Toxic China

Citic, KKR pitch in to clean up toxic China

Citic Ltd and KKR bid S$1.26b for Chinese sewage company United Envirotech after the country’s growth story over the past 30 years has turned its rivers toxic.

Citic Ltd, China’s largest conglomerate, and global private equity firm KKR have bid upto S$1.26 billion ($972 million) for sewage firm United Envirotech as they look to profit from China’s efforts to clean up its toxic rivers.

The deal would see Citic take full control of Singapore-listed United Envirotech, a membrane-based water and waste-water treatment and reclamation solution provider with businesses mainly in China’s chemical, petrochemical and industrial park sectors.

“Environmental protection is a top priority for China and Citic foresees not only commercial opportunity but also societal benefit from this investment,” Wang Jiong, Citic's vice chairman and president, said in a statement on Wednesday.

The data behind the opportunity are alarming. According to a 2012 report by Ernst & Young, China’s water resources have fallen 12.7% since 2000, while sewage rose from 22.8 billion tons to 38 billion tons between 2001 and 2010.

China’s water in urban and rural areas is frequently affected by industrial and household pollution, water-borne diseases and water-contaminated accidents, according to a 2011 World Health Organisation report.

As a result China in 2012 introduced stricter national standards on drinking water quality that come into effect in 2015. It is also working with the WHO to monitor the supply.

Pollution reduction was a key feature of Premier Li Keqiang’s address to the National People’s Congress in March. So Beijing has begun to pump billions of renminbi into developing the industry; which means funding for technology, research and equipment to upgrade existing plants and build new ones.

In short, a big clean-up is under way.

Going with the flow

There are a clutch of companies vying to benefit from this push, such as domestic players China Everbright International (CEI), Beijing Enterprises Water and Beijing Capital and foreign groups such as Suez Environnement, Veolia Water and Siemens.

Funds are also flowing in from International Finance Corp, the private equity arm of the World Bank, and from infrastructure funds such as the Macquarie Everbright China Infrastructure Fund.

The Ministry of Environmental Protection said in February it would spend Rmb2 trillion ($326 billion) to tackle water pollution in an effort to improve the quality of its water supply by 30% to 50%.

Domestic groups are seeking to raise cash on capital markets and to bring in high-end technology and expertise through mergers and acquisitions in an effort to seize the opportunities created by what is becoming a huge growth industry.

CEI, for one, signed a Rmb10 billion (US$1.6 billion) loan agreement with China Development Bank covering the 2013-2018 period. It also agreed $300 million of loans with the Asian Development Bank and has secured a $70 million loan from the IFC.

RRJ Capital, an Asian private equity firm run by former Goldman Sachs executive Richard Ong, paid HK$2.7 billion in December for a 7.85% stake in CEI, becoming its second-largest shareholder after its parent China Everbright Holdings.

According to MarketWeb, an online analysis group, 15% of companies in the Chinese sewage industry have foreign investors. 

The investments have flowed in both directions. Beijing Capital this month bought a New Zealand waste management business for NZ$950 million. In 2012, China Investment Corp, the country’s sovereign wealth fund, bought a 8.68% stake in Thames Water, the UK utility.

In the case of United Envirotech, or UEL, KKR invested US$40 million last year after earlier buying US$113.8 million of the group’s convertible bonds.

Citic and KKR's offer values UEL at S$1.9 billion on a fully diluted basis for all of UEL's shares. The consortium intends to maintain the listing status of UEL post-transaction. It also plans to subscribe for further shares in UEL by way of a private placement totaling S$50 million, S$100 million or S$150 million.

The company's existing management will stay in place. Rothschild advised CITIC. 

“Since 2011, we have been working closely with UEL’s strong management team to enhance UEL’s technological platform and expand its business,” said David Liu, co-head of Asia private equity and CEO of KKR China.

Additional reporting by Chris Dod

This article was corrected post publication to reflect the offer valued the company at S$1.9 billion  

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