7 December 2007
An article entitled Blackstone's full impact: use your minority stake to buy together
by Richard Malish, an attorney in the New York office of Mayer Brown's Corporate & Securities practice specializing in China investments, was published in the December 2007 edition of the International Financial Law Review. An excerpt from the article follows:
Private equity firms investing in China must often satisfy themselves with minority investments and limited exit strategies. Blackstone Group LP's September 2007 acquisition of a $600 million, 20% stake in Chinese state-owned China National BlueStar was similarly limited, but the benefits are already evident. Within two months Blackstone joined forces with BlueStar's parent company to make a consolidation play for Australian agricultural chemical maker Nufarm Ltd. for a reported $4 billion. The deal would be the first time a PE firm teamed up with its Chinese investment to pursue an overseas buyout, but will certainly not be the last. As Chinese enterprises continue to mature, PE firms will benefit from considering them both as targets and as peers eager to pursue "corporate partnership" transactions. The shift could have dramatic effects on the ability of Chinese enterprises to expand globally and to pursue transactions in the West with renewed vigor.
In China, many smaller PE funds have pursued investment from local governments to facilitate local transactions. The coup de grâce came this summer when Beijing's sovereign investment agency China Investment Corporate Ltd. purchased a $3 billion, 10% stake in Blackstone. Blackstone announced its investment in BlueStar within months, the first investment in China for the private equity giant. However, it appears that Blackstone is finding its deeper Chinese ties to be useful for more than simply executing buyouts. It has expanded the slate of potential companions with whom it can invest in "corporate partnership" transactions, deals which pair PE capital with that of an operating corporation, a signature transaction type for Blackstone. Chinese companies are ideal candidates for corporate partnership transactions as they are eager to expand into new markets, but still lack the experience to pull off sophisticated transactions in developed markets.
Other PE firms have attempted corporate partnerships with nonaffiliated Chinese firms. However, joint acquisitions with Chinese partners often require substantially greater efforts to close and make successful. Considering the substantial closing, policy and public relations risks associated with partnering with Chinese companies on acquisitions, private equity firms should naturally be seeking opportunities with greater upside potential. By bidding with an BlueStar's parent, Blackstone's Nufarm bid provides front-end value through ownership in Nufarm and a back-end interest through its equity ownership in BlueStar. As PE firms continue to develop relationships in the Chinese domestic market, we will no doubt see more of those relationships blossom into "corporate partnerships."