Biggest U.S. Takeover in China in Decade Hangs on Board Spat

  • Majority board asks Air Products to proceed with due diligence
  • Special board meeting on March 8 to vote on ousting directors
Photographer: Tomohiro Ohsumi/Bloomberg

Air Products & Chemicals Inc. has hit a bump as it attempts the largest U.S. takeover of a Chinese firm in more than a decade, stymied by an extended boardroom battle at Yingde Gases Group Co.

A divided board of the Hong Kong-listed firm failed to agree on a panel needed to review the offer, but has asked Air Products to proceed with due diligence to avoid further delays, Yingde said in a statement to the Hong Kong stock exchange Friday. The world’s biggest producer of hydrogen offered to pay at least HK$5.50 a share, valuing Yingde’s equity at about $1.3 billion.

The success of the bid now hinges on the speed at which Yingde proceeds with further talks on the back of the prolonged boardroom struggle. A former chief executive officer and chief operating officer, who were stripped of their executive powers but are still on the board, have been fighting to regain management control of Yingde. The two factions have called for a special meeting on March 8 to vote on the removal of the other group.

“Yingde’s current management seems united against the two dissident directors,” said Justin Tang, a director of global special situations at Religare Capital Markets in Singapore. “Air Products’ possible bid may be delayed by the board fighting.”

Reflecting shareholder anxiety over the situation, Yingde’s stock closed at HK$4.72 on Friday in Hong Kong, 14 percent below Air Products’ offer. It has rallied 21 percent since the details of the preliminary bid were announced on Jan. 20.

‘Friendly Transaction’

Air Products has $3 billion in cash to spend on acquisitions after it completed the $3.8 billion sale of a materials unit to Evonik Industries AG this month, Chief Executive Officer Seifi Ghasemi said Friday on a conference call. If Yingde won’t negotiate, the U.S. company may make a voluntary general offer for the company, he said in a Jan. 8 letter.

“We seek to engage in a friendly transaction with the company,” Ghasemi said on the call, which was held to discuss earnings for the latest quarter.

The deal would help Air Products increase its on-site business, in which gases such as hydrogen are produced at customers’ production locations, as 85 percent of Yingde’s sales fit that category, he said.

Urgent Meeting

Failure to form an independent committee to review the offer was because two directors challenged the capability of the proposed individuals, Yingde said. Another “urgent” board meeting to be held immediately after the Lunar New Year holidays will resolve the setting up of the panel, it said. Despite the sparring over control, the two directors are “fully supportive” of the Air Products offer, according to the statement.

“Maybe the composition will change,” said Glenn Ko, head of Asia desk trading strategy at HSBC Holdings Plc in Hong Kong. “But this does not change the attractiveness of the offer.”

The way forward for Yingde is to be taken over by someone else because the current management is so fractured, said Dennis Cassidy, head of corporate finance at The Anglo Chinese Group, the financial adviser for Sun Zhongguo, the former CEO, and Trevor Raymond Strutt, the former COO. Both directors support the Air Products proposal, which is the best offer at the moment, Cassidy said, speaking on behalf of them.

Key Support

Yingde’s 2018 notes rose 0.14 cents on the dollar to 97.56 cents in Hong Kong, the highest in a week, according to Bloomberg-compiled prices.

“The prospect of a deal with Air Products remains the key support for the credit,” said Rick Mattila, international head of market strategy at MUFG Securities Asia Ltd.

The offer from Air Products isn’t the only one Yingde has received. StellarS Capital made an offer at HK$4.50 a share, prompting Ghasemi to tell Yingde Chairman Zhao Xiangti during a Jan. 7 meeting that the U.S. company is willing to raise the offer to as much as HK$6 after the completion of due diligence.

One of the minority directors also informed the board of an interest from Baring to subscribe for Yingde shares at between HK$5 and HK$6, without providing details, Yingde said in Friday’s statement. Richard Barton at Newgate Communications Ltd., Baring Private Equity Asia’s external public relations firm, declined to comment. 

If Air Products acquires Yingde, it would be the biggest U.S. takeover in China since a consortium including Citigroup Inc. bought control of Guangdong Development Bank in 2006 for $3.1 billion, data compiled by Bloomberg show.

The uncertainty of U.S.-China relations created by President Donald Trump isn’t a factor in Air Products’ pursuit of Yingde, as China is the right place to invest for long-term growth, Ghasemi said Friday.

Air Products, which posted fiscal first-quarter earnings and issued a second-quarter profit forecast that trailed analysts’ estimates, fell 5.9 percent to $140.05 at 11:29 a.m. in New York.

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