AVCJ Awards 2017: Deal of the Year - Large Cap: Yingde Gases

Yingde Gases is mainland China’s largest independent on-site industrial gas supplier with a more than 30% market share in 2016. It had 70 facilities in operation, most of them on the premises of metals and chemicals producers tied to long-term contracts. Revenue was up for the year at RMB8.4 billion ($1.2 billion) but Yingde swung from a net profit to a net loss, largely as a result of rising impairment and finance costs. This was the fairly benign backdrop against which a painful shareholder battle broke out.

It started in November 2016, shortly after Yingde announced a private placement to China’s OriginWater Technology that was intended to help service a growing debt load. The company’s chairman and CEO and its COO – also founders and major shareholders – were removed, at a board meeting convened in their absence, due to unsatisfactory performance. Another shareholder took over as chairman while a representative of OriginWater became CEO.

This triggered four months of angst involving boardroom reshuffles, highly public disputes, and the cancelation of the share placement. As the situation deteriorated, dragging more senior and middle-level management into the shareholder fight, international gas producer Air Products made an offer for Yingde. This coincided with the company taking out a high-interest bank loan to avoid defaulting on its existing debt and ratings agencies downgrading its bonds to deep junk status.

Conviction play

Yingde mandated Morgan Stanley to run a sale process, but by then PAG Asia Capital had completed two months of due diligence with full support of management. It negotiated separately with the feuding major shareholders, winning irrevocable undertakings over 42% of the shares, secured bridge financing, made a general offer in early March and completed the deal within two months. The $2.7 billion enterprise valuation equated to 5.4x EBITDA, about half the level of Yingde’s global peers.

“The company was doing a share placement, so we were able to conduct due diligence. We got into the situation much sooner than everyone else, but if we hadn’t known the industrial gases industry so well we wouldn’t have jumped up so quickly,” says Weijian Shan, chairman and CEO of PAG.

Part of this was a historical familiarity with the industrial gases space in China. But the PAG team could also call upon more recent experience, albeit in the Korean market. A matter of weeks before PAG secured conditional undertakings from the Yingde shareholders, the sale process concluded for Daesung Industrial Gases, a supplier of general industrial and specialty gases.

A Goldman Sachs-led consortium bought the business in 2014 from Daesung Group, which was forced to divest assets in order to service its debts. MBK Partners acquired it from Goldman for a reported enterprise valuation of nearly KRW2 trillion ($1.8 billion), which equated to an EBITDA multiple of 13x. Two Korean conglomerates, Hyosung Corporation and SK Group, both submitted bids while several private equity firms, including PAG, were also said to be in the running.

“That process was educational for us, our team learned a lot from it,” Shan admits. He is curious why other private equity bidders, having done the work on Daesung, did not approach Yingde early on with more conviction, particularly given the acquisition multiple was much lower. He notes that one of PAG’s advantages is it operates as a single team, rather than having different groups of people in each market that engage in inter-jurisdictional competition.

End of the war

PAG found a way in because of the stalemate at board level. Xiangti Zhao, the replacement chairman who owned 12.41% of Yingde, cast himself as the savior of a company that was on the verge of collapse due to mismanagement. Zhongguo Sun and Trevor Strutt, the ousted CEO and COO, who between them owned nearly 30% of Yingde, contested this version of events. Claiming that Zhao was acting in concert with OriginWater to seize control of the business, they opposed the placement.

As a result, Yingde was willing to engage with other prospective investors and PAG signed a non-disclosure agreement in late December 2016 enabling it to conduct due diligence. This involved visiting all the major sites of the company throughout the country and interviewing its key customers. At that point, there was no guarantee these efforts would result in a buyout.

Even after securing irrevocable undertakings from Zhao, Sun and Strutt – regulatory filings indicate the two sides could not agree how to proceed with a sale – there was no certainty because Yingde could still have accepted an offer that was at least 5% higher. However, PAG had right of first refusal, which effectively shut out the competition. On that basis, the GP put together $1.5 billion in equity and bridge financing in time to launch a general offer for Yingde just as the auction process was beginning.

Within a month, investors representing more than 50% of the total shares had agreed to the tender, making the offer unconditional. Two weeks after that, the acceptance level reached 90%, ensuring PAG could proceed with a full privatization. It was the fastest ever take-private in the history of the Hong Kong Stock Exchange. “I tell the team to this day that we wasted two weeks for Chinese New Year, otherwise we would have done it even sooner and at an even lower valuation,” says Shan.

One of PAG’s first initiatives was to address Yingde’s financial situation. Debt was refinanced, and borrowings had dropped below 50% of total assets by the end of June, with the debt-to-EBITDA ratio also improving. Meanwhile, balance sheet cash increased by nearly 100%. In addition, unproductive assets have been monetized, internal management systems strengthened, and new growth strategies introduced. Yingde posted year-on-year increases in revenue, EBITDA for the first six months of 2017. 

Pictured: Tim Morrison (right) of PAG Asia Capital receives the Deal of the Year award from Hogan Lovells' Steven Tran

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• Topics
• Greater China
• Buyouts
• Industrials
• PAG
• China
• manufacturing
• energy
• AVCJ Awards