- The Washington Times - Monday, March 23, 2015

Venerable Italian manufacturer Pirelli, famous for its curve-hugging tires and curve-baring calendars, will be bought by a major Chinese rival, becoming the latest high-profile Western corporate name to succumb to the recent wave of acquisitions from cash-rich Chinese private and state-owned buyers.

With Chinese private conglomerates and state-owned enterprises (SOEs) both flush with cash, the Milan-based Pirelli, founded in 1872 and now the world’s fifth-biggest tire manufacturer, joins a long line of Western properties now answering to Chinese bosses, a list that includes IBM PCs, Volvo cars, AMC movie theaters, Smithfield hams and New York’s fabled Waldorf Astoria Hotel.

China National Chemical Corp., also known as ChemChina, announced Monday that it is buying into Pirelli in a $7.7 billion deal. Formed following the restructuring of several enterprises under the former Ministry of Chemical Industry, ChemChina is a diversified manufacturer that has only been in business since 2004.

ChemChina will initially buy a 26 percent stake in Pirelli from the holding company Camfin, owned by the Russian oil magnate Rosneft, Italian banks and Provera CEO and Chairman Marco Tronchetti Provera. Camfin will then enter into a joint venture with a ChemChina offshoot to create a wholly new company that will then initiate a takeover bid of Pirelli.

If all shares are sold in the tender, ChemChina could end up owning 65 percent of the new firm.

The deal, which is the largest incursion by China into Italian markets to date, will give ChemChina, led by aggressive Chairman Ren Jianxin, access to a major player in the upscale premium tire market. The agreement would likely give China the opportunity to further develop its auto industry, not to mention give the Italian firm a boost in the huge Chinese market, helping it compete with bigger rivals such as Michelin and Continental.

As with many recent deals, the Pirelli buy instantly gives a largely faceless Chinese company an instant presence and identity in Western markets.

ChemChina sells 20 million tires a year, yet its leading brands — including Aeolus — are relative unknowns on the global market. The Pirelli purchase will be one of the most expensive brand purchases by China to date.

As details from the acquisition emerged last week, shares in Pirelli, founded in 1872 by Giovanni Battista Pirelli, jumped to a 25-year high and closed at $16.67 — a sign, traders say, that rival bids may still emerge from other European tire makers.

ChemChina will also become the corporate power behind the famed Pirelli Calendar, a not-safe-for-work trade calendar whose limited distribution and roster of famous photographers and lightly clad supermodels have made it one of the most coveted freebies in the corporate world.

As Chinese savings grow, many see the struggling European economy as a major buying opportunity, analysts said.

The Chinese campaign for European investments is coming at a time when the value of the euro has fallen 20 percent against the U.S. dollar in recent months, making investments in Europe an enticing offer for Chinese SOEs flush with cash. Chinese officials are actively encouraging its SOEs to move west and invest.

“They’ve been given a mandate to expand overseas at any cost,” said the head of equity trading at one investment bank in Hong Kong, who described the recent string of deals as “empire-building”.

In Italy alone, Chinese interests hold minority stakes in the power grid firms Terna and Snam, turbine maker Ansaldo and luxury yacht firm Ferretti Group.

According to a study published by KPMG before the Pirelli deal, Chinese acquisitions in Italy have totaled $13 billion over the past five years — the bulk of which has come within the past year.

Not every SOE acquisition goes off without a hitch, Derek M. Scissors, a resident scholar at the American Enterprise Institute and author of the China Global Investment Tracker, wrote in a blog post Monday. Many SOE investments are poorly thought through and tend to give investors “indigestion afterward,” Mr. Scissors wrote.

“The Italian reaction is crucial to this. Even fairly large economies, such as Brazil, have been overwhelmed at times by surging Chinese acquisitions, leading to sharp drops afterward,” Mr. Scissors added.

“If Italy is more accepting, investment will prove durable.”

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