Blackstone inks first China deal

The US private equity firm will pay up to $600 million for a 20% stake in specialty chemical company Bluestar. It also gains two board seats.
Blackstone has announced its first China investment, paying up to $600 million for a 20% stake in China National Bluestar, a wholly-owned subsidiary of ChemChina.

In a written statement, ChemChina highlighted the benefits that the Blackstone investment could bring Bluestar, given the private equity firmÆs past exposure and understanding of the chemical industry via its ownership of Celanese Corporation and Nalco Company.

With its investment, Blackstone has negotiated two board seats out of a total board strength of 10, which is proportionate with its proposed equity ownership. Antony Leung, chairman for Greater China at Blackstone, and Ben Jenkins, head of Asia-Pacific private equity for Blackstone and a former director of Celanese, will join the Bluestar board.

ChemChina is a state-owned enterprise established in 2004 following the restructuring of certain companies run by the former Ministry of Chemical Industry. It has 92 production and operation enterprises, and 24 scientific and research and design institutes.

Bluestar is one of ChemChina's subsidiary companies. It was founded 23 years ago by Ren Jianxin and has grown into a leading manufacturer of new material and specialty chemical products. Its products include organic silicon, synthetic resins, cleaning agents and ionic membranes. Bluestar has the biggest organic silicon monomer unit in Asia. The Chinese firm's clients span the aviation and aircraft, textile, electricity, gas and a number of other industries.

Bluestar has been using M&A as a tool to expand its geographic reach and compete more effectively with its large-scale rivals. In 2006, the Chinese company closed three cross-border outbound M&A deals. In January, it acquired Adisseo Group, a French animal nutritional feeds company for $450 million. Then, in April, it bought Qenos, AustraliaÆs largest ethylene producer, for $200 million. Finally, in October, Bluestar paid $500 million for the silicon business of Rhodia of France, in a deal which made Bluestar the third largest silicon company in the world.

Bluestar has three listed units: Blue Star Cleaner, Shenyang Chemical Industry and Blue Star New Chemical Material. The shares of all three were suspended from trading on September 6 pending the announcement with Blackstone.

Bluestar also has a number of unlisted units. Across all its companies Bluestar had sales revenues of around Rmb30 billion ($4 billion) in 2006, up 28% from Rmb23.5 billion in 2005. No other financial data about the company's performance was made available.

Both Nalco and Celanese were successful investments for Blackstone. In 2003, a private equity consortium led by Blackstone acquired Nalco, a provider of water treatment chemicals, for $4.2 billion. It was listed in 2004. German firm Celanese was formed in 1999 via a demerger of HoechstÆs chemical businesses. Blackstone delisted Celanese in 2004 then relisted the firm on the NYSE in 2005.

UBS advised ChemChina, and Merrill Lynch advised Blackstone on the deal. Neither advisor had any comment.

The transaction is subject to final regulatory approvals and sources close to the deal say it is unclear when these will be in place. Securing requisite approvals has been one of the imponderables for private equity investments in China with a number of deals held up due to non-receipt of approvals.

But Blackstone is seeking a minority stake and this could be what swings regulators in favour of the deal. The China deal follows two investments made by Blackstone in Indian companies in August, both for similar sized stakes. Bankers say that financial sponsors in Asia are having to change their preference for majority control of investee companies. Minority stakes are easier to negotiate and close. Sponsors are, however, negotiating covenants and controls to ensure their interests and financial investment are not compromised by their minority ownership.

Blackstone was trading on Monday morning on the NYSE at around $21.38, down marginally from its Friday close of $21.54.
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