The Global Economic Impact of Private Equity Report 2008 - World ...

Hony Capital and China Glass Holdings*Lily FanginseadRoger LeedsSchool of Advanced International Studies, Johns Hopkins University“We knew that the Chinese glass industry was undergoing rapid consolidation that would increasingly favour larger players. We couldnot survive as we were structured; either we would be acquired by one of our larger competitors, or we would become an acquirer. …”Zhou Cheng, CEO, China Glass“We are company builders… I’ve given up trying to be loved as a private equity investor in China. But if I successfully executevalue-creation in an honest way, I can be respected.”John Zhao, CEO, Hony CapitalExecutive SummaryThis case traces the 2004 buyout of a state‐owned flat glassmanufacturer, Jiangsu Glass, by Hony Capital, a recentlycreated Chinese private equity fund, and the value-creationthat resulted from the transaction. Once in control, Honyrapidly orchestrated a major growth‐oriented restructuringof the company, a successful IPO on the Hong KongStock Exchange (with a new name, China Glass), a USdollar‐denominated bond offering in Singapore, other capitalraising events and the acquisition of seven Chinese glassmanufacturing companies. As a result, in the time span ofabout three years China Glass was transformed from arelatively obscure, mid‐size glass manufacturing companyto one of the largest, most efficient producers in China.One striking feature of this transaction was the close,collaborative working relationship between the Hony dealteam and the senior management of China Glass from thevery beginning, even during the due diligence phase. Thisearly and sustained bond between the key stakeholdersfacilitated and accelerated the major changes required totake the company to a new, higher level. An active, engagedboard of directors was established, revamped governancepractices were put in place and internationally acceptableaccounting and financial reporting standards wereimplemented. These reforms enhanced the company’scredibility with investors, attracted one of the world’s largestglass manufacturers as a strategic partner and investor, andcreated a solid foundation for rapid growth. Today, ChinaGlass is one of the few Chinese glass manufacturers listedoverseas and is trading at an estimated forward P/E ratioof about 23, twice the industry average. Since the buyout,daily production capacity has increased more than five‐foldfrom 900 tons in 2003 to 5,230 tons in September 2007.Revenues have grown from $44.5 million to more than$250 million. 1 The transformation has also positionedChina Glass to be far more competitive in global marketsby shifting its product mix towards high value‐add, highmargin varieties. As a result, exports since the buyouthave increased from 10% of sales to 30%.The significant value-creation generated by this private equitytransaction can be attributed to a number of noteworthyfeatures described in the case, including:• The close alignment of interests among the three majorstakeholders in the transaction: the seller, a municipalgovernment intent on privatizing the company quickly;the company’s senior management, also keen to seizethe moment and rapidly transform the enterprise into amarket leader; and the buyer, a recently launched privateequity fund that was sharply focused on executing abuyout strategy that would capitalize on new privatizationopportunities generated by a shift in government policy.• The shared vision of the private equity investor andcompany management about precisely what neededto be achieved to rapidly build a more competitive,growth‐oriented company immediately after the dealwas completed.• The strong belief by the private equity investor thata key factor for post‐investment success was theretention of senior management and the introductionof a new incentive‐based compensation structure thatwould motivate management to work towards a sharedset of objectives.• The onset in China of a significant policy shift, capturedby the central government’s 2002 directive that “thegovernment is not in the business of running businesses”.• An industrial sector that was undergoing rapidconsolidation and robust growth, which created veryattractive acquisition opportunities for savvy investors.This case also sheds considerable light on the significantdifferences between buyouts in China and most otheremerging market countries, compared with the US andEurope. For example:• Public‐to‐private: Many buyouts in the US and Europehave involved the outright purchase of publicly listed firms* The authors express their appreciation for the research and editing support provided by Brian DeLacey.1All US dollar figures are approximate, converted from local currency at an exchange rate of $1USD=RMB 7.5.The Global Economic Impact of Private Equity Report 2008 Case studies: Hony Capital and China Glass Holdings 115