The mud crab feast that started Yingde’s boardroom coup

Co-founders Sun and Strutt have one chance in four to prevail at Wednesday’s shareholders meeting, but PAG’s buyout offer stands regardless the outcome.

PUBLISHED : Saturday, 04 March, 2017, 9:02am
UPDATED : Saturday, 04 March, 2017, 9:01am

The scene is set for next Wednesday’s showdown among the founders of Yingde Gases Group Co.

At Yingde’s factory in Zhuhai, shareholders of China’s biggest industrial gases supplier will vote on two motions by two feuding factions of co-founders to kick each other out.

The first proposal by chairman Zhao Xiangti seeks to eject his two co-founders, accusing them of mismanagement.

An hour later, a second motion by former chairman Mark Sun Zhongguo and former chief operating officer Trevor Strutt will try to restore their positions while expelling Zhao.

At stake is ownership and management of a company that supplies one eighth of all the industrial gases for feeding China’s steel mills and chemical plants.

Air Products & Chemicals Inc made an indicative offer in January to buy Yingde, valuing the company at US$1.3 billion. That potentially makes it the biggest American acquisition of a Chinese business in a decade.

This week, a Hong Kong-based buyout fund upped the ante with a bid at the top end of Air Products’ price range, valuing Yingde at US$1.46 billion with a stipulation that a better offer must top it by at least 5 per cent.

“What we’ve been seeking all this while is a bidding competition where we can sell to the highest bidder,” Zhao said in an interview this week in Shanghai with the South China Morning Post.

Those sentiments were echoed by his estranged business partners Sun and Strutt in separate interviews in Hong Kong.

The three co-founders hadn’t seen eye to eye for a while. Strategic differences, management style and communication miscues added to a rift between them.

Yingde’s shares began trading in Hong Kong in October 2009 in a HK$3.17 billion (US$408 million) initial public offering.

Revenue almost quadrupled in the six years since, with net profit peaking at almost 1 billion yuan (US$145 million) in 2013, while earnings before tax, depreciation and amortisation tripled to 2.6 billion yuan during the period.

All the while, the expanding company had chalked up debt, with a total of 7.6 billion yuan of loans and bonds due between 2017 and 2020. Meanwhile, the company’s shares fell from its 2012 peak, with the 2015 market valuation half of what it started out with in 2009.

To help finance Yingde’s debt, Zhao engineered a sale of a 20 per cent stake at HK$3.20 per share to Beijing Originwater Technology Co., a sewage treatment company, to raise funds to repay an 880 million yuan due in 2017.

“When we proposed the placement to Originwater, we wanted them to help solve our financial problem,” Zhao said this week in Shanghai. “On the other hand, I wanted to enlarge the board of directors, and have a variety of views on the board.”

In early November last year, Zhao called for a board meeting.

On a Saturday morning over a feast of mud crabs and rice liquor by Yangcheng Lake outside Shanghai, the board, with an independent director dialling in from the US by phone, voted to kick Sun and Strutt off the board in absentia.

The two ejected co-founders claimed they were given too little time to prepare -- Strutt was en route Hong Kong from Shanghai when the notice came to his cellular phone -- and contested their expulsion through a court in the Cayman Islands, where Yingde was registered.

They also opposed Originwater’s involvement, claiming it was a premeditated and concerted hostile takeover. Combining Originwater’s stake with Zhao’s 12.4 per cent would enable them to surpass Sun and Strutt, who own 29.5 per cent of Yingde between them.

At the Yangcheng Lake meeting, the new board approved the stock issue to Originwater, and named the sewage company’s financial controller He Yuanping the new Yingde chief executive.

Three weeks later, He boasted during an investment forum that he had executed an acquisition and obtained control of Yingde in “the cheapest, quickest and easiest hostile takeover,” according to a video clip of his speech.

He spoke too soon. Through a series of complaints, court actions and requests for inquiry, the two expelled co-founders applied enough pressure on Yingde’s board to whittle the Originwater stock placement by half on December 18.

By January 11, the plan was abandoned altogether. He announced on February 21 that he would quit as chief executive, remaining as a non-executive director while Originwater retains its 4 per cent stake.

“Orginwater is definitely out,” Zhao said this week. “They are no longer in the bidding.”

Air Products, based in Allentown, Pennsylvania, said last week it remains interested in Yingde’s sale.

“We believe that the combination of Yingde and Air Products makes significant strategic and financial sense and would be of great benefit to investors, customers and employees of both companies,” the company said in a statement.

The bidding war more than doubled Yingde’s shares since January 6, attracting event-driven funds -- traders taking positions to profit from corporate feuds and significant events -- where they now own an estimated 15 per cent of shares, Zhao said.

Still, the animosity remains.

“We understand that Zhao, Sun and Strutt are not in the same bed. In fact, they are not even in the same house,” wrote Justin Tang, director of global special situations at Religare Investment Banking & Securities in Singapore, in a note the day after Yingde announced PAG’s offer. “There remains strong animosity” between the three founders, he said.

Sun and Strutt have one chance in four to prevail in next week’s showdown. Regardless the outcome, PAG’s offer stands, while Air Products is yet to table a firm offer.

“My heart is broken” by the fractured board, Sun said in an interview last week. “The best outcome now is to sell the company to the highest bidder.”

With reporting by Daniel Ren in Shanghai