Yingde founders’ PAG deal forces Air Products’ hand in bidding war

The three founding partners of Yingde have essentially set a floor price for the stock at HK$6 per share, which any new bidder will need to surpass.

PUBLISHED : Thursday, 02 March, 2017, 8:42pm
UPDATED : Thursday, 02 March, 2017, 11:00pm

A swift decision by Yingde Gases Group’s chairman Zhao Xiangti to join his rival directors Mark Sun Zhongguo and Trevor Strutt to accept PAG Asia Capital’s offer to buy the company has forced United States-based Air Products’ hand to get into the bidding game.

After weeks of bickering over who deserve to be in charge, the two feuding factions of founding shareholders - one led by Zhao and another consisting of former chairman Sun and former chief operating officer Strutt - have at least come to the same page on one thing.

They now appear to be -- at least through their public statements -- in agreement that selling their shares to the highest bidder is the way to go.

The three founding shareholders, who together own 41.9 per cent of Yingde, are bound by an irrevocable memorandum of undertaking signed on Monday to sell their shares at HK$6 each to PAG.

PAG, one of Asia’s largest private equity funds with US$16 billion of assets under management, has stipulated a condition that it must eventually be able to own more than 50 per cent of Yingde, including whatever shares it already owns or will buy in the open market, besides taking over the trio’s 41.9 per cent stake.

That means the December 2016 offer made by Air Products of HK$5.5 to HK$6 per share isn’t good enough, especially when the offer is subject to due diligence, and certain undisclosed conditions.

Yingde’s share price has risen 18 per cent in two days to HK$6.31, putting PAG within spitting distance from the finishing line.

Any other company that wants to join the bids will have to decide soon.

Air Products, based in Allentown, Pennsylvania, reaffirmed its interest a day after PAG’s offer was announced, saying it remains in the bidding game because 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 fact that Air Products and Yingde are in the same industry – with 9 per cent and 13 per cent share of China’s market for industrial gases in 2015, according to gasworld Business Intelligence – means Air Products has room to give a better offer than pure financial investors like hedge funds. Put simply, there are synergies in the form of cost savings and efficiency gains to be reaped from a merger, or takeover.

Still, companies in Yingde’s industry will need to stipulate a disclaimer on their offer -- that the merger won’t breach China’s antitrust regulations.

To trump PAG’s offer, a suitor will need to appeal to the minority shareholders who own the balance of Yingde’s shares, with an offer that’s attractive enough for them to sell their stakes.

This then will release Yingde’s three feuding founders from their undertaking to sell to PAG at HK$6 per share.

Given that Air Products and Yingde together have about 22 per cent of China’s industrial gases market, there’s ample room to argue that the merged businesses don’t threaten the survival of other suppliers, or restrict the choices of steel mills or chemical plants.

To outside observers, a point of intrigue is why chairman Zhao took the unnecessary step of signing the same undertaking with PAG, shortly after Sun and Strutt signed theirs on Monday.

Sun and Strutt have essentially set the floor price for all Yingde shareholders, at HK$6 per share. All that Zhao needed to do was to accept or reject the offer, like every other shareholder.

By throwing his 12.4 per cent into the pot, Zhao has brought PAG that much closer to the 50 per cent threshold it needs. It now only needs 8.1 per cent of shareholders to agree.

Zhao might have done it out of “fear of looking inept,” wrote Justin Tang, director of global special situations at Religare Investment Banking & Securities in Singapore, in a note.

A spokesperson for Yingde’s current board -- excluding Sun and Strutt -- would not comment, saying only that the company’s majority board welcomes bids from “all parties that would maximise shareholders’ interest.”

Still, both sides are pushing ahead with their preparations for a showdown in Zhuhai next Wednesday, where they will try to garner enough votes to expel each other from Yingde’s board.