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State bank funding to help major firms go private

Updated: 2012-08-13 01:54
By ARIEL TUNG in New York ( China Daily)

While Chinese stocks struggle to attract US investors, private-equity groups are seeking to buy out some of these companies with funding provided by State-owned China Development Bank.

Frustrated by their low valuations, recently delisted Harbin Electric Inc and Nasdaq-listed Fushi Copperweld Inc have turned to Abax Global Capital, a Hong Kong-based asset manager partly-owned by Morgan Stanley, in an attempt to go private.

Shares of US-listed Chinese companies have been hit hard by accounting scandals fueled, at least in part, by short sellers such as Muddy Waters LLC over the past two years.

While most Chinese companies haven't been accused of wrongdoing, the value of Chinese stocks has plummeted on the US stock market. The 180 Chinese companies that have issued securities on foreign exchanges since the start of 2010 are trading on average 21 percent below their offer prices, according to data compiled by Bloomberg News. The 82-stock Bloomberg Chinese Reverse Mergers Index has lost an aggregate 25 percent since August 2011.

There are 129 US-listed Chinese companies trading at an average of eight times their estimated 2012 earnings per share, compared with a ratio of 11 times EPS for 276 Chinese companies that trade on the Hong Kong exchange, according to data compiled by Citigroup Inc.

"If you can distinguish between a good company and a company that has issues, you can do very well investing in China," said Kevin Pollack, a fund manager at Paragon Capital LP in New York.

Abax, which manages $900 million in assets, started a $300 million fund this year to invest in US-listed Chinese companies.

In November 2011, Harbin Electric, a maker of electric motors in northeastern China and listed on Nasdaq, went private in a buyout by Abax and Yang Tianfu, Harbin's CEO, that was financed with a $400 million loan from the Hong Kong branch of China Development Bank, or CDB.

Yang and Abax each owned about 41 percent of the company's outstanding shares before the deal; the split now is Yang, 75 percent stake, and Abax, 25 percent.

On June 28, Abax said it had reached a deal to take over Fushi Copperweld, a Dalian-based manufacturer of copper wire and related products, along with the company's CEO, Li Fu.

The $9.50-a-share offer, which Fushi's board of directors approved, represents a premium of 21 percent above the stock's closing price on the day the deal was announced.

Although lower than Abax's initial bid of $11.50 a share in 2010, the offer was higher than one for $9.25 submitted last November.

The deal is valued at $363.8 million based on Fushi's shares outstanding as of May 4.

Fu, Abax and their affiliates, who own about 30 percent of the stock, will buy out the company with their own equity and debt financing from CDB in Hong Kong.

Fushi said its decision to go private was based on "the determination that this transaction appropriately recognizes the value of [our] business" and provides shareholders "an immediate and substantial cash premium for their investment".

Typically, such a deal requires approval from shareholders and the US Securities and Exchange Commission. A Fushi representative told China Daily in an e-mail that the deal is expected to be approved in the fourth quarter of 2012.

CDB is the biggest Chinese lender helping US-listed Chinese companies to go private. The bank has provided $1.085 billion toward such delisting transactions, more than China Citic Bank Corp's $25 million, the second-biggest outlay, according to data from Roth Capital Partners, an investment bank that specializes in emerging markets.

In June, China TransInfo Technology Corp, which makes geographic transportation-information software for the Chinese government, agreed to be taken private by its CEO, Xia Shudong, in a deal that values the company at $146.6 million.

The acquisition was funded with a loan from CDB.

The bank also played a big role in the privatization of China Security & Surveillance Technology in September 2011, before Harbin's financial buyout.

Some critics have speculated that CDB's financing has to do with Beijing's disagreement with Washington over cross-border regulation of accounting firms.

But a person close to the matter, who asked not to be identified by name, said it's a "pure commercial decision".

"CDB has its own criteria about loans made to any company. It may continue to finance deals going private if it sees fit," the person said.