NewQuest-led group seeks removal of China Hydro directors
An investor group led by NewQuest Capital Partners is calling for the removal of five directors of China Hydroelectric Corporation, citing strategic and operational issues at the company and the apparent lack of credibility and accountability on the board. The group has nominated four replacements. An extraordinary general meeting was scheduled for September 28.
In addition to NewQuest, which spun out from Bank of America Merrill Lynch last year and specializes in direct secondary transactions, the group comprises Swiss Re, Tsing Capital's China Environment Fund and water-focused investor Aqua Resources, as well as two family offices, Abrax and IWU International.
They collectively own 40% of China Hydroelectric and have invested approximately $170 million in the company since 2008. According to China Hydroelectric's 2011 annual report, NewQuest and Swiss Re held interests of 23.9% and 6.2%, respectively.
China Hydroelectric was set up in 2006 to acquire and operate small hydroelectric power projects of less than 50 megawatts in capacity. Over the next three years it raised approximately $350 million through four rounds of private financing and then $100 million when it went public in January 2010.
As of June 2012, it owned 26 hydroelectric power projects across four provinces in China with a total installed capacity of 548 MW. The company sells its electricity to local power grids, which are mandated by the government to buy from small hydro plants for fixed tariffs.
The investor group is concerned that failings at board and senior management level have contributed to poor stock performance. Despite EBITDA reaching $42.8 million in the first half of 2012, up 107% year-on-year, and net income returning to positive territory, the stock has fallen more than 92% since the IPO, wiping out nearly $700 million in value.
The investor group blames a liquidity shortfall - the company has a working capital deficit of nearly $130 million and almost $180 million in principal due by 2015 - and conflicts of interest. It claims that China Hydroelectric's executives are paid nearly five times the salaries of counterparts at Chinese companies with a similar revenue base, with minimal performance incentives.
The group is also uncomfortable about senior management's involvement in numerous other businesses, the combined chairman and CEO role, and questionable related-party transactions.
China Hydroelectric has denied these allegations and accused the investor group of trying to take advantage of the depressed stock price by staging a takeover of the company without paying a control premium. The company filed a complaint with a US court on September 10 but dismissed it last week.
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