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Naomi Rovnick

American buyout giant Texas Pacific Group has invested HK$625 million in Daphne International Holdings for a bond convertible into a minority stake, backing down from its hope to take control of the women's shoe retailer, sources said.
TPG, which manages funds worth more than US$50 billion, had wanted to buy Hong Kong-listed Daphne outright, but the retailer was unwilling to sell a controlling stake to the private equity investment firm, sources said.
'Daphne financially did not need this deal,' one source said.
The retailer's net profit rose 12 per cent to HK$492.2 million last year on sales of  HK$5.29 billion.
TPG has not yet bought shares in Daphne but has instead lent cash in the form of  debt convertible into shares under certain conditions.
Because of the uncertain outlook for the mainland economy, TPG wants to protect its cash in case the retailer's share price plummets.
Daphne will pay the buyout firm 3.125 per cent annual interest. TPG's loan converts into a 14 per cent equity stake in Daphne if the retailer's shares, which closed at HK$3.25 yesterday, reach HK$3.50.
TPG, which was advised by Nomura, can increase its equity stake in Daphne to 17 per cent if the retailer's shares rise further.
It has also bought warrants, giving it the right to buy a further 100 million shares in the  retailer if Daphne's shares reach HK$4.
TPG is understood to be keen to buy a larger stake in Daphne if it ever gets the chance.
Daphne, which operates thousands of stores across the mainland and Taiwan, has got involved with TPG because the western investor will help it improve its supply-chain management and investor relations. The company will use the loan to open new shops.
TPG has decades of experience working with retailers in the west. It previously owned stakes in Swiss luxury shoemaker Bally International and Burger King.
TPG partner Mary Ma, Lenovo's former chief financial officer, will join Daphne's board.
This deal comes during one of the quietest periods in years for private equity firms in China.
Buyout firms were hoarding cash in case any of their investments in credit-crunched western economies need financial lifelines, said Andrew Pawley, a corporate finance director at accountants Baker Tilly.
'They need to keep their powder dry in case existing portfolio companies need capital,' he said.
Before this transaction, only eight private equity investments into Chinese companies worth a paltry US$100 million combined had been completed so far this year.  
In the first half of last year, buyout firms spent US$4.6 billion acquiring stakes in 47 mainland companies, according to Dealogic.
Tactical shift
US private equity firm backs down from plan to buy out shoe retailer
Cash amount that TPG has granted to Daphne as convertible debt, in HK$: $625m



TPG changes Daphne deal to convertible debt