PE-backed consortium ups privatization bid for China's Yongye

According to a regulatory filing, the board has accepted a bid of $7.10 per share for all outstanding American Depository Shares (ADS), valuing the NASDAQ-listed company at approximately $360 million.

The consortium, which is led by Zishen Wu, Yongye's chairman and CEO, initially wanted to pay $6.60 per share but had to up the bid to $6.69 per share to win board approval in September 2013. However, the deal then fell at the final hurdle in March when shareholders refused to support it.

At issue was the proportion of shareholders required to vote in favor of the transaction. The previous minimum requirement was for majority support from all shareholders, not including consortium members. The requirement has now been modified to a majority of those shareholders that actually choose to participate in the vote.

The termination date for the deal has also been extended by three months to September, allowing time for a new vote to take place.

The situation offers insight into how jurisdiction of incorporation can become a significant factor in privatizations of US-listed Chinese companies. In order to list in the US in the first place, these companies had to restructure offshore and the Cayman Islands is historically the most popular and user-friendly destination.

Under mergers legislation that Cayman introduced in 2011, a take-private requires support from two thirds of shareholders participating in the vote, including those in the buyer consortium. This system replaced a choice between a tender offer and a court-supervised scheme of arrangement, which necessitated approval from 90% and 75% of shareholders, respectively.

Yongye is incorporated in Nevada, which means unlike Cayman, corporate boards must be mindful of US class action lawsuits claiming that they have been acting in the interests of the chairman behind the bid and neglecting those of other investors. As a result, some boards opt for more stringent voting thresholds.

However, securing majority support from shareholders outside of the buyer consortium can be problematic: shares in certain companies have become so widely dispersed through different registries that some shareholders forget or don't realize they own them.

The consortium controls approximately 33.2% of Yongye. MSPEA invested $50 million in the company in June 2011 and then bought a further $11 million worth of shares on the open market.

The PE firm and Wu will rollover their existing equity stakes into the acquisition vehicle, while cash additional cash equity financing will come from Wu and an entity called Lead Rich International. China Development Bank's Inner Mongolia branch has agreed to provide up to $214 million in debt financing.

Beijing-based Yongye claims to be the leading crop nutrient company in China based on total sales in 2013, with production facilities located in Inner Mongolia. Its principal product is a liquid crop nutrient but the company also produces a powder animal nutrient for dairy cows. Both are sold under the "Shengmingsu" brand.

Yongye posted a net income of $180 million for 2013, up from $99 million the previous year. Sales increased from $442.9 million to $661.9 million over the period.

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• Topics
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• Greater China
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• buyout
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• Morgan Stanley Private Equity Asia