Trina Solar bid group specifically allocated three months to obtain SAFE clearance - Merger MArket
The decision by the parties involved in the USD 1.1bn take-private offer for Trina Solar [NYSE: TSL] to allocate three months specifically to obtain the required foreign exchange approvals after all other major conditions have been satisfied, highlights the fact that moving money out of China has become a major issue for Chinese acquirers.
One lawyer, not involved but familiar with previous ADR deals, said he has not seen this kind of clause in a go-private context before.
This newswire has previously reported that the parties involved in the Trina Solar transaction have allocated a longer-than-usual eight months to complete the deal from the time it became binding, to take into account that the foreign exchange approvals process has become quite lengthy for some applicants this year.
The addition of the three-month period was proposed by members of the bid group, but if approval from the State Administration of Foreign Exchange (SAFE) hasn’t come through after three months, Trina Solar has the option to terminate the transaction, assuming all other conditions – except for those to be fulfilled at the time of closing – have been met or waived, the company’s preliminary 13E3 filing shows.
The document further notes that the chairman-led bid group will have to pay a reduced termination fee of USD 5m (or the renminbi equivalent) if Trina terminates the USD 11.60 per ADS deal on those grounds, assuming the bidders have used their “reasonable best effort to effect the currency settlement”. Otherwise, the termination fee for the bidders, referred to as the “parent termination fee” is USD 43.8m, while the company termination fee is USD 21.9m.
“Basically the company is reserving the right to move on after three months, if both parties have fulfilled their obligations and the regulator is holding up the deal,” said the lawyer, based on the information available in the 13E3 document.
Meanwhile, the chairman-led bid group does not have a right to terminate the merger agreement even after the 1 August, 2017 long-stop date if the sole reason the transaction has not been completed by then is a failure to convert the required amount of renminbi into US dollars, the deal documents show.
According to the deal background section of the 13E3, the special committee determined that “in light of, among other things, the foreign exchange process in recent similar transactions” the committee “might be willing to consider the requests” to allocate three months specifically to complete the currency conversion process and close the transaction.
Since the three months refer to the period after all other major conditions, including the shareholder vote, have been fulfilled and the deal parties have said they expect the deal to close in 1Q 2017, a reasonable deduction would be that they envisage holding an EGM before the end of this year or very early next year. And that in turn would suggest there is scope for the expected timetable to be shortened if the SAFE process turns out to be quicker than three months.
The Qihoo 360 effect
In all likelihood, the additional clause has come about because a number of other Chinese take-private transactions that rely on on-shore funding have got stuck waiting for SAFE approval in recent months. The most high-profile was Qihoo 360 Technology, where the prolonged SAFE process meant the bidders weren’t able to complete the USD 9.4bn transaction until July 16, even though shareholders had cleared the deal on March 30 and all other conditions were fulfilled by late April.
The USD 390.9m offer for iDreamSky [NASDAQ: DSKY] was also held up waiting for SAFE, but this news service reported today (31 August) that the approval has finally come through – three-and-a-half months after the EGM approval.
Meanwhile, China Grand Automotive Services [SHA: 600297] decided in late May to use offshore funding sources for its partial acquisition of Baoxin Auto [HKG: 1293] after the hoped-for SAFE approval dragged out. The USD 1.48bn tender offer was declared unconditional less than a week later.
The take-private of Trina Solar will be funded entirely with equity provided by the six sponsors, including a USD 576.2m contribution by Chairman and CEO Jifan Gao that will be funded by a renminbi-denominated USD 665m bank loan. All the funds will be contributed in renminbi, the 13E3 shows, and hence will need SAFE approval for conversion into dollars.
This news service has previously reported that the chairman will increase his current 5.5% stake in the solar power company quite significantly as part of the take-private exercise and 13E3 shows that he will end up owning 45% once the deal is completed. Shanghai Xingjing Investment Management Co and Shanghai Xingsheng Equity Investment & Management Co, which are both subsidiaries of Industrial Bank, will hold 20% and 15% respectively, while Great Zhongou Asset Management will hold another 15% and Liuan Xinshi Asset Management 5%.
Their combined equity contributions will amount to the renminbi-equivalent of approximately USD 1.35bn. According to the 13E3, those proceeds will cover the USD 1.1bn needed to complete the take-private, including related transactions, fees and expenses (assuming there are no dissenting shareholders), as well as a further USD 320m to repurchase Trina Solar’s two outstanding convertible bonds that have an aggregated nominal value of USD 288m.
Trina Solar’s share price hasn’t moved much since the 13E3 filing was made before opening on 26 August and on 30 August closed at USD 10.53 – a 10.2% spread versus the offer price.
A Trina spokesperson said the company considers itself neutral with regard to the take-private offer and will not make any comments.