PRINT THIS PAGE Buying spree28/03/2007. Source: Asia Private Equity Review (APER).
A surge of buy-out activities are taking place in China, says the Asia Private Equity Review. The recent spate of buy-out commitments is not only unprecedented, but is also a clear statement from foreign investors that their investment activities are in not anyway being impeded by the recently-implemented mergers and acquisitions rules. In recent weeks, a host of ground-breaking buyout deals have come to light, with more expected to be announced on the horizon. After having been an investor in the Shangdong-based Deosen Corp. (‘Deosen’) since 2004, Warburg Pincus has recently sealed a deal with a local party to jointly become a controlling shareholder in Deosen.
This is the first ‘control’ transaction in which Warburg Pincus has participated. According to sources, the private equity firm first took up a 17% equity position in Deosen, which is a producer of food additives. Then in May this year, Warburg Pincus received approval from local authorities to partner with a domestic ally to assume full control of Deosen. This joint interest is held through their an offshore registered investment vehicle, Gum Holding Ltd. Warburg Pincus holds a 30.6% stake; while Mr. Shi Zhengfu, who has been part of the senior management of Deosen, holds 69.4% (fig. 24).
As an indication of foreign financial institutions’ interest in this deal, South Africa’s Standard Bank together with Deutsche Bank arranged the US$181 million required to complete this second investment phase in Deosen by both Warburg Pincus and Mr. Shi. Although Warburg Pincus does not have a controlling stake in Gum Holding, according to Mr. Brett King, Partner of Paul Hastings Janofsky & Walker LLP, who is aware of the details of this deal, Warburg Pincus has the controlling power over the management of Deosen.
With Mr. Shi holding a 70% equity stake, Mr. King points out that while Deosen remains a People’s Republic of China company, through the offshore-registered Gum Holding, Warburg Pincus is empowered to exercise its control over Deosen. Warburg Pincus was not the only foreign firm that celebrated its first "control" deal in China. In another province in China, the Hong Kongbased CCMP Capital Asia was also toasting the set of agreements reached with Wuhan Kaidi Electric Power Co. (‘Kaidi’), paving its way to take control of one of China’s best-known companies that is involved in environmental technology.
Under the proposed structure, CCMP Capital Asia is to invest an initial 283 million yuan (US$35.8 million) in taking up a 70% stake in Kaidi. If the latter manages to achieve a set of milestones established between both parties, Kaidi will receive an additional 70.8 million yuan (fig. 25).
Listed on the Shenzhen Stock Exchange in 1999, Kaidi was established in 1993. But since 2004, its share price has been languishing under 10 yuan each. This, compared to 53.08 yuan back in March 2000, is an indication of its lethargic ability to capture investors’ interest. This is despite the fact that Kaidi is the first power environment protection company that is quoted on a China bourse. A n o t h e r buyout firm that recorded its maiden buyout investment in China is CVC Asia Pacific. After having bowed out from the Shandong Chenming Group deal, which was expected to have a deal size of 5 billion yuan, Asia's leading buyout firm has decided to be less ambitious. It will assume an 85% stake in the China arm of the New Zealandbased Carter Holts' operations.
A number of buyout deals are in the making, and are expected to be completed in the coming months. CDH Investments is expected to sew up its partnership with China Resources to jointly take over China Worldbest Group, the largest pharmaceutical group in China. The enterprise value of this deal is estimated to exceed 5 billion yuan, with China Resources to assume a 70% equity position in the new structure, while CDH Investments takes up the remaining holding.
According to sources, Affinity Equity Partners continues with its negotiations for the takeover transaction of Tiger Forest & Paper Group Co., Ltd. . Both parties are in the process of ironing out their differences following an accord on the initial agreement. There are also reports that The Carlyle Group is making another attempt to salvage its intended investment in Xugong Group Construction Machinery Co.
Beijing is showing all the signs of warming to the idea of allowing foreign investors to participate in "controlled" transactions. It is also clear that deal size, structure and industries are governing elements in deal consummation success.
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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