Primavera Capital invests $51m into China XLX

In buying up $51 million worth of convertible bonds issued by China XLX Fertiliser, the private equity firm will hold a 14.97% stake in the company once the bonds reach their five-year maturity.

The impetus for this somewhat alternative way of entering into the business came from Primavera, according to Stephan Yao, head of investor relations at China XLX, who explains that the company initially requested to receive an equity investment instead. "It's very difficult for PE funds to use straight equity in a PIPE deal because listed companies have to pay dividends every quarter and it's hard to anticipate the stock price," he says. "So we thought about some alternative solutions and arranged with our auditors [Ernst & Young] to have the transaction treated as 100% equity purely for accounting purposes."

Partner at Primavera Lian Jie, who led the deal on behalf of the firm and joins China XLX's board, says that the government will launch measures to promote the development of the local agriculture sector as part of its Twelfth Five-year Plan with the aim of ensuring stable food supply for the country. Regulators will also encourage consolidation of the urea industry to reduce overall emissions and energy consumption.

"The sector is very fragmented and coal prices have been going up, so the Chinese government has to help increase the size of the larger players," Yao says. "As China XLX is already one of the largest urea producers in China and the number one in Henan Province, we really stand to benefit from this consolidation."

Primavera may be attracted to the fertilizer market in general, but there were reasons why China XLX was chosen to be its first agriculture asset. According to Jie, the firm is one of the best and fastest-growing in its segment in China, because of the "considerable experience" of its management team and its stringent corporate governance practices.

In terms of China XLX's future, the fresh capital will allow the business to continue developing its fourth urea plant in Henan Province. Construction of the plant began in May and is expected to be completed by late 2013. The funding will also go toward the acquisition of further coal resources, as well as boosting the group's working capital.

"We will also be able to leverage Primavera's help for potential M&A opportunities, because they're looking at other agriculture and fertilizer-related companies," Yao concludes.

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• Topics
• Greater China
• Primavera
• Agriculture
• resources
• China