- AsiaInfo-Linkage is a rare example of a
US-listed, Delaware-incorporated ChinaCo take-private.
Normally these ChinaCos are incorporated in BVI and Cayman
- It was financed solely by Asian banks and
included debt financing, demonstrating the deepening Asian
acquisition finance market;
- It is unclear whether US-listed ChinaCos will
continue going private as valuations improve. Some believe
that most viable targets have attempted to go private or have
delisting from Nasdaq is a rare example of a
Delaware-incorporated ChinaCo take-private. It also signals the
Asia-Pacific’s deepening acquisition finance
While the last few years has seen many US-listed ChinaCos
going private, most are incorporated in offshore jurisdictions.
The Delaware element of this latest deal was challenging,
introducing greater litigation risk.
This deal also represents banks’ willingness to
finance leveraged buyouts (LBOs) in the ChinaCo take-private
space and follows Focus Media’s $1.7 billion LBO
financing last year, largest ChinaCo take-private to-date.
One of the most interesting aspects of these transactions is
the development of a growing pool of domestic and international
banks that are comfortable providing acquisition financing to
Chinese targets, said Davis Polk & Wardwell’s
The proxy document has not yet been released and so the deal
has not yet closed. However the offer from the
private equity consortium led by CITIC Capital and co-founder
Edward Tian is $12 per share for a total of $900
This deal has been financed through a $330 million debt
facility from Bank of Taiwan, Cathay United Bank, ICBC
International Capital, Maybank Investment Bank and Nomura.
Sterling’s Paul Strecker noted the lack of
take-privates involving Delaware-incorporated Chinese companies
listed in the US. The majority of take-privates have involved
either BVI or Cayman-incorporated entities.
Recent examples of
US-incorporated take-privates include Harbin Electric, a
Nevada-incorporated company that had listed via reverse
takeover and was
targeted by US short sellers.
Litigation risk is a key concern in Delaware-incorporated
companies’ take-private deals. The likelihood of
litigation against the special committee is generally much
higher for a US-incorporated company than an offshore holding
This is true especially when there is only one offer from a
private equity consortium that includes a co-founder of the
company. Independent directors on the special committee must
prove that, in hindsight, they fulfilled their fiduciary duty
to shareholders by soliciting further offers and then selecting
the best offer for the company.
raft of securities litigation firms have already announced
that they are investigating this deal in relation to a breach
of the independent directors’ fiduciary
Paul Hastings’ Brett King explained that this
is a blend of a US deal and an Asia financing, containing
elements of both. Having a China holdco structure with a US
borrower is especially challenging because laws in both the US
and China make the financing structure very difficult to put
There are rules in China related to providing offshore
security, and in the US related to offshore subsidiaries.
Combining the two is not only complicated, but also results in
a smaller security package, King said. Therefore these types of
deals often contain less debt than a typical LBO.
Further, while lenders must negotiate rules in both
jurisdictions, legal restrictions often can’t be
negotiated anyway. "There are certain things that they can and
can’t do, particularly with a US borrower with
offshore subsidiaries," he said.
This is also the first take-private financing that involved
only Asian banks, demonstrating their increased activity in the
acquisition finance market.
The holdco structures possible for a US-listed ChinaCo are
diverse, and the market is still trying to find a template for
this class of deals.
But that may not happen in the near future. King noted that
each deal is slightly different because they depend on
different factors related to portfolio specifics, such as
whether assets and cash are onshore, offshore, or a combination
"Whether a company needs working capital or has debt onshore
are major concerns for offshore lenders," he said.
"It’s difficult to template these deals."
Further, he said that the China holdco structure is likely
to remain in place until developments regarding the
"Until the renminbi is fully convertible and restrictions
are lifted on providing upstream offshore guarantees, security
shareholder loans and so on, challenges will remain for doing
China deals," he said.
As for the Asian banks, King said Taiwanese banks seem
particularly interested in these deals. Significant liquidity
in Taiwan’s market means they are trying to deploy
funds. But, he said, part of it might be bigger appetite in
Taiwan for PRC risk, especially since they may know these
companies from a business context.
Impact on outbound M&A financing
The debt financing may signal that foreign banks are more
comfortable with LBOs in ChinaCo take-private deals, which
could eventually extend into more financing options for
ChinaCos looking to outbound M&A.
Lehmkuhler said one reason why foreign banks have got
comfortable financing foreign sponsor-backed China
take-privates is the alignment of interests. "Foreign banks and
foreign sponsors both want to ensure that the
target’s cash flows can be repatriated out of
China," he added.
US-listed ChinaCos are also subject to Securities and
Exchange Commission (SEC) regulations and other rules governing
all US-listed companies, so that it’s easier for
banks to get comfortable with the company’s
Further, Lehmkuhler predicted that if a critical mass of
international banks gets comfortable underwriting what are
essentially domestic Chinese LBOs – and this can be
extended beyond the US-listed take privates – it may
significantly boost inbound China M&A.
That deal flow has historically been held back to some
degree by the lack of a viable LBO model for Chinese targets,
US-listed ChinaCo take-privates have been a trend since
2008, but five years on, market participants agree that deal
flow might be slowing.
It’s clear that the trend of US-listed ChinaCos
going private will not continue indefinitely, Strecker said,
although it is hard to say where we are in its evolution. We
are certainly seeing a trend downwards in number of deals, he
This may be because of higher equity prices due to
quantitative easing and asset purchase measures from central
banks worldwide. Although investor trust in ChinaCos has been
hit by short sellers, companies are seeing better valuations,
which may be why they are staying listed.
But Strecker added that there is no doubt that equity values
are a key consideration, although he doesn’t
believe that those are the only consideration for take-private
deals. Other reasons include available liquidity, analyst
coverage and perceived negative aspects of being listed in the
With the recent close of Focus Media’s
take-private and now AsiaInfo-Linkage’s deal,
IFLR sources have wondered how many viable US-listed
ChinaCos are left to take private. Some believe most options
have already delisted or tried to delist.
But others are confident that the trend will continue. One
counsel said that one deal can make a trend, and that more of
these deals may follow.
Davis Polk & Wardwell acted for CITIC Capital on US law
matters. Morgan Stanley was CITIC Capital's financial
Ropes & Gray advised AlpInvest, Akin Gump Strauss Hauer
& Feld represented CITIC Private Equity, while Edward Tian
and China Broadband Capital Partners II mandated Skadden Arps
Slate Meagher & Flom. China Renaissance was financial
advisor for some consortium members.
Shearman & Sterling was legal advisor the special
Goldman Sachs was the financial advisor to the special
committee, and was advised by Fried Frank Harris Shriver &
Paul Hastings advised lenders Nomura, Bank of Taiwan, Cathay
United Bank, ICBC International Capital and Maybank Investment
Bank as mandated lead arrangers in the $330 million debt
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