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.

It's not often a private equity firm can claim the distinction of having stood in the way of the biggest American takeover of a Chinese company in a more than a decade, but that's what happened with PAG Asia Capital.

On Friday, Air Products & Chemicals Inc. scrapped its push to buy Yingde Gases Group Co., leaving the door open for a HK$6-a-share ($0.77) bid by PAG that values China's largest industrial-gas maker at $1.46 billion. The Hong Kong-based private equity firm will now have to restore confidence in a company reeling from almost four months of management infighting.

At Sixes and Sevens
Yingde's share price has settled around the HK$6 offered by PAG
Source: Bloomberg

Air Products unveiled its HK$5.50 a share offer in January and indicated it could go to HK$6 subject to due diligence. Yingde, meanwhile, was battling its own internal mess that started with kicking two co-founders off the firm's executive board.

In early March, PAG effectively tied up a large chunk of Yingde stock after it managed to strike a deal with the company's three warring co-founders -- former Chief Executive Officer Sun Zhongguo and former Chief Operating Officer Trevor Strutt in the one corner and Chairman Zhao Xiangti in the other -- to purchase their combined 42 percent stake. PAG's offer is binding unless someone else comes in at HK$6.30 or more with an offer that's unconditional.

Air Products clearly didn't want to be that someone else, even though buying Yingde would have given it an almost 25 percent market share in China. PAG has until April 10 to get to 50 percent, which shouldn't be hard.

The challenge will be making the price worth it. Stock in Yingde, which sank as much as 4 percent on Monday to HK$6.01, dropped 20 percent last year and 34 percent the year before that, weighed down by mounting debts and struggling steelmakers as clients.

Management's open feuding meant Yingde's reputation has taken a knock, and while its multi-decade-long contracts with China's state-owned steel firms are an advantage, that's an industry in decline. PAG also risks a perception by Beijing that it's foreign, which could pose a regulatory hurdle.

Private equity likes to complain that deals in the region are expensive, but it's largely stepped up to the plate. A survey by Bain & Co. found that firms paid record valuations to acquire assets in Asia last year, forking out headier multiples than in the U.S.

Frothy
The average enterprise value to Ebitda multiple for acquisitions in the Asia-Pacific region by private equity firms was a record 17 times last year versus 10 in the U.S.
Source: Bain & Co. Asia-Pacific Private Equity Report 2017
Note: Data for the U.S. is for the first half of 2016.

Still, it's hard to escape the feeling that PAG is paying a bit too much. Unlike Air Products, it's not a strategic player that can eke out cost synergies from the transaction. And global competitors for the most part are busy digesting their own acquisitions, so they probably won't be interested in entering the fray.

For better or worse, it boils down to PAG. Yingde shareholders should hope the firm can make that lofty price tag pay off.

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