Trina Solar chairman plans to boost stake as he takes company private - source - Merger Market
* Chairman currently owns 5.5%, could exceed 30%
* 13E3 filing expected before end of August
* Consortium has links to state-owned entities
Trina Solar [NYSE: TSL] Chairman and CEO Jifan Gao will increase his stake in the company quite significantly as part of the proposed USD 11.60-per-ADS take-private exercise, according to a source familiar with the situation.
The funding will come from a loan provided by Industrial Bank [SHA:601166] and may see the chairman end up with more than 30% of the company post delisting, including his rollover stake, the source added.
Chairman Gao and his affiliates currently own just 5.5% of the Chinese solar power company, according to the 1 August announcement that a definitive merger agreement (DMA) has been signed. No shares are held by the other bid consortium members, which include two Industrial Bank vehicles and two additional Chinese entities.
Aside from the loan that will finance the chairman’s equity portion, the USD 1.025bn take-private will be entirely equity funded, the first source and a second source familiar with the situation said. The financing package includes provisions for the total amount of equity raised to cover all costs arising as a result of the take-private, including Trina Solar’s two convertible bonds that have a combined nominal value of USD 288m, they said. Both CBs are well out of the money and come with change-of-control or delisting puts at par.
As of March 31, the company had USD 621.4m in cash and cash equivalents, including USD 169m of restricted cash, which could potentially be used to cover the redemption of the CBs.
The DMA didn’t provide any details about the financing, except to say that an equity commitment letter has been signed between the “parent” bid vehicle and each of the sponsors. It also mentions a debt commitment letter, but that refers solely to the loan covering the chairman’s portion of the equity, the first source said.
More information about the financing will be provided in the preliminary 13E3 filing with the US Securities and Exchange Commission, which according to the two sources should be out before the end of August.
SAFE, NDRC and MOFCOM approvals needed
The equity financing will consist mostly of onshore money that will need approval from China’s State Administration of Foreign Exchange (SAFE) before it can be exchanged into US dollars to pay for the transaction, the first source said.
Obtaining SAFE approval has become quite a lengthy process for some applicants this year – Qihoo 360 Technology, iDreamSky Technology [NADSDAQ: DSKY] and Baoxin Auto [HKG: 1293] are some examples – as Beijing attempts to limit capital outflows, as reported. The parties involved in the Trina Solar transaction have taken this into account by allocating more time than usual to the expected timetable, the first source noted.
In the 1 August press release, the parties said the deal is currently expected to close during the first quarter of 2017 – or eight months (about 240 days) from when the deal became binding.
According to Dealreporter analytics, the 16 US-listed Chinese companies (covered by this news service) that have been taken private since the beginning of 2015 needed on average 139 days between DMA and closing.
Take-private targets have also tended to be more optimistic in their own forecasts of how quickly the deals would complete post signing a DMA. Qihoo expected to close its USD 6.7bn deal in just under 6.5 months, Wuxi Pharmatech projected to get its USD 3.01bn deal done in 4.5 months and e-Commerce China Dangdang [NASDAQ: DANG], which was the most recent one before Trina Solar to sign a DMA on 31 May, said it expects the USD 369.4m deal to reach the finish line in 2H16, implying a maximum of seven months.
The long-stop date for the Trina Solar deal is 1 August, 2017.
Aside from SAFE approval, Trina Solar will also need clearance from the National Development Reform Commission (NDRC) and China’s Ministry of Commerce (MOFCOM), the DMA shows. It will need to make an antitrust filing with MOFCOM since it exceeds the revenue threshold, doesn’t operate under a variable interest entity structure and will see a change of control as a result of the delisting, the first source said. However, China’s solar power industry is highly fragmented so the regulator isn’t expected to raise objections, the same source added.
Trina Solar is a manufacturer of solar modules, but operates across the value chain, making ingots, wafers and cells as well. More recently it has started to get involved in downstream solar power projects and as of the end of March 2016 had 967.3MW of downstream projects, including 920.8MW in China.
Alternative energy is an industry that Beijing is putting a lot of focus on and the official target is to increase the installed solar power capacity to 150GW by 2020, versus 43GW at the end of 2015, as reported.
The strategic importance of the sector might explain why the Trina Solar consortium members appear to have close links to the Chinese government. Research by this news service shows that Liuan Xinshi Asset Management Co is partly backed by state-owned Shanghai Industrial Investment Holdings (SIIC) and Lu’an Industrial Investment Development Co, which is state funded and backed by the local government of Lu’an. Also, Great Zhongou Asset Management (Shanghai) is 51%-owned by Zhong Ou Asset Management, which in turn is 35%-owned by Italian bank UBI Banca and 20%-held by China Private Ventures, the second largest shareholder of Tsinghua Science Park.
Separately, the two sources said that Shanghai Xingsheng Equity Investment & Management Co and Shanghai Xingjing Investment Management Co are both subsidiaries of Industrial Bank, whose largest shareholder is the Ministry of Finance of the Fujian Province.
Eyes on shareholder vote
The deal is also conditional on shareholders’ approval and given that the consortium owns only 5.5% of the shares and voting rights this could be one potential deal risk to monitor. At least two-thirds of the shares represented in person or by proxy at an extraordinary general meeting have to vote in favour for the deal to go through. Notably, Trina Solar has a few substantial third party investors – as of 15 April, Franklin Resources held 14.8%, Platinum Investment Management 12.9% and Oaktree Funds 5.8%, all according to Trina Solar's latest 20F filing.
Trina Solar lost 35% of its stock market value between mid-March and late June this year as solar power companies globally came under pressure from intense competition, a reduction in government subsidies and weak profitability. Just before the announcement of the DMA, Trina Solar’s shares traded at USD 8.25, representing a 40.6% spread to the indicative offer price. However, the chairman didn’t follow the path of some other take-private bidders who lowered their offers in response to market performance, but stuck to the terms flagged earlier, perhaps with the upcoming EGM vote in mind.
The news service understands that there have been some discussion with other potential bidders since the indicative announcement in mid-December, which may have contributed to keeping the offer price unchanged.
Four days after the DMA was announced (4 August), the stock closed at USD 10.49 and the spread had narrowed to 10.6%.
A representative for Trina Solar declined to comment beyond the public filings.