ShangPhama board agrees to TPG-backed buyout

According to a regulatory filing, the ShangPharma board has accepted an offer of $9.00 per share, a 30.8% premium to the closing price on July 5, the last trading day before the offer was submitted.

The buyer consortium, comprising three trusts of which Hui and his family are beneficiaries, a vehicle owned by ShangPharma Director Kevin Chen, and subsidiaries of TPG, already own approximately two thirds of the outstanding shares. In July, it was stated that Hui held a 54% interest while TPG had 11%.

Therefore, the transaction, which is still subject to a shareholder vote, should close reasonably smoothly, and then Cayman Islands-incorporated ShangPharma would then be delisted. This is expected to happen in the first or second quarter of 2013.

The US private equity firm originally invested in ShangPharma in 2007, paying $35 million for a 25% stake via TPG Biotech and TPG Growth. The company went public in 2010, with TPG generating $24.6 million through a partial sell down of its holding as part of the offering. The funds involved are TPG Biotech Partners II, a $402 million vehicle launched in 2006, and TPG Star, a $1.5 billion expansion-stage fund, also of the 2006 vintage.

TPG has committed $25 million in equity to the transaction, while Standard Chartered will provide $40 million in debt plus a $9 million in credit facilities.

ShangPharma performs contract research work - including discovery chemistry, discovery biology and preclinical development - to international companies such as Eli Lilly and GlaxoSmithKline, as well as a number of domestic players.

The company reported a 39.5% year-on-year decline in net income to $1.6 million for the third quarter of 2012, primarily due to lower profit from operations, lower interest income and rising foreign exchange costs. Net revenue for the period was up 10.6% to $31.9 million, credited to higher volumes from the company's top customers and greater cross-selling of services.

Net income for 2011 as a whole came to $11.1 million, down from $13 million the previous year, even though revenue jumped to $111.6 million from $90.3 million.

Board approval for the ShangPharma buyout follows similar approval from Focus Media for a $3.7 billion deal backed by The Carlyle Group, FountainVest Partners, CITIC Capital Partners, China Everbright and Fosun International. With Zhongpin getting the go-ahead in November, four of the 12 private equity-supported buyouts of US-listed Chinese firms now stand a shareholder vote away from completion.

J.P. Morgan, O'Melveny & Myers and Conyers Dill & Pearman are advising ShangPharma's independent committee, while Kirkland & Ellis is providing legal counsel to J.P. Morgan. The buyer consortium is represented by Ropes & Gray, Maples & Calder and Fangda Partners, and Latham & Watkins is advising Hui individually. Skadden Arps is legal advisor to ShangPharma.

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