Chinese Buyers Push Back Against Reverse Break Fees

Buyers who resist the fees may weaken their bids for wary U.S. sellers.

The HNA logo is seen on a building in Beijing on February 18, 2016. Chinese conglomerate HNA will buy US technology distributor Ingram Micro for $6.0 billion. AFP PHOTO / GREG BAKERGREG BAKER/AFP/Getty Images ENLARGE

The HNA logo is seen on a building in Beijing on February 18, 2016. Chinese conglomerate HNA will buy US technology distributor Ingram Micro for $6.0 billion. AFP PHOTO / GREG BAKERGREG BAKER/AFP/Getty Images PHOTO: GETTY IMAGE

Pressure from sellers is convincing eager Chinese buyers to pony up big reverse breakup fees in their acquisitions. This is a recent trend, and some buyers are pushing back, say bankers and lawyers who have advised on several recent Chinese deals.

 

Buyers pay sellers reverse breakup fees if they can’t close an announced deal. While such fees are common in mergers, the ones in recent Chinese deals are  unusual because they put the buyers on the hook for risk they can’t control.

 

“The break-up fees reflect Chinese eagerness to get deals done,” said Xiuping Zhang, a managing director at investment bank Moelis & Co.

 

Many Western boards are wary of Chinese bids, which can be erratic, say deal advisers. The higher risk of regulatory scrutiny of the deals, and a growing desire by large Chinese companies to put cash to work outside the country have combined to give Western sellers more clout.

 

In the announced $6 billion acquisition of Ingram Micro Inc. by Chinese conglomerate HNA Group, the buyer will pay $400 million if the deal is blocked by the Committee on Foreign Investment in the U.S.. The committee, known as CFIUS, can stop deals on national security grounds. Its workings are done in secret and its members don’t usually reveal why they’ve stopped deals.

 

According to bankers and lawyers, it would be more typical for the U.S. sellers to take on such burdens, because they should have a better handle on the leanings of their domestic regulators.

 

Anbang Insurance Group Co. in its announced $1.6 billion deal with Fidelity & Guaranty Life, agreed only to a unilateral breakup fee, borne by the seller. Under the terms of the deal, FG&L will pay $51 million if the deal fails.

 

Negotiators for printer maker Lexmark International got a Chinese consortium to agree to a $150 million reverse breakup fee in their $3.6 billion deal. The fee is payable if the deal doesn’t pass Chinese regulatory review. But the buyers would also be on the hook for a $95 million payment if U.S. regulators block the deal.

 

Buyers who resist such fees are putting themselves at a disadvantage in auctions. Two bidders for Ingram Micro refused to pay the reverse termination fee during the negotiations for the company. That’s partly why their bids didn’t succeed, according to merger documents filed with the Securities and Exchange Commission.