PRINT THIS PAGE Centre of Focus23/08/2005. Source: Asia Private Equity Review.
A host of foreign private equity firms are making deals in China, underscoring the country's irresistible allure, says the Asia Private Equity Review. The US$350 million investment size pledged by a consortium of private equity investors to Lenovo Group Ltd eclipsed a handful of deals consummated in recent weeks in China and further reaffirms the country's powerful magnetism. In the month of March alone, foreign investors have committed close to US$500 million, in private equity capital, to various projects in China.
The investment made by Texas Pacific Group, and its subsidiary, Newbridge Capital together with General Atlantic Partners LLC ('the consortium') is the largest for 2005. The consortium of investors has committed to provide Lenovo Group US$350 million for the latter's acquisition of the IBM's PC business. Texas Pacific Group together with Newbridge Capital are committing to a total of US$250 million, with the former taking up US$200 million, while the latter accounting for the balance. General Atlantic Partners is subscribing to an investment of US$100 million.
Under the terms of the agreement, Lenovo Group will issue the consortium a total of 2.73 million unlisted Series A cumulative convertible preferred shares at an issue price of HK$1,000 (US$128.21) each and unlisted warrants to subscribe for 237,417,474 shares, amounting to US$350 million. Assuming full conversion of preferred shares and warrants, the investment translates to a 12.4% equity position in Lenovo Group (fig.12). If the investors decide to convert the preferred shares only, their combined stake will represent 10.2% of Lenovo Group's enlarged share capital.
The capital injection from the consortium will alleviate the pool of cash required by Lenovo Group in its acquisition of IBM's PC assets. As of 30th September 2004, Lenovo Group's unaudited accounts showed that it had HK$3.126 billion or an approximate US$400 million in hands. It has, however, agreed to pay IBM at least US$650 million in cash with the residual US$600 million in the form of Lenovo Group's common stock. Lenovo Group also assumed US$500 million in liabilities from IBM in the acquisition.
Lenovo Group is listed on the Hong Kong Stock Exchange and is China's leading information technology company. Its strong Lenovo brand commanded 27% of China's personal computer market in 2003. Outside of China and Japan, Lenovo leads all other brands capturing 12.6% of the Asian PC market. Its partnership with the consortium of private equity investors portrays China's leading enterprises' favoured assessment of the role of foreign private equity in their development.
Harbour Networks Holdings is another information technology company that believes private equity will provide it with the necessary funds for its business expansion. In early March, it raised US$37 million from the Hong Kong-based TVG Capital Partners, formerly known as Telecom Venture Group, and Singapore's Temasek Holdings. Harbour Networks' existing shareholders, Warburg Pincus and DragonTech Ventures also joined in this third round of funding. Harbour Networks is an IP-based next generation data networking equipment company which was first seeded by DragonTech Ventures and Warburg Pincus. Together they committed no less than US$58 million in the first and second rounds of financing.
Outside of the information technology space, CLSA Private Equity Management ('CLSA Private Equity') and the International Finance Corp.('IFC') have also pledged funds to growing companies separately.
In its latest investment, CLSA Private Equity has further enhanced its portfolio of food companies in taking a stake in Huishan Dairy Holdings Ltd., a leading dairy products manufacturer based in Shenyang in the Liaoning Province. Through its ARIA Investment Partners II, LP, CLSA Private Equity will lead a party of investors, including Japan Asia Investment Co. Ltd. and invest US$15 million in Huishan Dairy Holdings.
The dairy products company in Shenyang produces fresh milk, yoghurt and flavoured milk drinks.
Between September 2004 and March 2005, CLSA Private Equity toasted the listings of two of its food companies. In September last year, Singapore-based Petra Food Ltd. listed on the local bourse. CLSA Private Equity sold a portion of the shares that it had held at that time and reaped a 2.74-fold return. In December 2004, FU JI Food and Catering Services, one of China's largest food caterers, listed its shares on the Hong Kong Stock Exchange. Its shares, offered at HK$3.10 each and raising gross proceeds of approximately HK$310 million (US$40 million), were 40 times over-subscribed.
The IFC joined CLSA Private Equity in taking an interest in China's food industry, albeit in a different area. After more than six months since it first indicated interest in Sichuan New Hope Agribusiness, the IFC sealed a deal to commit US$45 million in the agricultural company. The transaction gives the IFC an approximate 6.98% equity stake in Sichuan New Hope, one of China's largest producers of feedgrain.
Even as the IFC completes its investment in Sichuan New Hope Agribusiness, the market is awash with speculation that the investor is about to take on another investment in China. This time, the target is rumoured to be in the banking and finance sector. The private sector investment subsidiary of the World Bank is believed to be joining ING Groep NV, the Dutch insurance giant, in taking an approximate 5% stake in Bank of Beijing. If materialised, based on the 1.78 billion yuan (US$214.8 million) committed by ING Groep for a 19.9% shareholding in Bank of Beijing, the IFC's investment will amount to 447 million yuan.
The growing list of transactions (fig.13) consummated and waiting to be consummated in China are solid signals that the dragon in the East has awakened to the torrent of foreign capital, including that coming from private equity investors.
Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com
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