HK court upholds CVC asset freeze over South Beauty founder

CVC is said to have paid around $300 million for a majority stake in South Beauty, with Zhang remaining a shareholder in the business and continuing to participate in strategic decisions. However, revenue has reportedly fallen dramatically since the acquisition.

According to a ruling handed down by Hong Kong's High Court, CVC and Zhang are now involved in arbitration, and an injunction - that included a disclosure order required to freeze assets held by Zhang - was granted on February 26 in support of these proceedings. Justice Andrew Chung decided to continue this injunction, dismissing objections from the respondent.

Zhang and two other respondents, Grand Lan Holdings Group (BVI) and South Beauty Development, argued that the disclosure order should not stand because the principal assets covered by the injunction were real properties and there was insufficient risk of dissipation.

In his ruling, Justice Chung endorsed two points made by La Dolce Vita Fine Dining, the CVC-owned vehicle through which the South Beauty investment was made: "the real properties" cited did not necessarily represent all the assets covered by the injunction; and "very substantial sums had been paid by them and it is still unknown where those sums now are."

The ruling does not reveal details of the nature of the dispute between the parties. However, it follows reports last month that South Beauty could face a restructuring after seeing takings fall by over 50%. CVC obtained $140 million in debt to support its purchase of a 69% stake in the restaurant chain and held initial discussions with the banks involved over remedies to the situation, according to Debtwire.

The drop in revenues was linked to a move by Beijing to rein in spending by officials from state-owned enterprises and government agencies on entertainment and luxury goods. Sales of luxury brands in China have already suffered as a result of the initiative, which is part of a broader push to cut down on corruption.

At the time of CVC's investment, South Beauty had nearly 80 directly-operated restaurants in 24 cities across China, serving Sichuan-style dishes to the mid-to-high end business and casual dining market. Zhang opened her first restaurant in 1991 after returning to China from Canada, but the first South Beauty outlet, located in Beijing's central business district, dates back to 2000.

In 2008, CDH Investments and China International Capital Corporation (CICC) took a minority stake in the business and ambitious expansion plans were put in place. These didn't come to fruition and Zhang told media in 2011 that she regretted taking PE investment. Plans for a mainland IPO floundered when the application was rejected by regulators, while a subsequent attempt to list in Hong Kong was aborted.

South Beauty was one of the final few deals in CVC's third pan-Asian fund, which closed at $4.1 billion in April 2008. According to Oregon Investment Council, the vehicle had achieved a total value multiple of 1.66x and an IRR of 15.8% as of September 2014. The firm closed Fund IV at $3.5 billion last year.

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• Topics
• Buyouts
• Greater China
• Consumer
• Regulation
• China
• Consumer
• buyout
• CVC Capital Partners
• regulation