The deal will be subject to approval of Shuangma's shareholders at an interim shareholders' meeting to be held later this month, as well as approval from China Securities Regulatory Commission (CSRC) and the Ministry of Finance and Commerce.
Lafarge China is a wholly-owned subsidiary of Lafarge-Shui On Ltd, which is a joint venture between French cement giant Lafarge SA (which owns 55%) and Hong Kong-listed Shui On Construction and Materials. Before this transaction, Lafarge China owned 57% of Shenzhen-listed Shuangma and 75% of Dujiangyan Cement. The other 25% of Dujiangyan Cement was owned by Dujiangyan Construction Materials. The deal is the first instance of a foreign investor increasing its stake in an A-share listed company through a restructuring.
"This sort of deal is indicative of growing MNC (multinational corporation) interest in the A-share market - a market that they have had access to since 2006, but where corporate valuations haven't helped deals get done. The A-share market gives MNCs potential access to a wide range of strong industrial companies," says Chris Brooks, CLSA's head of M&A.
CLSA acted as a financial advisor for Shuangma through China Euro Securities, a sino-foreign joint venture between CLSA and Fortune Securities Company.
Lafarge China acquired its controlling interest in Shuangma in 2007. The injection of a 50% equity stake of Dujiangyan Cement into Shuangma is expected to take place before July this year, and fits into Lafarge ChinaÆs plan to boost Shuangma's ailing business and market position through new technology. Once the new shares have been transferred, Lafarge China will own approximately 80% of Shuangma.
"The asset injection facilitates technology transfer, allowing Shuangma to benefit over time from production efficiencies ¡which gives it a positive outlook, especially given the growth prospects for cement in Sichuan," says Brooks.
Dujiangyan Cement is a major cement producer in Sichuan, with an annual production capacity of 3.2 million tonnes. Construction is a significant growth industry in the southwestern Chinese province. Sichuan lies at the centre of China's ôGo Westö policy, a plan to correct imbalances in the country's economic development by placing more of a focus on inland provinces that have experienced growth at a slower rate than those on the coast. Furthermore, Sichuan was at the very centre of the devastating earthquake in May last year and the substantial reconstruction needed since then has meant that demand for construction materials far exceeds the supply.
Shuangma's shares finished at Rmb7.4 on Friday, up 3.8% from the previous day, but significantly down from its Rmb18.40 high in May last year, immediately after the earthquake.
This is the first significant M&A deal that China Euro Securities has worked on since it was granted an A-share broking license by the CSRC in June last year.
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