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From Pizza Express to Thomas Cook, why do the Chinese have such poor luck buying British companies?

Pizza Express
From Pizza Express, to Thomas Cook, to House of Fraser and Hamleys, these deals are all turning sour

Its debts are crushing. The restaurant market is saturated. The dough balls weren’t quite garlicky enough. Over the last few days we have heard lots of explanations for why Pizza Express is suddenly in trouble and might even disappear from the high street. But in fact there is a simpler one that has been overlooked. It is owned by the Chinese. And while the Chinese may have the world’s most dynamic economy, they are also turning into the world’s worst investors.

Over the last five years, there have been a wave of Chinese takeovers of British companies as that rising giant of an economy starts to flex its financial muscle. But there is also a pattern emerging. From Pizza Express, to Thomas Cook, to House of Fraser and Hamleys, these deals are all turning sour. It turns out China’s entrepreneurs don’t have the experience to work out a good deal, and their own fast expanding market is so different to our mature one that they can’t see how much trouble lies in store for the companies they are buying into. They may get savvier one day – but there is no sign of it yet.

There has been plenty of hyperbole about Chinese companies taking over the world. Acquisitions in Europe hit a peak of €35bn (£27bn) in 2016, and even though it has declined since then it is still running at €30bn a year. In Europe, with their usual protectionist instincts, countries are already putting up barriers. Germany has put in tougher rules to make it harder for Chinese businesses to take control of its customers, and earlier this year the EU stepped up its scrutiny of the country’s ambitions.

Emmanuel Macron, France’s president, has led calls for new laws to prevent “strategic industries” falling under Chinese control.

But perhaps no one need worry too much. Most of the money the Chinese spend will simply be wasted. Just take a look at the evidence. Five years ago China’s Hony Capital paid £900m for Pizza Express, perhaps under the impression it could take the brand global. It remains to be seen what happens to the business next, and it would be unfair to write it off completely – but that is not looking like a great deal right now and its owners will struggle to hang on to the cash they have put into the business.

That is more than some of its compatriots have managed. The Chinese investment group Fosun helped to rescue the travel firm Thomas Cook, pumping cash into the failing business as it tried to stave off collapse, but most of that now looks to have been lost as the business collapsed. It remains to be seen whether its far larger acquisition of Club Med works out better.

China’s Sanpower bought a majority stake in House of Fraser in 2014 in a deal that valued the chain at £450m, and with ambitious plans to expand it in its home country. But last year the chain collapsed into administration.

Likewise, China’s C.banner, a fashion conglomerate, took control of the toy shop Hamleys in 2015 in a deal that valued the business at around £100m. That didn’t work out very well either. Earlier this year, the company was sold to India’s Reliance at a knock-down price.

It is not hard to see the pattern there. Fast-growing Chinese companies, with huge cash piles from their rapidly growing domestic market, and lots of access to cheap loans, are making ambitious moves into the British market. But the results are often catastrophic. Why? There are two reasons. First, most of the Chinese companies doing deals don’t yet have much experience of foreign takeovers.

They are typically well-connected entrepreneurs who have managed to ride China’s extraordinary economic boom to make themselves a fortune. They have usually built their businesses from scratch. But that doesn’t mean they have the skills or the expertise to buy a business in a very different country.

If a British entrepreneur started trying to buy companies in China, it probably would not be a great surprise if he or she came unstuck.

So perhaps we shouldn’t be too shocked if the same is true the other way around. Making acquisitions on a different continent is one of the hardest things to do in business. Not many people can pull it off – and certainly no one in China seems to have managed it.

Next, the two economies could not be more different. A mature market is very different from a developing one. In China, the economy has been expanding at 7pc or 8pc a year for a couple of generations. There is buoyant demand and new markets are emerging all the time. The main challenge is to come up with all the stuff its newly affluent consumers want to buy.

In Britain, markets are typically overcrowded and fiercely competitive, and that makes it a far tougher place to do business. Viewed from Shanghai or Beijing, Thomas Cook or Hamleys may have looked like a great opportunity, with the potential for a rapid turnaround, and the possibility of growing the brand in China.

Looked at from London, they are an old-fashioned travel agency struggling to cope with the internet, or a tired toy shop facing crippling taxes and rates and weak demand.

China’s ambitious entrepreneurs don’t seem to understand how much trouble the companies they are buying into are in. When it becomes clear, they get burnt.

Whatever the reason, however, one conclusion is surely clear. Politicians continue to get themselves worked up about the threat of Chinese money buying up our most prized assets.

They can put up barriers, and pass new laws to stop that. But they are such terrible investors the money will mostly be lost. They aren’t snapping up jewels: they are buying dogs.

Maybe China’s tycoons will learn one day, and get better. But until that happens, we might as well just take the money – and wait for it to be lost.