Australia lies directly in the path of the outbound China investment tidal wave and the size of Chinese companies’ acquisitive power is creating a healthy flow of transactions for law firms Down Under

The numbers are staggering. While M&A activity dropped significantly in the Asia-Pacific region for the first quarter of this year, the value of M&A transactions in Australia increased from US$17bn to US$25bn on the same period last year, according to Bloomberg; outbound investment from Chinese companies accounts for 70% of all M&A activity in Australia. And Australia’s legal industry has reaped the benefits of this dramatic increase in the levels of Chinese investment.

Partner Barry Irwin, who is the co-head of Australian top-tier firm Clayton Utz’s national energy & resources practice and the leader of its China practice, recalls that as little as four years ago there were only occasional instructions from Chinese investors looking to move into Australia, but about two years ago it all started to change and the M&A activity driven by Chinese buyers has become exceptional over the past 12 months.

“We have seen a marked increase in the flow of instructions from Chinese companies, as well as an extraordinary number of enquiries – on average at least two a week somewhere into the firm,” Irwin says.

Although Clayton Utz has been involved in investment projects of Chinese companies in other sectors, the energy & resources sector is the firm’s main focus, and is where the majority of the workflow comes from (it accounts for more than 75% in one form or another). “My two managerial roles used to have very different responsibilities. Now they are just like one and the same thing – that’s how things have changed,” Irwin says.

Major China outbound M&A transactions in Australia have been almost exclusively in the resources sector. Recent headline deals include Hunan Valin’s A$1.2bn investment in Fortescue Metals, China Minmetals’ US$1.7bn offer for Oz Minerals and Chinalco’s US$19.5bn courting of Rio Tinto.
“Certainly the outbound work is a lot more significant than it was even a year ago, and the importance of resources [for China] and the decline in prices has made Australian assets more attractive,” says Stephen Minns, a partner in the Melbourne office of leading Australian firm Mallesons Stephen Jaques, the firm acting for Chinalco on its bid for a stake in Rio Tinto.

Blake Dawson is another Australian firm that has advised on a growing number of M&A transactions in Australia involving Chinese purchasers. It recently expanded its Shanghai office by hiring partner Michael Wadley to head up its China practice.

Prior to joining Blake Dawson, Wadley was the principle of Wadley Business Consulting in Shanghai, a firm he established in 2003. He notes that Chinese companies’ rising demand for legal advice and assistance on outbound investment in Australia motivated him to make the move.

“Blake Dawson sees China as an important market and has recognised that China outbound M&A offers great opportunities,” Wadley says. “I decided to join Blake Dawson also due to the fact that it requires comprehensive geographical coverage, resources and expertise to handle large deals and be able to provide high-level of legal advice to Chinese clients investing into Australia.”

Sources of referrals
As some Chinese companies become more familiar with the Australian market and legal environment, they will increasingly approach local Australian firms to assist their acquisitions in the country. However, for the time being, referrals remain the main source of new clients and business at Australian firms.
There are many different sources of referrals: from Chinese law firms, international firms with offices in China, investment banks, accounting firms and other business service providers.

For firms like Clayton Utz, which does not have a physical presence in China, referrals are particularly important. “We feel that even if it is nice to have an office in China, it’s a luxury we can live without. One of the reasons for that is because of the two international associations that Clayton Utz belongs to – Lex Mundi [PRC member – Jun He] and PRAC [PRC member – King & Wood]. That means Clayton Utz has an association with the two top-tier law firms in China,” Irwin says.

Another reason he cites is that opening an office in China means that a firm would end up targeting FDI into China and doing work for whoever comes through the door, and Clayton Utz has decided that it doesn’t want to do that. “It is extremely difficult to identify prospective clients in China, so you have to have a focus,” Irwin says.

According to Irwin, 20–30% of the firm’s referrals come from the two law firms in the same associations and Clayton Utz also receives referrals through other PRC firms and international firms that have offices in China. “Because we don’t have an office in China, we don’t compete against other international firms there. So we are in a better position to receive referrals from them when their Chinese clients want to do deals in Australia,” he says.

So far, nine Australian firms have established a presence in mainland China, including top-tier firms Allens Arthur Robinson, Blake Dawson, Mallesons Stephen Jaques, and Minter Ellison.
Most of these offices were set up to service investment into China and they are now reinventing themselves to target outbound investment, performing a support role for offices in Australia.

“Four years ago, around 90% of the work done in Shanghai was related to money flowing into China. We set ourself up to service that business. In the last few years, we have recognised that China’s outbound investment, particular into Australia and Southeast Asia, is a proven growth area. So we are looking to grow our China practice in that direction and become more integrated into China’s business community,” said Seamus Cornelius, a partner with Allens Arthur Robinson (AAR) in Shanghai.

“The vast majority of the legal work relating to China outbound investment is done in Australian offices. Our role up here is more to assist in the early stage of transactions and provide a convenient service point in China for Chinese clients. We clearly think it is important to have an office in China. It gives us much better ability to service clients.”

AAR accesses work through both direct marketing and referrals. It identifies clients it can approach directly and tries to work directly with them, while at the same time developing new clients through the PRC firms it has worked with on inbound investment. The firm has also entered into a ‘best friends’ relationship with leading UK law firm Slaughter and May to work together in the region (excluding Japan).

Maturing acquirors, desirable clients
Although the valuations of assets in Australia are at a more reasonable level than a year ago, Chinese investors are still not rushing into making deals. “There are strong interests from SOEs and large PRC companies in making investment in Australia’s energy & resources sector, but they are also very interested in making sensible investment,” Cornelius says. “In the downturn, when the market is not hot, there is an opportunity for companies to do deals more sensibly and within a better timeframe. For every deal that gets done, there is a good chance for them to learn how to do deals more efficiently in Australia.”

He also points out that many Chinese investors now see regulatory requirements – particularly obtaining the regulatory approval from Australian treasurer Wayne Swan and the Foreign Investment Review Board (FIRB) – as a natural part of the dealmaking process, and they are relying on legal advisors to navigate them through this potentially tricky process.

And as more Chinese companies begin to use local expertise in Australia, the competition between Australian firms will inevitably also increase. “As Australian firms’ conventional client base is shrinking because of the global financial crisis, more firms will start to tool up and prepare themselves to service China outbound investment. Competition in this area is huge and is getting bigger,” Irwin says.

“Chinese companies have opaque methods of selecting law firms and there are not just one or two top-tier Australian firms leading the pack. The energy & resources sector is not the exclusive domain of the big firms at all and in many deals, Chinese companies will use all sorts of law firms.”

However, Irwin, like many other Australian lawyers, is bullish when asked about the growth prospects of China outbound investment in Australia. “The global financial crisis is affecting China, but it will be relatively short lived there. It gives a perfect opportunity for China to establish energy & resources security for itself,” he says.

“The deal flow will remain at the same level as it is now, which is reasonably good, for the rest of this year. And in the absence of what I call ‘inappropriate decisions’ from the FIRB, it will increase substantially.”

Australia provides the resources China needs so urgently for its economic miracle and, in return, China provides Australia with cheap cooking pots, washing machines and cars it manufactures from the metal it has purchased.

And Australian firms look set to prosper as Chinese investors flood the market in the 2009 gold rush.