Germany's Man Group is buying convertible notes and existing shares of Chinese truck manufacturer Sinotruk to achieve a 25% equity ownership plus one share for an outlay of €560 million ($789 million) as it seeks to deepen its presence in China.
Hong Kong-listed Sinotruk will issue €486 million worth of convertible notes due 2012 to Munich-headquartered Man. Man, which is the third-largest heavy truck manufacturer in the world, has also agreed to purchase 4.2% of the Chinese company's existing share capital from its controlling shareholder for €74 million. The shares will be subject to a two-year lockup period.
The conversion price of the note and the acquisition price of the existing shares are both set at €0.8113 per share (approximately HK$8.76), representing a premium of 16.64% over the closing price of Sinotruk before it was suspended from trading on June 29. It also represents a 21% premium to Sinotruk's 60-day trading average.
Assuming the notes are fully converted, Sinotruk will issue 599.063 million shares, representing 21.7% of its enlarged issued share capital, to Man, which will increase Man's stake to about 25% from 4.2%.
Around 70% of the money raised by Sinotruk will be deployed towards localisation of licensed technology and know-how, including an improvement of design and manufacturing capabilities, an upgrade of manufacturing facilities, the setting up of new production lines and an enhancement of its production capability. The balance 30% of the proceeds will be used as working capital.
Man has also negotiated the right to nominate four directors to Sinotruk's 17-member board. Of the four, one will be an executive director. At this stage, the shareholder agreement between Man and Sinotruk does not contain a mechanism for Man to increase its stake and it has no provision for it to put its shares back.
Man is represented by Goldman Sachs. Sinotruk is represented by J.P. Morgan and China International Capital Corporation (CICC) with Guoco Capital as an independent financial adviser.
"This is a long-term association for Man," explained Dominique Nadelhofer, spokesperson for Man. "With this investment we are now established in all four Bric [Brazil, Russia, India and China] countries."
As part of the deal, Man will license its TGA truck, engine, chassis and axle technologies to Sinotruk to help the Chinese company develop a new heavy truck series for China as well as the export market. The new truck will be manufactured at Sinotruk's existing plant in Jinan, the capital city of Shandong Province.
Sinotruk has entered into a technology license agreement with Man for a term of seven years at a license fee of €85 million.
"At the first step, Man will provide some parts, including an engine for the new truck to Sinotruk but it is envisaged that all parts will be localised very quickly," said Nadelhofer.
The deal announced yesterday cements a longstanding relationship between Man and Sinotruk. Sinotruk's parent company, China National Heavy Duty Truck Corporation, built China's first heavy truck in 1960 and purchased the truck technology of Man's subsidiary Steyr as early as 1984. This was followed by other license agreements in the same sector.
Sinotruk is currently the leading producer of heavy trucks in China, with a market share of around 20%. It sold over 100,000 heavy trucks in 2008, generating revenues of Rmb26 billion ($3.8 billion) on which it earned an Ebit of Rmb1.25 billion.
"Any projections at this stage are quite tentative, but we hope to be selling 50,000 of the new trucks by 2015," said Man's Nadelhofer.
Man is a supplier of trucks, buses, diesel engines, turbo machinery, and special gear systems with revenues of approximately €15 billion in 2008. In that same year, the Man Group generated total revenues of €617 million in China, and employed around 350 people in the country.