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CITIC, Warburg in $450m Chinese deal

In one of China’s largest-ever private equity transactions, CITIC Capital and Warburg Pincus are to acquire 22.5 percent stakes in Hayao Group, a leading pharmaceutical business.

Hong Kong-based CITIC Capital Markets Holdings and US-based Warburg Pincus have agreed to acquire stakes of 22.5 percent each in Hayao Group, the Chinese pharmaceutical company.

The two private equity firms are paying US$100 million each for the stakes as part of a privatisation that values Hayao Group at US$450 million. As part of the same transaction, Heilongjiang-based venture capital firm Chenergy is acquiring ten percent of Hayao Group for an undisclosed sum.

Following the deal, the state-owned Assets Supervision and Administration Commission of Harbin, previously Hayao Group’s sole owner, will remain the largest shareholder with a 45 percent interest.

Based in Harbin in Heilongjiang province (North East China), Hayao Group’s core products are antibiotics, over-the-counter medicines and healthcare/dietary supplements. The firm has established a range of national brands including Hayao General Factory, Sanjing, Hayao Factory Number Six and Shiyitang.

Hayao sought private equity funding partly in order to buy out shares in its Shanghai-listed subsidiary Harbin Pharmaceutical Group, in which collapsed brokerage China Southern Securities had secretly built up a 61 percent stake in breach of exchange disclosure requirements.

In conjunction with the new funding, Hayao has announced a general offer for the 65.24 percent of Harbin that it does not currently own. In a statement, the firm said it is making the offer “to eliminate the negative impact that China Southern Securities’ improper stock dealings and holdings have had on the company, its shareholders and the normal trading of the company’s stock in the secondary market”. Most of the consideration for the shares will be paid to China Southern’s receivers.

Commenting on the deal, CITIC Capital CEO Yichen Zhang said: “Having successfully established itself as one of the leading pharmaceutical manufacturers in China, the Hayao Group now has the enhanced capital base necessary to be the dominant player in a large but fragmented domestic market.”

Global investor Warburg Pincus, which has $14 billion in assets under management, was one of the first Western investment groups to enter the Chinese market in 1995, and has since invested over US$400 million there in ten companies. In June 2004, it bought a 30 percent stake in Datang Telecom Technology, a telecom equipment maker, for US$70 million.      

CITIC Capital was established in early 2002 as the international investment banking arm of Hong Kong’s CITIC Group, and is jointly owned by CITIC Pacific and CITIC International Financial Holdings. The firm offers a range of investment banking, asset management and securities brokerage services.

China is giving glimpses of its enormous potential for private equity deals as 2004 draws to a close. In November, Carlyle Group was reported to be in discussions regarding the acquisition of an 80 percent stake in Xuzhou Construction Machinery Group, in a US$400 million deal that would be the country’s first leveraged buyout. Earlier this month, Carlyle was again being cited as the potential acquirer of a 25 percent stake in China Pacific Life Insurance for US$400 million.