China reformation

State-owned enterprises are ready for PE ownership

As Chinese SOEs embrace funding from private equity firms and foreign companies, two PE firms are competing for a controlling stake of Gree Electric.

As China allows increasing amounts of outside capital into its core businesses, the country's private equity players are seeing more and more opportunities for investment.

Zhuhai-based state-owned home appliance manufacturer Gree Electric Appliances said in a statement on Tuesday that two bidders were competing for a 15% stake in the group.

One of the companies is controlled by Hopu Fund while the other is controlled by Hillhouse Capital.

Both companies have deep pockets, important as this game needs a huge amount of capital to play.

To get its hands on the 15% stake, the winning candidate will need to pay Rmb39.8 billion ($5.5 billion). The high price squeezed out most private equity rivals and left Hopu and Hillhouse as the final candidates.

Gree Electric has a very high-profile chief executive in Dong Mingzhu, and is an important company. It posted first half profits of Rmb13.8 billion thanks to the fact that it has cornered about 20.6% of the global air-conditioner market.

Gree needs further review to finalise the stake sale. Whichever private equity firm wins will replace the state-owned Assets Supervision and Administration Commission (SASAC) and will become the new controlling shareholder of the home appliance company.

This transaction is just one example of the state owned enterprise (SOE) reforms that started in 2015. The Chinese State Council said in April this year that almost 70% of SOEs in China had begun mixed-ownership reform, allowing more social capital to hold stakes in SOEs.

“Another 100 SOEs will start their ownership transformation soon,” SASAC secretary-general Peng Huagang said in April. “We will strengthen the reform by changing the original operational mechanism; such as setting up contract terms for the board of directors and executives and hire professional managers.”

Private equity firms have had fewer opportunities with startups since the start of this year. Perhaps it is time for them to look at a bigger market in China.

Both Hopu Fund and Hillhouse Capital have participated in multiple equity acquisitions in China. Hillhouse, which owns stakes of 58 US-listed companies, acquired a 1% stake in Shenzhen-listed Aier Eye Hospital only last week. And one of Hopu’s affiliate companies acquired a 10% stake in Harbin Pharmaceutical Group, another SOE, in early August.

“There are a lot of opportunities tied up with the reforms of SOE ownership,” a lawyer in Beijing commented to FinanceAsia. “And these are not only open to PE firms.”

Overseas conglomerates are also eyeing opportunities. The lawyer mentioned that French state-owned electricity company Électricité de France is actively looking to acquire stakes in some SOEs.

As well as private equity and foreign companies, SASAC met several Chinese internet companies in August and encouraged them to participate in the ownership reform of SOEs. “We are aiming to create a world-class enterprise with mixed-ownership,” the SASAC said on its social media.

 

This story has been corrected in the second paragraph to show that Gree Electric issued the statement on Tuesday not Wednesday

 

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