Guangzhou Auto increases bid for Denway by 25%

Guangzhou Automobile yesterday increased its privatisation offer to shareholders of Hong Kong-listed Denway Motors by about 25%, by offering them more Guangzhou Auto shares. The improved offering still includes no cash and the buyer said "there will be no further revision to the...share exchange ratio".

Guangzhou Auto, China's largest carmaker, is planning to make its 37.9%-owned affiliate Denway a wholly owned subsidiary and then list its own shares on the Hong Kong stock exchange instead. Since the privatisation will be paid for entirely through new shares, the current shareholders of Denway will become shareholders of Guangzhou Auto, but with continued exposure to Denway and its 50-50 joint venture with Honda.

According to a joint statement from the two companies yesterday, Guangzhou Auto will now pay 0.474026 new Guangzhou Auto H-shares for every Denway share, or 25.2% more than the 0.37861 per share that it offered when the deal was first announced on May 19. Based on the mid-point of the estimated valuation range for Guangzhou Auto and the new share exchange ratio, Guangzhou Auto will now have to fork out about HK$31.1 billion ($4 billion) to buy the rest of Denway, compared with $3.3 billion under the original offer.

The improved offer comes after Denway's share price plunged 24% in a single day when the buyout was first announced -- although that sell-off was partly an adjustment to market movements during a three-week suspension of the Denway stock -- and suggests that the management wasn't confident that the shareholders would approve the takeover. Under Hong Kong regulations, it needs the approval of 75% the share capital owned by Denway's independent shareholders present at an extraordinary general meeting, and no more than 10% of the votes can be cast against. The company has yet to set a date for the vote.

The latter requirement in particular has proved a difficult hurdle for several Hong Kong privatisation attempts in the past, as it typically doesn't take that many investors to block the deal. Investors know this of course, and have more than once used it as a way to force the buyer to increase its price.

And here it seems the Guangzhou management may have helped prompt such a move by an inadvertent comment at the press conference when it announced the deal in mid-May. Asked whether the company would consider raising the share exchange ratio, chairman Zhang Fangyou said it was "not currently" contemplating an increase, which prompted immediate speculation that it may be willing to do so later on.

At the request of the Hong Kong regulators, the company had to issue a clarification on May 24 saying that the chairman's reply shouldn't be read as a "no increase statement" under the takeovers code, but also shouldn't be interpreted as an indication that the company would increase the share exchange ratio in the future.

But now it has.

In yesterday's statement, Guangzhou Auto said it believes the previous share exchange ratio was "reasonable", and the revised ratio will "further enhance the attractiveness of the offer". It added that the revised offer shows its willingness to share its potential growth with the Denway shareholders and said it believes it will engage the support of those same shareholders. This time it also stressed that it will make no further adjustments to the share exchange ratio.

Denway's share price jumped 12.4% at the opening, but then trended lower throughout the day and ended just 2.3% higher at HK$3.62. 

The revised offer implies a valuation of HK$6.66 for each Denway share, which represents an 84% premium versus yesterday's closing price and a 48.3% premium to the last closing price before the stock was suspended on April 29, after adjusting for the final dividend for 2009.

This valuation is again based on the mid-point of the valuation of Guangzhou Auto that has been carried out by Anglo Chinese, an independent valuation adviser appointed by the car marker. Anglo Chinese estimates the value of Guangzhou Auto at between HK$13.62 and HK$14.49 per H-share, which at the mid-point implies a market capitalisation of $10.7 billion. However, Guangzhou Auto's valuation per share will supposedly be reduced by just over 7% to account for the fact that the company will issue more new shares under the revised offer.

The privatisation and subsequent listing by introduction of Guangzhou Auto in Hong Kong will result in a more streamlined corporate structure that will allow the group to manage its resources more efficiently and to make more effective decisions with regard to the management and operations of each of its joint ventures, the chairman said when the plan was first announced. Guangzhou Auto has joint ventures with Toyota, Japanese truck and bus manufacturer Hino, and Fiat, while Denway has its with Honda under the name of Guangqi Honda. Following the privatisation, Guangzhou Auto will take over Denway's stake in the latter, which will put all the JVs within the group at the same subsidiary level.

Secretary to the board, Lu Sa, added that the direct listing of Guangzhou Auto, which has been in the works in various shapes since about 2007, will also improve the corporate governance and management transparency and will allow the group to more easily tap into the international capital markets - although both Lu and Zhang stressed repeatedly that the company has no need to raise funds in the near-term.

Platinum Investment Management, which holds 5.2% of Denway's shares has made an irrevocable undertaking to vote in favour of the privatisation (valid until July 31) and
according to reports in the Hong Kong media, Templeton Asset Management, which is Denway's largest independent shareholder with a 15.5% stake, has said too intends to support the deal.

China International Capital Corp, J.P. Morgan and Morgan Stanley are acting as financial advisers to Guangzhou Auto with regard to the Denway privatisation. BNP Paribas is advising Denway's independent board committee.