United Technologies bids for Chinese fire alarm company

The diversified technology company offers to pay $247 million to gain control of its China affiliate as the global fire and security business continues to deliver stellar results.
United Technologies Far East (UTFE) has made a voluntary general offer for all the outstanding shares and options of GST Holdings, ChinaÆs largest producer of fire alarms, at a price which ascribes an equity value of HK$2.7 billion ($350 million) to the company. At an offer price of HK$3.38 per share, UTFE will pay HK$1.93 billion ($247 million) for the 71% of GST it does not already own.

As part of the takeover, UTFE has entered an agreement to buy a 53.4% stake in GST held by GST International Management. That acquisition is conditional on UTFE gaining the acceptance of at least 90% of GSTÆs minority shareholders as the intention is to delist GST from the Hong Kong stock exchange where it currently trades.

UTFE is a wholly-owned subsidiary of US-based United Technologies Corp (UTC), the diversified technology company behind Otis lifts, Carrier heating, and Pratt and Whitney aircraft engines, amongst other things. Through this acquisition it will become a market leader in the fire detection sector in China where GST has a market share of around 35%.

The two companies have had a relationship for some time. After GST listed in 2005, UTFE bought a 19% strategic stake in the Chinese firm, making it the second largest shareholder after the founders. Since then, UTFE has been gradually increasing its ownership level and in December 2007 it raised its stake to 29%.

UTC has adopted a strategy of buying strategic stakes in Chinese companies in the fire detection sector and then working alongside these firms. In March 2006 it upped its stake to 29% in China Fire Safety Enterprise Group, a Fuzhou-based firm which provides fire detection and suppression systems. In June 2006 it entered a joint venture with Beijing Leader Huaxin Electronics, a firm with a strong presence in the Chinese fire detection market and a manufacturing facility in Beijing where it produces fire systems for the domestic market.

In its third quarter earnings call posted on www.seekingalpha.com, UTC said the three months to September was its best quarter to date in fire and security with 10% revenue growth. Half of this was organic growth driven by the petroleum, oil and gas markets and marine segments. Within fire and security, the fire and safety division led the growth with double digit expansion in Asia. UTCÆs management also said it expects to grow operating profit in the fire and security division around 30% on revenue growth of around half of that, leading to considerable margin expansion.

On the call, analysts questioned how a predicted slowdown in China would impact UTCÆs business, but the management seemed confident that orders from China will continue to be forthcoming. The stimulus package announced by the Chinese government last month suggests that UTC's optimism could be correct.

The intention of the acquirer is to invoke Cayman IslandsÆ law, where GST is incorporated, to compulsorily acquire the remaining shares not covered in the deal, and once the company is wholly owned by UTFE, an application will be made to delist GST.

The offer price of HK$3.38 is 78% higher than GSTÆs HK$1.90 close on November 7, which was the last trading day before the stock was suspended, and a 20% premium to the stockÆs highest price in the past six months, which it reached on June 30. The share price has recently been under some pressure and has fallen 23% since the beginning of September.

The share price moved towards the offer price yesterday as the stock resumed trading after the general offer was announced, gaining 35% to HK$2.56.

GSTÆs initial public offering in 2005 was led by Morgan Stanley on a sole basis and had a happy outcome; a retail book that was subscribed 22 times and an institutional book covered around three times. Venture capital firm 3i invested in GST in 2005 and held 12% after the IPO.

But Citi seems to have made inroads with the client recently and is advising GST on the current deal. UTFE is being advised by UBS.
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