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WHEN EQUITY IS DIFFICULT TO BUY
By Andrew Whan Wednesday, January 24, 2007
Last year was generally a dismal one for private equity investors looking to buy out state-owned enterprises in China. This was perhaps best exemplified by US private equity investor Carlyle's attempt to buy out Xugong, the biggest state-owned construction machinery manufacturer. In October 2005, Carlyle agreed to pay $375m for 85 per cent of Xugong. In October 2006, after a year of being blocked by the government, Carlyle reduced its proposed stake to 50 per cent. Some private equity houses have switched investment strategies. In early December, Goldman Sachs announced three investments involving acquisition of minority stakes in companies with A-shares listed on China's stock exchanges through private placements: Fuyao Glass, an automobile windscreen manufacturer, Midea Electronics Appliance, a household electrical appliances manufacturer, and Chengdu Yangzhiguang, maker of aluminium foil. Goldman Sachs has taken advantage of rulesthat came into effect a year ago removing a long-standing prohibition on foreign investors acquiring A-shares of listed companies in China directly. In each case, Goldman Sachs agreed to acquire about a 10 per cent stake, the statutory minimum for foreign “strategic investments”, and to pay close to the minimum price, which is 90 per cent of the 20-day historical trading average price before announcement of the deal. These investments require the approval of the Ministry of Commerce and the China Securities Regulatory Commission. Under Chinese law, Goldman Sachs's A-shares will be subject to a three-year lock-up. The three investments' share prices have soared since the announcements. Last November, H&Q Asia Pacific announced the completion of its $45m acquisition of a 43.3 per cent stake in Yuchai Engineering, a leader in the small-sized excavator industry in China, after obtaining all relevant government approvals. Clearly, some private equity houses are making headway by taking minority as opposed to controlling stakes, making it easier to obtain regulatory approvals and sidestepping politically sensitive concerns. Does this signal the demise of big buy-outs in China? Not necessarily. In November, the Ministry of Commerce approved the $325m acquisition by Rotary Vortex, a consortium formed by Goldman Sachs and Chinese private equity house CDH, of a 100 per cent stake in Shineway Group, the biggest state- owned meat processor, as well as a 25 per cent stake in its listed subsidiary. The Ministry of Commerce's approval of a buy-out of an SOE will be a relief to private equity players. Commentators point out a crucial difference between the Shineway and Xugong deals: meat processing has little to do with China's national security. The writer is a partner in the Hong Kong office of Clifford Chance | 
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发表于 2007-3-18 23:05:00
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