Germany Toughens Stance and Blocks China Deal

(Bloomberg) -- Chancellor Angela Merkel’s government for the first time vetoed a possible Chinese takeover of a German company, signaling a toughening stance toward investments from the country.

Merkel’s Cabinet on Wednesday voted to block the potential purchase of German machine tool manufacturer Leifeld Metal Spinning AG by a Chinese investor. The government took the precautionary measure even though Yantai Taihai Group indicated at the last minute that it will withdraw its offer.

The decision follows a government review examining possible negative impacts of the sale that concluded a purchase would raise national security concerns. Leifeld -- based in the city of Ahlen in the state of North Rhine-Westphalia -- is one of the leading producers of high-strength metals for the car, space and nuclear industries.

“Leifeld produces some really top-notch machinery,” said Mikko Huotari, deputy director at the Mercator Institute for China Studies in Berlin. “Germany is well aware of the threat” posed by the Asian country’s goal of becoming the leader in advanced manufacturing under the so-called Made in China 2025 program.

Tighter Measures

Germany is joining the U.S. and Canada in taking a tougher line on China. Merkel’s government has been at the forefront of moves to bring in European Union-wide screening of outside investments after being the target of Chinese acquisitions in recent years. Policy makers are acting out of concern that China is seeking access to sensitive technology or wants to boost its global influence by acquiring key infrastructure including ports and electricity networks.

Since Germany tightened its measures blocking unwanted takeovers in July 2017, more than 80 deals have been probed, with more than a third of those involving Chinese investors directly or indirectly, an Economy Ministry spokeswoman said. The government hadn’t used the law to block an investment since it was established in 2004.

As part of the tougher approach, Merkel’s government swooped in last week to nab a stake in one of the country’s largest power-grid operators, thwarting an attempt by a Chinese firm to buy the holding. The Economy Ministry is also looking at further tightening rules on foreign investments in the country from outside the EU.

Blocked Purchases

In May, Canada blocked a proposed takeover of construction firm Aecon Group Inc. by a unit of China Communications Construction Co., while the U.S. House of Representatives in July voted to expand reviews of foreign investment in sensitive industries. Chinese investment in U.S. technology companies probably would become more difficult and time-consuming under the legislation, with an increased risk of being blocked by a U.S. government panel that examines national security risks.

The German Economy Ministry is looking at lowering the threshold for examining a foreign takeover to purchases of stakes of less than 25 percent. The country’s domestic intelligence service said in July that Chinese acquisitions of high-tech companies in Germany represent a potential national-security threat.

The German government already last year tightened rules for foreign investors after a public backlash over high-profile acquisitions by Chinese corporations -- such as the Midea Group Co. purchase of robot maker Kuka AG in 2016. A Chinese takeover of semiconductor-equipment maker Aixtron SE failed due to U.S. opposition.

German Concerns

State-owned investment bank KfW last Friday announced plans to temporarily acquire a 20 percent holding in 50Hertz Transmission GmbH. KfW will buy the stake -- valued at about 770 million euros -- from Belgium’s Elia System Operator SA/NV. State Grid Corp. of China had previously been in talks to purchase the holding.

The depth of German concern is evident in the government taking action to stop the sale of a relatively small business. Leifeld, owned by the holding company of a former German media executive, had 33 million euros ($39 million) in revenue and 5.2 million euros in earnings before interest, taxes, depreciation and amortization in 2016, the latest available data on Germany’s federal gazette. That year, it received 13.3 million euros of new orders from China.

Leifeld was perplexed by the decision, saying its technology is only used in the civilian nuclear industry. “But the prospects for a success of the offer no longer existed in this politically charged atmosphere,” Leifeld CEO Oliver Reimann said in a phone interview. “Our potential buyer therefore withdrew its offer. With that, the deal is off the table.” The company now plans to pursue a public listing, Reimann said.

Blocking the deal “is probably the right move,” Marcel Fratzscher, head of the Berlin-based DIW economic institute. “You have to ask yourself why Chinese companies with no foothold in Europe are willing to pay so much more than other competitors to buy up these firms?”

--With assistance from William Wilkes and Patrick Donahue.

To contact the reporter on this story: Arne Delfs in Berlin at adelfs@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Chad Thomas, Chris Reiter

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