The cancellation of a US$282m five-year leveraged buyout financing for Harbin Pharmaceutical Group Holding (Hayao Group) has underscored the challenges involved in the LBO market in China, perhaps signalling that the buyout financing market in the country is not ready to take off – at least not yet.
Billed as a template for future buyout financings, Hayao Group’s deal – which backed the acquisition by a consortium of private equity firms of a 55% stake in Hayao Group – was cancelled when the acquisition fell through.
Under the terms of the acquisition, Hayao Group was to use the funds raised from the private equity firms to buy the 65% of Shanghai-listed Harbin Pharmaceutical Group (the listco) that it did not already own.
That would have included buying the 58% held by the liquidation committee of the China Securities Regulatory Commission (CSRC), which had taken the stake as a result of the bankruptcy of China Southern Securities.
Hayao Group’s purchase of CSRC’s stake would have triggered a general offer and led to the privatisation of the listco. In order to maintain its public listing, the listco would then be obliged to refloat some of its shares after a lock-up period of six months.
The exact reason that the acquisition failed to take place is not clear. Citigroup, the financing’s sole mandated arranger, declined to comment, but bankers involved said it was abandoned because of unexpected changes to PRC securities laws relating to general offers for listed companies in China.
The revisions, to Article 88 of the PRC Securities Law, were made on October 27 2005, but came into effect on January 1 2006.
Others pointed out that prior to the changes, rules under the takeover code in China required an investor making a general offer to shareholders of a listed company to make an offer for 100% of the company.
Provided there was an agreement on the price, the selling shareholders were not allowed to sell only part of their stakes. This meant that had Hayao Group made a general offer, CSRC would have had no choice but to sell its entire stake.
However, the changes announced in October made provision for a partial general offer, throwing up the possibility of the CSRC selling only part of its stake. That became the contentious issue between the private equity consortium and CSRC as the latter’s stake in the listco was no longer treated as a single block. Failing to reach an agreement, the private equity consortium decided to cancel the LBO.
Bankers away from the deal were quick to point out that the cancellation of the financing might be a blessing in disguise for Citigroup, given that the deal received a poor response.
Indeed, since being launched into sub-underwriting in early November 2005, only two banks – ABN AMRO with a US$35m take-and-hold commitment and ICBC (Asia) with a US$50m underwriting commitment – had joined the deal.
To be fair to Citigroup, however, the sub-underwriting was put on hold in early December as soon as it got wind of the changed regulations and getting a third of the deal in commitments within three weeks was not bad at all.