Berlin mulls stricter rules on foreign takeovers

Oscar Geen
09 May 2018

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German regulators are increasingly nervous about foreign investment into German companies but have yet to block a deal, as Chinese PE firms allocate increasing amounts of capital to the DACH region. Oscar Geen reports

At the end of April, Germany's upper house (the Bundesrat) wrote a letter to the government suggesting that it expand its powers for reviewing foreign investments in German companies so that it could scrutinise minority investments below the current threshold.

"The Bundesrat is now recommending that the government lowers the threshold for review of foreign investments in German companies from its current level of a shareholding of at least 25%," says Daniel Wiedmann, an attorney at P+P Pöllath + Partners specialising in German and EU competition law and merger control. "The background to this is that there were some recent investments under this threshold that they would have liked to review."

The development comes just under a year after the German government adopted an amendment to the foreign trade and payments ordinance, expanding its powers to review and block foreign acquisitions. Says Wiedmann: "Since last July the government has reviewed around 50 transactions. They are also making use of the full extended review period in many cases. It used to be one month with the possibility of an additional two. Now it is two months with the possibility of an additional four."

However, a deal has not yet been blocked and Thomas Fetzer, managing director at investment bank Baird's Frankfurt office is not concerned by the latest development. "So far, political intervention on foreign investment has not affected our ability to intermediate cross-border investment and we do not expect it to in the near future," he says.

P+P's Wiedmann acknowledges this but is more concerned about the general direction of legislation. "Although a deal has not yet been blocked, it is possible that transactions could have been cancelled because of a negative signal from Berlin in the early stages," he says. "We also see that they impose obligations on transactions. At least in critical deals, foreign buyers are becoming less willing to sign deals with a break clause because sooner or later someone may have to pay one."

Great wall of capital
Part of Fetzer's optimism stems from the large amount of activity he sees from Chinese private equity. "Chinese PE firms have a lot of capital available for LBOs of German companies," he says. "Some, like Cedarlake Capital have established partner relationships with German GPs to get better access to dealflow. Others are co-investing selectively, such as Citic Capital, which took an equity position in 3i's acquisition of Formel D from Deutsche Beteiligungs AG (DBAG) last year."

Baird ran the auction of DBAG's automotive services company Formel D, which was eventually sold to 3i for approximately €400m. Citic Capital contributed €72m in equity co-investment alongside 3i and BNP Paribas.

"Additionally, Sino-CEEF, a new $10bn Chinese private equity fund with government support that is focused on central and eastern Europe, has recently set up a Munich office and is actively evaluating investment opportunities in the region," says Fetzer. The fund was originally set up in 2016 with the goal of fostering further cooperation between China and CEE in key areas such as technology and infrastructure, but is increasingly evaluating German assets as well.

Another reason that Fetzer is less concerned is the lack of action in some high profile cases: "Midea's acquisition of Kuka was a deal that many people expected Berlin to intervene in. It looked like an acquisition that was hard to pull off, it is a high-tech business in an important sector, a German business family held a significant minority block of shares, and the business fit was not immediately obvious. Yet it was not blocked."

Wiedmann on the other hand thinks it could just be a matter of time before the regulator picks a battle that will set a wider precedent: "The current sentiment suggests that the government may be looking for a test case that it can be sure of winning before it blocks a deal. There were already a few high-profile cases but likely the government was not sure it had a strong enough case."