of economic decline, Italy has become a hunting ground for Chinese companies keen to take control of prized but cash-strapped corporate names such as Pirelli, and they are no longer investing from the back seat. "The Chinese have the capital, Italy has the brands, the products and the know-how, but no money," said a banker with direct knowledge of the Pirelli deal.
State-owned China National Chemical Corp (ChemChina) is to buy the world's fifth-largest tire-maker in a 7.1-billion-euro ($7.7 billion) deal that will put the 143-year-old Italian company in Chinese hands.
The planned takeover, announced on Sunday, is one of the biggest acquisitions by a Chinese company in Europe and comes after a string of buys by Chinese investors in the euro zone's third largest economy, which is struggling to emerge from its longest recession since World War Two. 

Unbeknownst to the rest of the world, Pirelli is but the tip of the iceberg when it comes to the Chinese shopping spree in moribund Italy. What's more, the largest buyers into Italian firms these past few years have been Chinese:

The Chinese shopping spree has included power grid firms Terna (TRN.MI) and Snam (SRG.MI), turbine maker Ansaldo and luxury yacht maker Ferretti, as well as a number of small stakes bought by the Chinese central bank in Italian blue-chips.
China's European deals have usually targeted sizeable stakes but not the outright control ChemChina will get on Pirelli. "I think this is a clear signal that they do not want to invest behind the scenes any longer. They want to play a leading role, in the limelight," said Alberto Forchielli, managing director of Mandarin Capital Partners...

A study published by KPMG before the Pirelli deal said Chinese acquisitions in Italy totaled 10 billion euros over the past five years, half of which in 2014. Last year nearly a third of foreign purchases in Italy were Chinese, it said.
So the deal makes sense for both sides. Italian firms are capital-starved and seek new markets in Asia. Meanwhile, Chinese firms need to put vast cash piles to good use, so why not buy name-brand Europeans that can also help with the R&D bits? Italy's leadership tacitly accepts this process as their country attempts to escape from years and years of stagnation:

[Italian Prime Minister Matteo] Renzi has pledged to modernize the economy and cut red tape. After more than a year in power he still seems to be enjoying a honeymoon period with overseas investors. And this year's expected pick-up in the economy is helping.

Renzi, an inveterate tweeter on all subjects, has been uncharacteristically silent about the Pirelli takeover but his government has made no protectionist noises over ChemChina, even as it snapped up one of Italy's best-known corporate names. Bankers say Italy's attitude is encouraging Asian investments while Italian companies gain exposure to the huge Chinese market.

Joel Backaler, author of "China Goes West", said Chinese companies also needed to invest in Europe to compensate for their own very competitive domestic market. "With labor and energy costs rising and the pressure on margins increasing, Chinese companies that want to sell at a premium price need to have something different, for example better quality tires than those you can find in China," he said.
And yes, F1 too will continue as-is with the Chinese at the controls of Pirelli for the remainder of its contract and possibly beyond:
Pirelli motorsport director Paul Hembery told reporters at Sepang ahead of the Malaysian Grand Prix that the supplier remains committed to the sport[:]

 "For us, it's business as normal," he said. "Motorsport for Pirelli remains key. Pirelli is involved in over 250 championships in 54 countries and F1 is the pinnacle of all that activity. Our view is as before, nothing changes. We see F1 as a medium to long term involvement for us and we will be very happy to continue in the sport. It is a business decision to be here. We're not here for fun. It has a great impact on our presence in the market from a brand point of view and buyers' decision-making point of view. We would like to continue with that."
Dear friends, it's called "globalization." Deal with it since tire protectionism would've been a stretch too far.