AsiaInfo: how a US-incorporated ChinaCo goes private

Author: Ashley Lee | Published: 6 Jun 2013
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KEY TAKEAWAYS

  • AsiaInfo-Linkage is a rare example of a US-listed, Delaware-incorporated ChinaCo take-private. Normally these ChinaCos are incorporated in BVI and Cayman Islands;
  • 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 already delisted.

AsiaInfo-Linkage’s delisting from Nasdaq is a rare example of a Delaware-incorporated ChinaCo take-private. It also signals the Asia-Pacific’s deepening acquisition finance market.

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 Mark Lehmkuhler.

The deal

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 million.

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.

Delaware-incorporated

What?

Shearman & 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.

Why?

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 company (holdco).

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.

A raft of securities litigation firms have already announced that they are investigating this deal in relation to a breach of the independent directors’ fiduciary duties.

Debt financing

What?

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 into place.

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.

Why?

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 of both.

"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 renminbi.

"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 financial records.

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, he said.

Take-private slow-down

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 added.

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 US.

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.

Tear sheet

Davis Polk & Wardwell acted for CITIC Capital on US law matters. Morgan Stanley was CITIC Capital's financial advisor.  

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 committee.

Goldman Sachs was the financial advisor to the special committee, and was advised by Fried Frank Harris Shriver & Jacobson.

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 financing.

Related links:

Protecting ChinaCo take-privates from US litigation http://www.iflr.com/Article/3161697/Protecting-ChinaCo-take-privates-from-US-litigation.html

IFLR Asia M&A Forum: public M&A key takeaways http://www.iflr.com/Article/3161915/IFLR-Asia-M-A-Forum-public-M-A-key-takeaways.html

How to prevent ChinaCo accounting fraud http://www.iflr.com/Article/2841569/How-to-prevent-ChinaCo-accounting-fraud.html