Posted tagged ‘Oceanus’

Asian LBO Market Develops Taste for Abalone

November 29, 2011

The following was published in May of this year in IFR Asia Magazine. Thank you, Robert Bishop, for passing it along:

HONG KONG, May 14 (IFR) – Leveraged finance bankers are coming to grips with industries ranging from chemical manufacturing to abalone farming as buyout sponsors, faced with growing competition from cash-rich corporate buyers, increasingly turn to niche markets.

Private equity firms are looking at Singapore-listed, China-based abalone producer Oceanus Group and US-listed contract chemicals manufacturer Chemspec International.

“While there are some big assets out there, most are being dominated by corporate buyers generally willing to pay more and have access to cheaper funding than the PE [private equity] funds,” said one LBO banker. “With corporate buyers becoming more aggressive, I think we’ll see PE funds looking more at niche market industries that aren’t attracting the strategics.”

Leveraged buyout loans of a combined US$105m were completed in the first four months of 2011 in Asia, excluding Japan and Australia, comparing favourably with last year’s annual total of US$190m. Overall activity, however, remains weak compared with 2007 and 2008, when Asian LBO loans reached US$8.5bn and US$11.3bn, respectively.

GREATER CHINA OPPORTUNITIES

Greater China accounts for a significant portion of the LBO market, with KKR seeking two leveraged financings for Oceanus Group and Taiwanese electronic components maker Yageo.

Reuters reported in late April that KKR was in talks to buy Oceanus in a deal that might be worth around US$500m. Oceanus’ share price spiked on the news and bankers are still awaiting word from KKR if it wants to proceed with the buyout.

“Leverage on debt normally seen on this type of deal would be around 4.0-4.5 times Ebitda,” said a banker looking at the buyout. The company’s 2010 Ebit was Rmb278m or US$42.8m, according to an OCBC Bank analyst’s note, which would put debt for the buyout at around US$170m-$190m.

The company’s profits were expected to rise in a few years as young abalones matured, said bankers. However, they have expressed concerns over how to evaluate the company.

“While Ebitda should rise as more abalones mature, it’s always risky to make judgments on projected Ebitda, especially in the agriculture industry, where crops can be vulnerable to many things,” said a Singapore-based leveraged finance banker.

Some bankers have also expressed concerns over the structure of Chinese buyouts, since offshore holding companies cannot merge with onshore operating entities. The debt remains at the holding company level and can be subordinated to debt sitting at the operating company level. In addition, offshore banks often have no recourse to onshore assets and can only be paid through dividends or offshore receivables, due to an inability to take cash out of China.

Adding to the wariness over Chinese LBOs is the recent slew of mainland companies facing fraud allegations. One of the most high-profile cases is that of Hong Kong-listed China Forestry Holdings, a Carlyle Group investment.

Trading in the plantation operator’s shares has been suspended since January, and the company admitted in April that its previous management had falsified bank statements and logging permits provided to auditor KPMG. China Forestry reported a 2010 loss of Rmb2.71bn after drastically lowering the value of its plantation holdings.

While bankers mulled the Oceanus financing, the NT$31.1bn (US$1.08bn) five-year loan backing the US$1.6bn bid by KKR and Yageo founder Pierre Chen to take the company private was almost fully subscribed in the early bird stage, bankers said.

The facility, which UBS and Nomura had underwritten, had received commitments well in excess of NT$20bn, one banker added. Final commitments are due on May 20 and around 10 banks have joined so far.

The facility has an opening margin of 250bp over the secondary CP rate and offers four ticket levels, with a top-level all-in of 301.5bp.

The pricing is considered tight by international standards, but it is enough to attract strong interest from the liquidity-flush local banks. A handful of international lenders, mostly those with a local presence and access to Taiwanese dollar deposits, have also joined.

“There aren’t many deals to choose from right now, so, even though pricing is thin for us, we are certainly looking at it,” said a source at an international bank when the deal was launched.

In Hong Kong, MLAs Chinatrust Commercial Bank, Fubon Financial Holdings and ING Bank closed a circa-US$200m equivalent loan this month to back IK Investment Partners’ US$350m buyout of Offshore Incorporations. Seven lead arrangers joined the loan, which was split into a US$153m tranche and a ?31m euro tranche. The loan was heavily oversubscribed with each of the seven banks joining in participation scaled back by 57%.

The dollar portion goes towards the acquisition cost, which will be about 40% debt funded. The euro portion will be drawn down by Vistra, another IK portfolio company in Europe. A banker said the loan had a leverage of around four times the combined Ebitda of Offshore and Vistra and a leverage of less than 5.5 times the Ebitda of Offshore itself.

MANAGEMENT BUYOUTS

Also in Hong Kong, private equity fund Permira secured a US$215m loan earlier this month via Goldman Sachs, HSBC, ING Bank, SG and Standard Chartered Bank to take out the around US$200m it paid to buy Asia Broadcast Satellite in September 2010.

Permira and the ABS management team bought Kingsbridge, the holding company for ABS, from Citigroup Venture Capital International. The deal was originally funded entirely through equity.

Meanwhile, Standard Chartered has completed a 15-month, US$70m bridge loan for the privatisation of Chemspec, on which one additional bank joined. The debt has leverage of around 1.5 times Ebitda, according to a banker.

Chemspec CEO Jianhua Yang and private equity fund Primavera Capital Group, founded by former Goldman Sachs Greater China chairman Fred Hu, have teamed up for the privatisation transaction.

In March, the company announced it would merge with Halogen, an entity jointly owned by Yang and an affiliate of Primavera. At the time of the announcement, Yang owned about 55% of Chemspec’s outstanding ordinary shares.

Chemspec is expected to de-list from the New York Stock Exchange in or after the third quarter

 

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