Germany stalls Chinese takeover of Aixtron, citing security worries

By Maria Sheahan and Caroline Copley

FRANKFURT/BERLIN (Reuters) - The German government has withdrawn its approval for a Chinese takeover of chip equipment maker Aixtron, citing security concerns and throwing up an unexpected hurdle for a 670-million-euro ($728 million) deal on the home stretch.

The government had cleared the deal on Sept. 8 but Aixtron said on Monday that the Economy Ministry had now cancelled the clearance certificate for Fujian Grand Chip Investment Fund LP (FGC), a Chinese investment fund controlled by businessman Zhendong Liu, and planned to reopen a review of the takeover.

The decision to rescind the approval was based on "previously unknown security-related information", Germany's Deputy Economy Minister Matthias Machnig told German daily newspaper Die Welt, without being more specific.

The Economy Ministry declined to provide details on how long its review might take.

The government's move comes as protectionist noises from Berlin grow louder and just a week before Economy Minister Sigmar Gabriel is due to travel to China with a business delegation.

There is rising concern over whether the government should do more to protect strategic technologies following a series of bids for German companies by Chinese investors this year.

In the 4.5 billion-euro takeover of German industrial robot maker Kuka by Chinese household appliance maker Midea earlier this year, Berlin initially sought a deal to limit Midea's stake to 49 percent.

It had wanted to curb the Chinese company's influence on what it viewed as a national champion in its push to digitalise German industry, but eventually allowed the takeover after major German shareholders in Kuka sold their stakes to Midea.

Under German law, the government can block takeovers only if they jeopardise energy security, defence or financial stability.

In June, Gabriel called for a Europe-wide safeguard clause which could stop foreign takeovers of firms whose technology is deemed strategic for the future economic success of the region.

GREATER SCRUTINY

Other governments in Europe and the United States have also put China's offshore ambitions under the spotlight this year.

Australia blocked the $7.7 billion sale of the country's biggest energy grid to Chinese bidders in August, citing unspecified national security concerns.

In July, British Prime Minister Theresa May also delayed signing off on a $24 billion nuclear power project partly funded by China, citing the need to review the details. She eventually approved the deal in September.

Eric Schweitzer, president of Germany's DIHK Chambers of Industry and Commerce, warned against putting up further hurdles to Chinese investment in an interview published in German newspaper Handelsblatt on Monday.

German foreign investment in China was worth more than 40 billion euros in 2014, far outweighing Chinese investment in Germany of roughly 1.4 billion, according to the foreign ministry.

However, a sharp increase in Chinese business takeovers in Europe - which jumped 44 percent last year as Beijing pushes firms to expand their global presence - has brought the issue to the forefront of political attention.

In the latest sign of Chinese appetite for German technology, chipmaker Sanan Optoelectronics has said it had been in contact with lighting group Osram about a potential acquisition or cooperation deal.

MM Warburg analyst Malte Schaumann said a move by Berlin to block the takeover of Aixtron would also have negative implications for a deal between Sanan and Osram.

Shares in Aixtron, which makes machines used in the production of red, blue, green and white light emitting diodes (LEDs), were down 10.5 percent at 5.19 euros by 1316 GMT on Monday, well below FGC's offer price of 6 euros per share.

Aixtron's stock lost nearly half its value late last year on news of a big order cancellation by Sanan, which is also co-financing FGC's takeover offer.

Aixtron executives have backed FGC's offer, which ended on Friday. FGC declined to comment when contacted by Reuters.

The German company has been trying to return to profit in the face of overcapacity and take back leadership of the global market for LED chip-making equipment from U.S. rival Veeco Instruments.

According to Aixtron's most recent annual financial report, Veeco held a 53 percent share of the market for MOCVD equipment, used to make LEDs, in 2014, while Aixtron had 41 percent.

Aixtron executives have warned that the company's only alternatives to the deal with FGC would be to keep investing its scant funds in new technology in hopes of a recovery of demand, or to shrink its business and its workforce.

"If the deal fails, Aixtron’s future looks bleak and additional deep restructuring measures should be expected," Hauck & Aufhaeuser analyst Tim Wunderlich said, who recommends that investors sell the company's stock.

A number of other deals are still pending completion, including China's Shanghai Electric Group takeover of German aviation equipment manufacturer BAW for $219 million and Chengdu Techcent Environment's acquisition of assets in Germany's ALBA worth more than 300 million euros.

($1 = 0.9181 euros)

(Additional reporting by Adam Jourdan in Beijing; Editing by Gopakumar Warrier, Susan Fenton and David Stamp)