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Attracting wealthy investors can be a challenge for companies and governments who are facing tough times. But when those investors are from China, showing them the door later can prove even harder.
Pirelli, the Italian tyremaker, sought succour from Chinese chemicals maker Sinochem a decade ago. It was by no means the only one. Chinese entities were voracious buyers around that period, spending not far off $700bn on outbound mergers and acquisitions between 2016 and 2021, according to Dealogic. Roughly a third of that was in Europe. That doesn’t include the $150bn of offers that were made and later withdrawn.
In some cases, that money comes with even more strings than first thought. From March, the US will ban Chinese-backed hardware and software that interacts with cars. That is potentially a problem for Pirelli, whose tyres are no longer mere rounds of rubber but tools for harvesting data, likely to get even smarter as cars go fully autonomous.
With 20 per cent of its revenue coming from the US, Pirelli has good reason to decouple its capital ties with China. Sinochem holds a 34 per cent stake. But without a willing seller, doing so is a challenge. Pirelli’s former chief executive Marco Tronchetti Provera tried to coax his Chinese partners into selling, without success.
There are workarounds, potentially. Golden-share style options that give the state a final veto are more backstop than solution. Rome does have the power to suspend Sinochem’s voting rights, although it’s not clear that would pacify US authorities. The Dutch government dusted off an old piece of legislation to take control of Chinese-owned chipmaker Nexperia.
On the private side, finding buyers will be tough. Pirelli’s market capitalisation of €6.7bn is less than the €7.1bn that Sinochem’s purchase valued it at a decade ago. Its operating margin is less than 2 percentage points higher since then, although the global workforce has been pruned by a fifth.
Once, Chinese buyers boasted attractions beyond the size of their cheques. Access to a huge, fast-growing market, for example. Since they often had little overlap with the companies they were buying, antitrust risk was slight. Swiss agritech group Syngenta, for example, sold itself to China’s Sinochem after rejecting US peer Monsanto.
Selling big stakes in the open market is also problematic. Even divesting part of its 34 per cent stake in Pirelli on the market would drive down the price, especially since at 10.6 times forward earnings, according to LSEG, it already trades at a slight premium to fellow tyremakers Michelin of France and Germany’s Continental.
That leaves the traditional buyers of last resort: governments. Oil-rich Middle Eastern states have cash to spend and are still welcome in the US. Pirelli already has a joint venture with Saudi Arabia’s sovereign fund. But if all else fails, it might even fall to Pirelli’s home country to help cook up some kind of solution to this pressing China challenge.
