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October 2006 Issue
In Brief

Private Equity in Japan Enters a new phase that will witness further participation from foreign investors Feature
Asian Strategies of Global Firms In the increasingly crowded Asian private equity market Analysis
ASEAN Scores Its Largest Fund which signals a return of investors’interest in this region Funds
First Aussie Buyout by Nikko underscores broadening foreign buyout investors’ profile Buyouts
Australia's Healthcare Industry Scores billion dollar commitment from foreign buyout firms Buyouts
Buyout Activities Surge in China despite the recent M&A regulations Greater China - Buyouts
The Last Private Equity Investor in Focus Media pares down its holdings, after having first invested in its competitor Greater China - Divestment
Non-Technology Funds Dominate India’s fund pool, indicating investors are no longer focusing in venture capital India Corner - Funds
Newbridge Waits to Increase Its exposure in auto financing India Corner- Growth/Expansion
Buyout of Q'Sai Foretells A New Trend taking place in Japan, where retiring founders of businesses are opening up opportunities to investors Japan Corner - Funds
Content

Pan Asia
News
Funds
Buyouts
For the Second Time
Growth/Expansion

Greater China
News
Beijing Seeks to Retain Control of Its Steel and Ships
China Achieves a Herculean Task in Defining Bankruptcy
Funds
Buyouts
Buying Spree
Growth/Expansion
Technology

India Corner
News
Funds
Buyouts
Growth/Expansion
Divestments

Japan Corner
News
Buyouts
Divestments

Summary
Index & Exchange Rates

Japan: Phase II

One month, two defining events. On 6th September, the first prince of the chrysanthemum throne in 41 years was born. Before the calendar month passed, Japan welcomed its 90th prime minister, Mr. Shinze Abe, who succeeded Mr. Junichiro Koizumi. After a five-year tenure, Mr. Koizumi is best remembered for having presided over a period of extensive economic upheaval in the world’s second largest economy, which has since shown data of a cheerful recovery. When Mr. Koizumi took office in April 2001, Japan was registering negative growth of its gross domestic product, but this was reversed in the following year. By the end of the 2005 fiscal year, his c o u n t r y recorded 3% growth. In the first quarter of this year, the Nikkei 225 reached a sixyear high and b r e a c h e d 17,000. This, compared to the depressing 8,000 back in mid 2003, was an accolade to Mr. Koizumi’s economic policies. In the five years since Mr. Koizumi took office, coincidentally, the private equity landscape in Japan has also undergone extensive changes, and is evolving into a new stage of development just when Japan welcomes its youngest Prime Minister, Mr. Abe.

From Aliens to Friends of Buyouts

Once alien to the buyout concept, during the past five years Japan has firmly established itself as a buyout market. With the exception of 2001 and 2005, buyout funds dominated Japan’s funds pool, tallying up to US$8.7 billion, representing 70% of the aggregate new funds coming in from January 2001 to August this year. Significantly, the 24 months ending 2004 was one the most volatile periods in the recent history of Asian private equity, yet the US$4.47 billion pool of buyout funds coming from Japan during these two testing years have helped bolster the region’s total fund pool.

Advancing with Confidence

It is however in the investment arena that Japan’s private equity investors have demonstrated their ability to emulate, as well as rival, its global counterparts. In 2001, Japan’s domestic firms have participated in 25 deals that amounted to US$1.56 billion, ...

Buyouts

For the Second Time

CVC takes control of healthcare business once again

After more than a year without clinching a buyout deal in Australia, CVC Asia Pacific, together with its parent company, CVC Capital Partners (‘CVC’), re-entered the market with stupendousness. In September, CVC unveiled its ambitious takeover of DCA Group (‘DCA’) for a staggering A$1.8 billion (US$1.3 billion).

CVC has made a cash offer of A$3.5 per share. The price has already factored in the future dividend payments DCA has undertaken to pay, i.e. a total dividend of A$0.19 to its shareholders, including the final dividend of A$0.04 that was announced earlier with a payment schedule due on 25th October.

CVC places high value on its latest acquisition. The deal’s enterprise value is A$2.78 billion. In paying A$3.50 apiece for DCA’s share, the offer represents a premium of approximately 50% to DCA’s closing price on the 16th of August, the day prior to the first speculation of a possible ownership change. Before DCA’s share was suspended from trading on the 22nd September, its share price closed at A$3.20. The generous transaction price also equates to 11.8 time the healthcare operator’s income before tax, depreciation and amortisation (‘EBITDA’), and 24.6 times its profit after tax in the fiscal year 2006.

Listed on the Australian Stock Exchange since 1987, DCA specialises in diagnostic imaging and residential aged care. It has grown significantly after acquisitions of more aged care facilities and properties. At 30th June 2006, DCA has approximately A$2.4 billion in total assets and over 7,500 employees. Ithas recorded revenue and EBITDA at A$953.3 million and A$226.1 million respectively in the year ended on 30th June. As the diagnostic imaging industry is expected to surpass a growth rate of 5%, and with 71% of DCA’s total revenue coming from its imaging division, the prospects for DCA look promising. DCA will also continue to strengthen its market position through acquisition and development in Australia and New Zealand.

In late 2003, CVC Asia Pacific teamed up Ironbridge Capital and GIC Special Investments Pte Ltd. in committing A$813 million to take control of Affinity Healthcare Ltd. Eighteen months later, the private equity investors exited from the healthcare operator and had doubled more than their invested capital.

The US$1.3 billion takeover of DCA is the largest private equity transaction in Australia’s healthcare industry. At the end of last year, Pacific Nursing Solutions and Qualcare Group Holdings were separately acquired by CHAMP Private Equity Partners and Ironbridge Capital. The investments have underscored private equity investors’ increasing interests in healthcare companies in Australia and New Zealand.

DCA is the third buyout deal that exceeds a US$1 billion transaction sum in 2006. Its consummation further consolidates Australia’s central position in the Asian buyout market.

Greater China- News

Beijing Seeks to Retain Control of Its Steel and Ships

Following the recent policy announcements that further defined controls over foreign interests in China’s key industries, Beijing has added both the steel and shipbuilding industries to those that have the 49% foreign interest ceiling limit. In China’s 11th Five Year reform plan, Beijing has identified a number of ports, including Dailan, Qingdao, Bohai Bay and Shanghai as centres for shipyards.

According to reports, China’s ban on allowing foreign investors to take a majority stake in its steel and shipbuilding industries has frustrated Mr Lakshmi Mittal, the steel baron who has recently successfully taken over Arcelor SA. His Mittal Steel is keen to acquire assets in China, to further consolidate its number one position in the global steel industry.

China Achieves a Herculean Task in Defining Bankruptcy

The long-awaited bankruptcy law was finally approved by China’s legislature in August, and will come into effect in June next year. The Enterprise Bankruptcy Law will replace the 1986 regulations, and will be applicable to both state-owned and private sector enterprises.

The efforts to draft a new bankruptcy law commenced in 1994. The new law includes a clause that allows financial regulators to take a key role in complex insolvent situations.

Under the amended law, it authorises the financial market watchdogs to issue approvals for bankruptcy applications for industrial companies that cannot sustain their business due to liabilities.

The new bankruptcy law represents a “complete and well-grounded legal system to deal with those insolvent firms” said Mr Gong Zhenhua, a partner at the Shanghai-based Ronghe Law Firm. According to Xinhua Agency, more than 100,000 debt-ridden state companies will go through the liquidation procedure under the newly-amended law.

Greater China- Buyouts

Buying Spree

A surge of buyout activities take place in China

The recent spate of buyout 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 off-shore 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% . 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 Kong-based 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.

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.

Another 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 Zealand-based 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.