CITIC Capital takes majority control of Harbin Pharmaceutical

Harbin Pharmaceutical was the GP's first state-owned enterprise (SOE) restructuring deal. In 2005, it partnered with Warburg Pincus and local PE firm Heilongjiang Chenergy Hit High-Tech Venture Capital to acquire a 55% stake in the company for RMB2.04 billion ($246 million). CITIC Capital and Warburg Pincus each held 22.5%.

In June of last year, CITIC agreed to purchase Warburg Pincus’ entire stake, taking its ownership in Harbin Pharmaceutical to 45%. The other main shareholder, Harbin State-owned Assets Supervision & Administration Commission of the State Council (SASAC), retained its 45% interest in the company.

Three months later, Harbin Pharmaceutical said there would be a further restructuring under the mixed-ownership reform policy. This is the latest government initiative to encourage private investment in SOEs. It has resulted in private equity participation in deals involving subsidiaries of Sinopec, China Unicom, and COFCO Group.

To date, mixed-ownership reform has tended to mean introducing private sector best practices without ceding government control. Harbin Pharmaceutical is unusual in that CITIC Capital is taking its stake to 60.86% - at a cost of RMB1.5 billion - while Harbin SASAC’s interest will fall to 32.02%. The transaction has since been approved by the Harbin local government, although confirmation by SASAC at central government-level is still required.

Harbin Pharmaceutical is the second-largest pharmaceutical company in China, producing more than 20 dosage forms and over 1,000 drugs, such as antibiotics, modern Chinese medicines, and animal vaccines. It has two Shanghai-listed listed companies: Harbin Pharmaceutical Holding and Harbin Pharmaceutical Group Sanjing.

State sector reform has been on the Chinese government's agenda for decades, but it has has been difficult for private equity to participate. Even when they do get access - typically as minority investors - bringing about the change is even harder. 

For example, when CITIC Capital invested in Harbin Pharmaceutical, the company was spending four times its annual net income on television commercials and investing in a portfolio of 100-plus products, many of which didn't make any money at all.

Furthermore, each subsidiary maintained its own finances, which meant that profit-making businesses were receiving low-interest returns on bank deposits while loss-making units paid heavy premiums to borrow money. Centralizing the financial structure meant facing down resistance from managers desperate to hold on to power. When the process was finally completed in 2009, it turned out the company had a net cash position of RMB4 billion.

Exiting can also be challenging, given the need to find a solution that satisfies government-related stakeholders with political interests as well as private equity investors with financial imperatives.

 

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• Topics
• Greater China
• Buyouts
• PIPEs
• Healthcare
• China
• CITIC Capital
• buyout
• Exit
• Warburg Pincus Asia