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April 2006 Issue
In BriefInvestors Face Unexpected Hiccups in their respective quest to gain control of key assets. Case studies of three impending buyouts in the Greater China region Feature
A Willing Buyer and a Willing Seller sealed the largest buyout deal in Australia. Newbridge acquires Myer stores and two Melbourne properties for A$1.4 billion Analysis
Credit Cards Industry in South Korea is back on investors' radar screen following Vogo Fund's recent expression of commitment to BC Card, indicating a new chapter in the country's credit finance market Buyout
A Patriarch of China Equities was arrested and his fall from grace further highlights the web of complexities in China's business environment Creater China Corner
A Happy Investor Checks Out of Hotel Leela after having made the investment 12 months ago, recording an internal rate of return of 130%. India Corner - Divestment
Japan is Asia's LBOs Showcase Market following Softbanks recent acquisition of Vodafone Japan which is the largest LBO in Asia, receiving no less than ¥1.1 trillion commitments from global institutions Japan Corner
Content
Pan Asia
News
Funds
Buyouts
Growth/Expansion
Technology
Divestment
Greater China
News
Tung Lung Unlocked
Shenzhen Development Bank Draws Media Attention – Again
In Search of Alternative Energy
Funds
Fund Showers in China
Technology
Divestments
India Corner
News
Funds
Growth/Expansion
Technology
Divestments
Japan Corner
News
Growth/Expansion
Buyouts
Summary
Index & Exchange Rates
In Pursuit of Control
IIn the era of globalization, trade between economies with or without low barriers have been the impetus that has fuelled global economic growth. According to the World Trade Organisation, between 1997 and 2004, world merchandise trade has soared by 64.8%, from US$11.3 trillion to US$18.65 trillion. Asia has also benefitted from this trend, recording a 70% rise in imports and exports during this period. While global leaders recognise the merits of free trade, it remains an ideology that many government bodies find difficult to put in practice. In Europe, Mittal Steel’s earnest attempt to take over Arcelor SA met with a wall of opposition. At the heart of this was the principal fear that the deal would eliminate substantial numbers of Arcelor’s 94,600 employees, majority of which who are working in Europe.
In the USA, the US$18.5 billion bid advanced by China National Offshore Oil Company for UNOCAL had to be aborted following Congress’ overwhelming display of disapproval. In Asia, private equity investors are encountering unexpected hurdles in their pursuit to take control of some enterprises. This is particularly prevalent in Greater China where regulators are weighing the pros and cons for them to release control over some of the most protected industries in their own markets.
In the few weeks before the March end, a number of buyout transactions that private equity investors were hopeful to have or close to be completed by that time, remained in the “uncompleted” status. Five months after The Carlyle Group (‘Carlyle’) announced having reached an agreement with Xugong Group Construction Machinery Co. (‘Xugong Group’), it was revealed that the deal has yet to be consummated. Warburg Pincus, which hatched a plan back in 2004 to take control of Harbin Pharmaceutical Joint-Stock Co. (‘Harbin Joint-Stock’), the Shanghai-listed subsidiary of Harbin Pharmaceutical Group Holding Co. Ltd. (‘Harbin Group’) is unlikely to announce any progress of the venture in the immediate future.
Across the Taiwan Strait, Carlyle’s ambitious attempt to buy Eastern Multimedia Corp. (‘Eastern Multimedia’), shortly after its disposal of Taiwan Broadband Communications (‘Taiwan Broadband’) to Macquarie Bank, aroused discomfort in the island’s regulatory body. As foreign private equity investors, armed with a colossal pool of capital, seek to broaden their investment returns in the nerve centres of global economic growth, there are differing interpretations of the gospel of free trade in each market, as events surrounding Xugong Group, Harbin Group and Eastern Multimedia testify
Xugong: So Close and So Far Away
In late October 2005, after almost two years of courtship, Xugong Group agreed to sell an 85% equity stake to Carlyle in exchange for a capital injection of US$375 million. Although Xugong Group is China’s largest machinery maker group, its balance sheet has been feeble. From authorised information released by the machinery maker, it acknowledged currently facing a long list of financial burdens. Xugong Group is in pressing need of more than...
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Japan CornerBig is Beautiful
Softbank’s acquisition of Vodafone Japan makes a mark in Asian leverage buyout
It was the largest leveraged buyout (‘LBO’) in Asia – Softbank Corp’s acquisition of the world’s biggest mobile phone operator’s Japan unit, Vodafone KK. In mid March, Softbank announced a ¥1.8 trillion (US$16.4 billion) commitment for taking over the entire operation of Vodafone KK. The deal was more than six times of the transaction sum commanded by Japan Telecom when it was consummated back in August 2003, then the largest buyout in Japan. In Asia’s corporate takeover register, the acquisition of Vodafone KK is not only the largest transaction in the telecommunications industry, but is also the largest LBO. Softbank’s ability to secure loans of a staggering ¥1.1 trillion to ¥1.2 trillion, underscores LBOs are catching on in Asia, and Japan is becoming the showcase market.
Vodafone KK came to Softbank, Japan’s largest investor in the information technology sector, when it was scouting for new investment opportunities. In November last year, Softbank was one of the four establishments that was received a mobile licence. It set the scene for Softbank to hunt for its prey.
Currently, Japan’s mobile phone market is dominated by NTT DoCoMo which accounts for 56% of the market share; while KDDI takes up 24%. Vodafone KK which came to the Land of Rising Sun in 2001, captures an approximate 17%. In the six months ending September 2005, it reported a 55% drop of its operating profit, down to £191 million (US$344.04 million). Softbank saw a buyout opportunity that would further advance its corporate agenda.
In taking up the 97.7% stake in Vodafone KK, Softbank employed a multitude of avenues to raise the required capital. Based on the prevalent response, there are no shortage of institutions that are willing to provide the non-recourse loans.
Softbank will fork out ¥200 billion for Vodafone KK’s common shares. To match this colossal sum, Softbank has recently sold 173,000 shares of Yahoo!Japan and raised an approximate ¥23.3 billion. Yahoo! Japan, in which Softbank continues to hold 41.3% after its recent disposal of shares, will take up preferred shares in committing ¥120 billion. Vodafone has not entirely left its operations in Japan. Through its Vodafone International Holdings BV, it continues to hold an equity interest. Vodafone International will provide ¥400 billion, of which ¥300 billion will be in the form of preferred shares and equity warrants while the residual ¥100 billion will come in as subordinated loans.
The largest LBO by an Asian corporate investor attracted institutions across the globe to provide the required ¥1.1 trillion to ¥1.2 trillion loan that Softbank was seeking. Deutsche Bank AG and Mizuho Corporate Bank will each provide loans of more than ¥200 billion, while Citibank N.A., Goldman Sachs Group Inc., WestLB AG and Calyon will each offer loans of between ¥100 billion and ¥200 billion.
LBOs in Japan have come of age. In August 2003, RHJ International, then known as RHJ Industrial Partners, led a consortium of investors, including Newbridge Capital, TVG Capital Partners and PPM Ventures (which had since ceased operations in Asia) and committed ¥261.3 billion for taking over the fixed line business of Japan Telecom. The deal secured facilities that amounted to ¥224 billion. Ten months later, in June 2004, The Carlyle Group and Kyocera Corp. committed ¥220 billion to acquire DDI Pocket Inc. from KDDI Corp. The investors raised senior secured debt that amounted to ¥198 billion. The leverage that institutions are prepared to commit to Softbank’s acquisition in Vodafone KK, is by far the largest (fig. 32). It is a statement of investors’ assessment on the future prospects of Vodafone KK, as well as the economic health of Japan.
NewsTung Lung Unlocked
Tong Lung Metal Industry, the first buyout known to have taken place in Taiwan, has recently completed its latest phase of restructuring. On 23rd March, Tong Lung resumed its trading on Taiwan’s over-the-counter market.
Once the world’s third largest door lockset maker, in 1998, Tong Lung faced a debt piled that amounted to NT$8.8 billion (US$270.16 million). In 2000, HSBC Private Equity Asia invested NT$1.8 billion into Tong Lung and took up a 70% stake.
After an extensive structural overhaul, in which Tong Long raised an additional US$55 million to assist with its restructuring efforts, the lock maker reported a significant reduction of its debt mountain, from a high of NT$6.4 billion to NT$500 million in 2005. The management is eager to further reduce its debt/equity ratio, from the 47% in 2005 to under 30% in 2006, according to a report by BNP Paribas Equities. The report also suggested that HSBC Private Equity Asia is now positioning to pare down its current stake in Tung Lung. (China)
NewsShenzhen Development Bank Draws Media Attention – Again
Shenzhen Development Bank, the first bank that ceded control of its board room to foreign investors, is embroiled in a new wave of controversy. The former chairman of the bank, Mr Zhou Lin, and three other persons were arrested on suspicion of having illegally granted loans that amounted to 1.5 billion yuan (US$187 million). Mr Zhou is believed to be the mastermind behind the loans which have become the subject of legal contention between Shenzhen Development Bank and a host of companies that were associated with the original recipients of the loan.
In 2001, Mr Zhou, then the branch chairman of Shenzhen Development Bank, approved a loan of 1.5 billion to the Beijing-based Capital Network. Mr Zhou had held the position of Shenzhen Development Bank’s Communist party secretary during his tenure at the bank. The loan to Capital Network was intended for the development of a prime property site in Beijing. After Newbridge Capital had put in place a new team of managers at the bank, the missing 1.5 billion yuan matter surfaced. The management of Shenzhen Development Bank initiated legal proceedings to recover the missing sum. It is understood an approximate 700 million yuan could be recovered, while the whereabouts of the remaining 800 million yuan remains unknown.
According to sources, Shenzhen Development Bank is being counter-sued by one of the defendants in this suit. A subsidiary of the Hong Kong-listed Beida Jade Bird Group is seeking to enjoin the plaintiff to cease and desist from defaming it through legal challenges. The case is currently being heard by one of the courts in Beijing.
In May 2004, Newbridge Capital made history when it invested US$147.6 million in Shenzhen Development Bank, and took up a 17.89% equity stake, after enduring a year of arduous negotiations. It was the first foreign private equity house that had succeeded in gaining control of the board of a local state-owned bank. (China)
NewsFund Showers in China
There has been no abatement in the establishment of China funds
China might have lagged behind India in 2005 in attracting commitments from limited partners, but the equation is likely to be reversed during the year. In the first quarter of the year, China registered a record pool of new funds coming into this market. Including the much anticipated China Broadband Capital Partners LP that is managed by CBC Partners LP, China welcomed an additional US$448 million in the first three months of the year.
After a period of speculation, CBC Partners, LP to be led by Mr Edward Tian, Founder and Chairman of China Netcom Group, announced its formation. China Broadband Capital Partners, LP will have a fund size of US$200 million to US$300 million. It will make investments in telecommunications, media and technology-related companies that are largely based in China. It is one of the largest private equity funds ever launched by a Hong Kong H-share company.
One of the very first to express its faith to the future prospect of CBC Partners LP is Hong Kong’s fixed line operator, PCCW Ltd. It announced a commitment of US$50 million. PCCW has an established relationship with China Netcom Group. Last year, China Netcom Group took up a 20% shareholding in PCCW.
2006 is set to take China’s fund pool to a new high. After having been in the China market since 2002 and invested in a long list of technology companies, Silicon Valley’s Draper Fisher Jurveston has decided to organise a China-dedicated fund. DFJ Dragon Fund has a target of US$100 million and is expected to have its final closing completed by mid year.
The concept of raising a dedicated investment vehicle for special situations is catching on in China. Most recently, the government of the city of Tianjin, a prosperous city south of Beijing, is planning to raise a 20 billion yuan (US$2.4 billion) industrial fund – The Bohai Industrial Fund – that will be used to finance the city’s industrial and infrastructure development. The Tianjin government is optimistic to raise some 5 billion by June this year.
With China registering an unprecedented transaction total in the first three months of the year, at approximate US$4 billion, the country needs a torrent of private equity capital to match the growing pool of companies’ appetite for equity financing. (China)
NewsIn Search of Alternative Energy
Solar energy is gaining popularity in China. According to the Worldwatch Institute, a Washington-based environmental group, there are an estimated 30 million households that have installed solar systems in China, representing 60% of the global number of users. The relatively low cost for installation has fuelled an industry boom.
The Wuxi-based Suntech Power Holdings Co., backed by a host of investors including Goldman Sachs, DragonTech Ventures, Actis China Investment Holdings, Financiere Natexis Singapore 3 Pte Ltd., Prax Capital was listed on NASDAQ last year. Since then, its share price has enjoyed an upward path. By the end of March, Suntech Power’s share price closed at US$36.99, a 146.6% increase to its offer price of US$15.
Most recently, Warburg Pincus and Goldman Sachs were quoted by China’s local press about their respective negotiations for two more alternative energy companies CEEG Nanjing PV-tech Co., Ltd and Baoding Tianwei Yingli New Energy Resources. (China)
This online issue of the Asia Private Equity Review is made available with abbreviated content. To read the full content together with more in-depth news, perspectives, and analysis, please subscribe or contact us to purchase back issues.