Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

For the first time in several years, it's a Chinese company on the receiving end of a sizeable overseas takeover.

The problem for Pennsylvania-based Air Products & Chemicals Inc. is that while there's little doubt Yingde Gases Group Co. is a good business with some solid assets, it's leveraged to the hilt and grappling with a boardroom spat that could make the company a lot more costly a purchase than its enterprise value north of $2 billion would suggest.

And it isn't only for those reasons Air Products looks brave. Beyond a handful of deals like L'Oreal SA buying China's top-selling facial mask maker in 2013, international purchases have been few and far between. Buyers are worried about regulatory rejection -- Coca-Cola Co.'s 2009 tilt at a Chinese juice company was vetoed by Beijing -- plus there's the nation's slowing economic growth and falling currency.

Losing Steam
Majority-stake acquisitions or full takeovers of Chinese companies by foreign firms have been falling
Source: Bloomberg

Still, snagging China's biggest industrial gas maker sounds like something of a coup. Air Products has been in China since 1987 but remains the smallest of the big four industrial gas giants globally. Praxair Inc. and Germany's Linde AG have agreed to merge, while France's Air Liquide SA is still digesting its acquisition of U.S.-based Airgas Inc. Although stock in Yingde Gases has surged more than 30 percent this week after a trading halt was lifted, its shares trade below price-to-book and Air Products, fresh from a $3.8 billion deal to sell its chemicals unit, has the cash.

Hit the Gas
Yingde shares have chalked up a dismal performance over the past five years
Source: Bloomberg

The thing is, Yingde may not be cheap enough. Not only was its net debt 3.25 times earnings before interest, tax, depreciation and amortization in the first half (blame a high exposure to China's beleaguered steel sector for that), but Yingde seems nowhere near to solving its corporate governance problems. What's more, according to Moody's Investors Service, the recent repayment of a HK$820 million ($106 million) bank loan that was funded by short-term borrowing means the company continues to face refinancing risks.

A share placement that never transpired may have alleviated repayment pressures somewhat, but would also have diluted stakes held by two founding directors who were removed from the board last year and now are trying to get reinstalled. A competing bid by a little-known firm called StellarS Capital was also rejected at a meeting this week.

Air Products' approach is in its infancy and Yingde has said it will seek a legal opinion before pursuing any talks. Rather than dive in, the American firm would be prudent to hold off until Yingde's shareholder mess sorts itself out. Bitter corporate battles are par for the course but in China, things can get complicated quickly, especially when you're dealing with a company that has onshore assets, a listing in Hong Kong and a Cayman Islands registration.

Taking a wait-and-see approach may be the wiser move.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net