CHINESE conglomerate Citic, in a bid to move into the fast-growing environmental-protection sector in China, is partnering American private-equity firm KKR to buy at least a majority stake in wastewater treatment firm United Envirotech Ltd (UEL).
The offer to buy the shares of the Singapore mainboard-listed firm at S$1.65 a share in cash - a premium of 12.6 per cent over its last transacted price of S$1.465 on Nov 6 - values UEL at about S$1.9 billion.
With this, Citic will become the controlling shareholder of UEL; KKR, now the single largest shareholder, will slip into second place.
Citic, which will extend a loan of S$1.27 billion to fund the special-purpose vehicle used for this acquisition, plans to use the firm as a flagship unit in the water and wastewater treatment business.
Its vice-chairman and president Wang Jiong said: "Our investment in UEL provides us a strong platform to develop in China's water and wastewater treatment sector. Environmental protection is a top priority for China, and Citic foresees not only commercial opportunity, but also societal benefit from this investment."
UEL provides membrane-based water and wastewater-treatment solutions to businesses in China's chemical, petrochemical and industrial parks.
The deal includes an offer to KKR for its convertible bonds worth S$44 million and due in 2016, representing about 10.2 per cent of the enlarged share capital of UEL. KKR had on Tuesday exercised its right to convert another US$18.7 million into new shares, boosting its post-conversion stake in UEL to 29.7 per cent.
With KKR's stake and commitments from UEL's chief executive officer Lin Yucheng, its chief investment officer Pan Shuhong and independent shareholders, the offer has already secured support representing 51 per cent of UEL's share capital.
After the close of the offer for the shares and the convertible bonds, Citic and KKR will also subscribe for between 30.3 million and 90.9 million new UEL shares at S$1.65 apiece. The funds will be used in case holders of the firm's medium-term notes decide to redeem their bonds with the change in control of the firm, and for the acquisition of wastewater treatment plants and working capital.
All told, if the placement is approved by UEL shareholders, Citic will end up holding between 50.6 and 67.4 per cent of UEL; KKR will hold between 23.8 and 36.2 per cent, and Dr Lin and Ms Pan will own the balance.
The deal is conditional on the approval of five government agencies in China, which could take four to six months.
The consortium plans to keep UEL listed; this is to allow shareholders to ride on the future growth of the industry, said UEL's executive director Chong Weng Chiew.
There are no plans to introduce changes to the business, although a comprehensive review of UEL will be done after the close of the offer. Dr Chong told reporters on Wednesday that the offer has come at the right time for the firm: "Our industry favours very large players, given the increased participation of state-owned enterprises in this space. They will offer an extensive network in China, and their expertise and track record will be very helpful for our development in future."
There will also be opportunities to tap Chinese onshore financial institutions, which will benefit the firm, given the capital-intensive nature of its business, he added.
The environmental protection industry, with a compounded annual growth rate of more than 15 per cent a year, is one of seven strategic industries the Chinese government is nurturing. Industry players are expecting a wave of investments in environmental-protection projects, as a significant part of the 430 billion yuan earmarked for the sector under China's 12th Five-Year Plan ending next year has not yet been spent.