This year, many private equity deals have been blocked in China, including the attempted acquisition by Carlyle of an 85% stake in Xugong Group, a major construction machinery company, by concerns either that the assets are too cheap or that they have strategic significance. The news that Goldman may have pulled off a coup is thus likely to give heart to an industry which has had problems sourcing deals, despite record amounts of liquidity.
Specialists are quick to point out that a major difference between the Xugong and Shineway deals is that food processing is not considered a strategic or protected asset in China.
Although the Ministry of Commerce gave its approval earlier this week, and the State-owned Assets Supervision and Administration Commission (SASAC) signed off a month ago, ChinaÆs top securities regulator, the China Securities and Regulatory Commission (CSRC), also needs to wave the deal through, a process that could take a couple more months. The CSRC is involved because the deal concerns a listed company, a subsidiary of Shineway.
Detractors, meanwhile, maintain that competition concerns could slow the process down since Goldman and CDH have already invested in a top Chinese meat processor. This deal was with China Yurun Food Group.
In a style which Goldman has made its own over the past couple of years, the private equity investment in China Yurun was followed by a successful IPO exit (lead managed by Goldman) in September 2005, with China Yurun raising $200 million. Post-IPO, GoldmanÆs stake fell to 6.46% post-greenshoe, while CDHÆs stake fell to 3.31%. Both Goldman and CDH have representatives on the board, namely Joyce Hsu I-Yin, an executive director, and Jiao Shuge respectively.
The competition accusation is based on the concern that investments in two leading companies by the same investor could lead to price collusion, and hence harm the consumer. However, given how low their stake in Yurun now is, that may not worry regulators. And likewise given that the top three meat companiesÆ combined market share in China is less than 10%.
Another distinction is that China Yurun was invested by GoldmanÆs Principal Investment Agency (PIA), while Shineway has been invested by the Special Situations Group (SSG), according to sources close to the deal.
ôDeals with the PIA are generally run with third-party money as a purely financial investment with a view to an exit,ö notes one banker, ôwhile the Special Situations Group is run using the bankÆs own balance sheet. They run their investments in a completely different way.ö
Another specialist says that the competition question was closely examined by the relevant authorities during the auction process, and GoldmanÆs bid was cleared of that concern.
The Shineway deal occurred in two parts. In the first part, SASAC sold its 100% stake in Shineway Group to Rotary Vortex for Rmb2 billion. In the second part, Rotary Vortex acquired a 25% stake in a domestically listed company, Henan Shuanghui Investment and Development from Haiyu Investment, adding to the 36% stake already held in the company via the Shineway Group.
According to one specialist, the operating assets are distributed through both the group and listed company level.
Chinese media reports say that several shareholders of Haiyu Investment are actually managers of the Shineway Group, who obtained the shares in Henan Shuanghui following a transfer of the shares to them by SASAC. Carving out a separate shareholding for themselves would enable the managers who fostered the successful growth of the company to be duly rewarded - this was necessary since Shineway was originally an SOE, and they tend not to distribute share options. Such a move would naturally also help obtain management support for the sale of the parent company.
The upshot is that Rotary Vortex now holds a 100% stake in Shineway Group and a 61% combined stake in the listed company.
Assuming the deal goes through, Goldman will be patting itself on the back because they stole the deal from under the nose of CCMP Capital Asia, formerly the private equity arm of JPMorgan, but spun off about a year ago, and now quite independent.
CCMP had been dealing with the Chinese parties for many months, but were outbid at auction through the late but aggressive Rmb2 billion bid from Rotary Vortex for Shineway Group, say sources, which came in at 10% more than the CCMP offer. Haiyu Investment's stake in the listed company was not put on the block at the auction, according to one specialist, but was sold to Rotary Vortex in a separate deal for Rmb562 million.
CCMP balked at such an unexpectedly high price for Shineway Group û indeed, CCMP believed that they had an exclusive understanding with the company and various levels of government to be the only buyers.
However, Goldman fit the bill as a buyer and in any case time was running out: since the deal involved the listed company it had to be done before it embarked on the share reform programme, which the government is currently rolling out across all listed companies.
ItÆs likely that Goldman, having made a killing with China Yurun at the private equity stage, the IPO underwriting stage and probably in the final exit stage (the share price has more than doubled since last yearÆs listing) is trying to replicate the deal bonanza on a considerably larger scale with Shineway Group. Shineway turnover in 2005 was Rmb4.5 billion.
JPMorgan advised Shineway Group on the transaction.
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