Morgan Stanley, IFC US$200m bet on Conch

Morgan Stanley, IFC US$200m bet on Conch
Published: 01 January 2006


Conch Cement said 31 December that its parent would sell 180 million shares, or about 14.3 per cent of the share capital, to the two. The deal may cost up to CNY 1.61bn, or CNY 9 a share, sources said.

The Shanghai-listed company is the industry largest by output. The US investment bank Morgan Stanley is set to become its third largest shareholder, while IFC, the private equity arm of the World Bank Group, number-four.

The deal is pending approval from the Ministry of Commerce and the state asset watchdog, since the company is controlled by the state.

Shares of Conch opened at CNY 9.65 apiece and rose 2 per cent in the morning session. They have risen over 60 per cent in the latter part of this year, when the Shanghai Composite Index tumbles.

The industry has been strictly monitored by the cabinet vowing to close down small older units to ease the overcapacity. "That is a positive for bigger players like Conch, with advanced equipments and sound environmental protection skills," a Shanghai-based analyst said.

Conch, based in the central province of Anhui, forecasted "an in excess of 50 per cent fall" in net profit for this year, as coal and power costs shot up. It earned CNY 961 million in fiscal 2004, an annual gain of 30 per cent.

"This deal helps disprove the conventional wisdom that there is too much private equity money chasing too few deals in China," one senior China-based investment banker said.

Global heavyweights including Carlyle Group, Newbridge Capital, JP Morgan and Goldman Sachs have all raised billion US dollar funds specifically for Asian private equity investments, particularly in China.

"There is an increasing number of deals and the size of deals is getting larger and larger," according to Maurice Hoo, a partner at Paul, Hastings, Janofsky & Walker, which specialises in private equity deals. He said the turning point was a clarification issued in October by the State Administration of Foreign Exchange that reopened the door for offshore restructuring of foreign buyouts after a ruling at the beginning of the year effectively made them illegal.

Rather than use the offshore structure, Morgan Stanley and IFC acquired their stake in Anhui Conch by buying non-tradable "legal person" shares from the Anhui government-owned parent company, which retains a 35.24 per cent stake.

The deal requires approval from regulators and the company is yet to put forward its state share flotation proposal, which is expected in February or March next year.

Yesterday’s announcement comes one week after the Carlyle Group closed a 3.3 billion yuan deal for a little less than 25 per cent of state-owned China Pacific Life insurance. That deal came on the heels of Carlyle’s ground-breaking three billion yuan purchase of 85 per cent of Xugong Construction Machinery in October.