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

Executing the IPOEach of the initiatives taken in the months immediately beforeand after Hony closed the transaction at the end of 2004were building blocks for creating a more professionallymanaged, internationally competitive company. The ultimateobjective of these reforms was to establish credibility withprospective investors and regulators, which would positionthe company to gain continuous access to diversifiedsources of capital and a platform to expand – a necessityfor China Glass’s long‐term growth and competitiveness.Moreover, a successful IPO would eliminate the company’sfinancial dependence on the State, and place it squarelyin the ranks of private companies that are continuouslysubjected to the discipline of market forces. In other words,the future availability and cost of capital would be a functionof market perceptions of company performance rather thangovernment considerations.As the controlling shareholder, Hony took charge of guidingthe company through the entire underwriting process,selecting the investment bank and financial advisors,overseeing the preparation of the prospectus, registeringthe offering with the Hong Kong authorities, orchestratingand running the road show and establishing the timing andpricing of the offering. Zhou believed that “Hony’s hands‐oninvolvement at every step of the process was critical to thesuccessful outcome of the IPO”.In June 2005, only seven months after Hony closed thebuyout transaction, China Glass Holdings Ltd issued 90 millionnew shares on the HKSE, raising US$25 million of capital, thebulk of which was applied to meet the previously agreedstrategic objective of rapidly expanding production capacity.As one measure of how far the company had come in a shortperiod of time, the offering was eight times over-subscribedeven though the IPO price represented a 12.8 P/E ratio, wellabove the prevailing industry average of about 8.0. Post‐IPO,Hony continued to control the company, albeit with a dilutedequity stake now of 62.56%; management held 12.44%,Pilkington held 9.9% and the remaining 15.1% was in thehands of the public shareholders.Creating a market leader: executing anacquisition‐led growth strategyFrom the very beginning of their strategic discussions,Hony and China Glass management shared theunderstanding that a successful listing would be only thebeginning of China Glass’s fight to become China’s premierflat glass manufacturer. Pre‐IPO, ranked tenth in scaleamong domestic manufacturers, China Glass was in atenuous position facing the inevitable onslaught of industryconsolidation. “Either we will be acquired by one of our largercompetitors, or we would become an acquirer,” explainedZhou. Post‐IPO, armed with the international brandrecognition and the permanent source of diversified capitalafforded by the listing, China Glass was ready to be the latter.In February 2006, only eight months after China Glass’s HKSElisting, the company announced its intention to undertake amajor acquisition on an unprecedented scale in the historyof the Chinese glass industry. The transaction involved theacquisition of seven glass manufacturers with a combineddaily capacity of 4,780 tons, more than three times ChinaGlass’s own capacity. The expansion took the companyfrom three production lines to 14, making it China’s largestlisted flat glass producer. With one stroke, not only did thisacquisition extend China Glass’s footprint to all theeconomically important regions of the country, but it alsoresulted in a significantly more diversified and technicallyadvanced product portfolio, containing varieties such aslow‐e glass, super‐thin glass, silicon glass and solar glass.Hony led China Glass through every stage of thetransaction, serving as both the strategic mastermind andthe execution specialist. The Hony team played a criticalrole in selecting the acquisition targets, designing a feasiblefinancing strategy, mobilizing the required capital and guidingthe company through a web of technical complexities.When the entire transaction was finally completely inmid-2007, China Glass had established itself as the leadingChinese glass manufacturer. When asked about Hony’srole in the acquisition strategy, Zhou said without hesitation:“Without Hony, we could never have dreamed of takingChina Glass where it is today.” (See Exhibit 5 and Exhibit 6for a summary of recent acquisitions by China Glass, and thecompany’s post‐acquisition capacity and product portfolioinformation respectively.)Expanding access to international capital marketsIn July 2007, two years after the IPO, a much larger andcompletely restructured China Glass again demonstratedits ability to access capital from international sources oncompetitive terms. Returning to the public securities market,the company successfully issued a US$100 million ($95.8million net after fees and commissions), five‐year, 9.625%US‐dollar denominated note in Singapore. The bulk of theproceeds from this bond issue were used to strengthen thecompany’s balance sheet by refinancing and extending thematurities of existing debt obligations. Hony was againinstrumental in marketing and placing this offering.Employment practicesThrough the years, Hony never wavered from one of thefundamental tenets of its investment philosophy: buyoutsuccess in China depends on the retention of keymanagement personnel. Zhao explained: “We will only makean investment when we are convinced there is a completealignment of interests with senior management about whatneeds to be done post‐investment to grow the company.Consistent with this approach is our conviction that we willnot do a deal that requires a change of management.” Inthe China Glass case, as of mid‐2007 there had been nomanagement turnover, no abnormal layoffs associated withthe buyout and employee wages and benefits had beenstructured to ensure competitiveness with industry standards.The Global Economic Impact of Private Equity Report 2008 Case studies: Hony Capital and China Glass Holdings 121