The Warburg Pincus investment was announced on Wednesday and is being made in two parts. First, $75 million will be used to buy equity shares and convertible preferred shares in the Hong Kong-listed entity Titan Petrochemicals. Warburg Pincus is also being alloted warrants at a strike price which translates to a further capital infusion of approximately $20 million.
The investment in Titan's equity shares (worth $35 million) will give Warburg Pincus a 9.9% stake in the business along with one board seat. Assuming conversion of the $40 million worth of preference shares, the firm's stake will increase to 18.2% and, assuming all of the warrants are exercised, it will finally stand at around 22%. However, the private equity firm has stated that its current plan is to maintain the stake at 9.9%.
The second part of the transaction involves a $100 million investment in China StorageCo. This company has been created to operate TitanÆs onshore storage terminals in China. Warburg Pincus will own 49.9% of the business, while the balance will be owned by Titan, allowing it to consolidate results.
Warburg Pincus will get board representation in China StorageCo proportionate with its investment, which means it will probably end up with two out of four board seats.
China StorageCo will pay $20 million of the $100 million infusion to Titan. Sources close to the deal say this part of the structuring is intended to allow Titan to repay some loans.
Titan's chief executive officer, Barry Cheung, says the transaction supports the companyÆs wish ôto diversify and thereby reduce heavy reliance on VLCC (very large crude carrier) earnings - which are very volatile û and increase revenues from downstream services which are more stableö. Titan has been seeking to transform its business towards an integrated oil logistics model, offering end-to-end transportation, storage, supply and distribution services on a single platform.
Two phases of China StorageCoÆs terminals in Guangdong and Fujian province are currently operational. A third site in Yangshan is underway. ôThe infusion from Warburg Pincus will give us the additional liquidity to complete our three China projects,ö says Cheung.
Titan also announced on March 28 that it has signed a deal with a facility for repairing and building shipyards in Fujian, hoping to inject this facility into China StorageCo. The facility is currently owned by Titan's majority shareholder.
Rajiv Ghatalia, managing director of Warburg Pincus, says Titan fulfils the firmÆs requirements for ôa strong management team in a company well-positioned in a sector poised for growth.ö
Titan also announced its fiscal 2006 results on Wednesday. The company showed a revenue increase of 11% to HK$11.5 billion ($1.47 billion) and grew recurring Ebitda by 18% to HK$868 million. However, its net profit declined 67% to HK$100 million. The company attributed the decline to the poor VLCC market in the fourth quarter coupled with a 23% increase in interest expenses. Analysts comment that the capital infusion by Warburg Pincus would help reduce gearing and bring down interest costs.
Sources close to the deal say the capital infusion into Titan will provide the company with liquidity and a cushion, while allowing it to focus on using the money invested into China StorageCo to grow the storage business. Titan has already indicated that it will sell some of its VLCC fleet in an effort to lower the contribution of the VLCC business.
Warburg Pincus was advised by Morgan Stanley and Titan by Merrill Lynch.