Over the last few years, investors and business got accustomed to see China as a major foreign investment destination but now the situation seems to be turning around. In 2015, the level of Chinese outbound investment almost reached the amount of inbound foreign investments ($118bn compared with $126.3bn).
Chinese companies are particularly active in Europe and their investments in 2015 have increased by 44%, from €14bn to €20bn. Active investors are trying to obtain advanced technologies and diversify their business affairs, as they face increasing pressure from competition and transition to a “new economy”, orientated towards services and technology. It is clear that if China wants to sustain its competitiveness and impressive growth in the future, it needs to find new sources of productivity growth and innovation seems to be the right solution.
Figure 1 – Chinese OFDI in Europe hits a new record high in 2015. Value of Chinese OFDI transactions in EU-28 economies (€m) (Source: Rhodium Group)
The great interest in German companies is not surprising, having in mind Germany’s leadership in the high-tech sector and experience with productivity improvement. Germany is very attractive for Chinese investors also due to its friendly business environment and predictable revenues. Recent deals, such as the acquisition of KraussMaffei by ChemChina, Chengdu Techcent Environment purchase of Bilfinger’s, Midea Group’s investment in robotics maker Kuka among others are a great evidence for this unprecedented interest.
It is worth mentioning that Chinese takeovers are not executed without any difficulties. On one hand, national governments are becoming more and more concerned about Chinese influence in crucial industries and it is not uncommon to see big deals blocked by regulators, such as GO acquisition of Philips’ lighting business. On the other hand, advisors share that they often face integration problems, related to differences in culture of doing business (the so-called Guanxi approach, the traditional “scheme” used in personal and business relationships), reporting systems and preferred valuation multiples.
EQT, the champion developer
EQT Partners is a Sweden-based private equity operator sponsored by the Wallenberg family, one of the richest and most powerful families of Swedish entrepreneurs, with interests ranging from Saab to Ericsson, from Electrolux to ABB. Founded in 1994, EQT has raised 18 funds with an aggregate committed capital of over €29bn, almost 25% of which only coming from the VII Fund, launched during 2015 and closed at the end of July at the hard cap of €6.75bn. Focused on opportunities in Northern Europe, the fund was subscribed by the same investors in prior EQT funds for over 70% of the committed capital, testifying the good reputation and track-record developed by the PE operator over the years. Portfolio companies are located across Europe, Asia and the US and are engaged in a wide range of sectors, such as industrial, consumer goods, TMT, healthcare, energy and financial, together generating yearly revenues in excess of €17bn. Historically, EQT’s exit strategy has been characterized by Trade Sales (in which a portfolio company is handed over to an industrial and strategic buyer), followed by Secondary Buyouts and IPOs.
Beijing Enterprises Holdings, the Chinese conglomerate giant
Beijing Enterprises Holdings (“BEHL” or “the bidder”) is a Hong Kong-based listed company. Currently, it represents the sole overseas conglomerate controlled by the Beijing Municipal Government, whose primary goal is to enhance the country’s growth by facilitating capital, technology and management expertise inflows from the international market. With 2015E sales and EBITDA amounting, respectively, to approx. €7.0bn and €0.7bn (9.9% margin), BEHL is a diversified conglomerate with focus on gas business, brewery operations and sewage and water treatment services. The current market cap of the company is €5.7bn, trading at 0.8x the revenues and 8.2x the EBITDA.
EEW, the German incineration market leader
EEW (the “Venture-backed company” or “VBC”) is a leading Germany-based energy-from-waste company with an approx. market share of 17% of the German waste market. Specifically, the VBC engages in the production of electricity, district heat and process steam, with activities in Luxembourg and the Netherlands. It generates trailing revenues in excess of €540m, 60% of which derived by collecting waste from municipalities and businesses across Europe, with the remaining 40% coming from energy sales (including electricity and steam) and trailing EBITDA of €190m (35.3% margin). EEW currently operates a total of 18 waste incineration plants, with volume of 4.4m tones, at a 95% utilization rate.
The company plays a pivotal role in the local energy infrastructure, producing in total 6 TWh of energy: 50% of the waste volume is supplied by local utilities under long term contracts, while another 30% is represented by waste from commercial and industrial users, with pricing renewed on a yearly basis. In 2015, EEW reported unaudited net profit after tax and extraordinary items of €65.6m, and consolidated net assets of €452m.
THE TRANSACTION’S UNDERLYING FRAMEWORK
EQT’s development contribution to EEW
Back in 2013, EQT’s rationale to take over EEW was mainly driven by the company’s unique combination of a leading market position in the German waste market (17%), associated with a top-10 positioning globally, a geographically diversified portfolio and a cutting-edge technology.
By leveraging on the great expertise developed from the investments made in both energy infrastructures, as in the case of Adven (a leading provider of sustainable energy infrastructure in Finland, Sweden and Estonia), Midland Cogeneration Venture (the largest natural gas-fired cogeneration plant in the US) as well as in the waste market, as in the case of NORD (leading specialist in the treatment of hazardous waste in Denmark), EQT was the ideal partner for EEW to thrive.
In line with its worldwide reputation as a PE investor focused on granting portfolio companies long-term growth via its hands-on approach, EQT prompted a change in the management of the company, paving the way for value creation opportunities that have been marking EEW’s life since then. Specifically, the strategic actions undertaken were aimed at improving the cost structure, while focusing on R&D to provide clients with increasingly environmentally friendly waste disposal solutions, in order to broaden EEW’s customer base. Along with it, EQT supported the VBC through the pursuance of attractive both organic and inorganic growth in Germany, namely the acquisition of IHKW’s power plant as well as the disposal of Muellverwertung Borsigstrasse, active in the waste recycling and in the production of heat for the district heating network.
Beijing Enterprises’ strategic rationale and deal drivers
The major driver of this strategic acquisition is Beijing Enterprises Holdings’ ambition to bolster its position in the waste management sector and gain access to the knowledge and strong expertise of EEW. This ambition is fostered by the rapidly increasing waste generation and energy consumption of the most populous country in the world. According to research conducted by the World Bank, China’s waste generation is growing at the fastest pace among all countries worldwide and its share is expected to increase by almost 50%, reaching over 21% by 2025, compared with a current level of 15%. In addition to that, studies have showed a strong relation between income level and waste generation and consequently the increase may be even bigger than anticipated if the economy of the rising dragon continues to expand at the same pace.
Nowadays, renewable power represents a very small portion of the energy sector in China. However, for a number of reasons among which the government’s commitment to reduce carbon emissions, the intolerable pollution of big Chinese cities, the climate talks in Paris and energy security concerns, China’s National Development and Reform Commission has decided to undertake a series of reforms in the sector and prioritize green energy sources.
Consequently, companies producing renewable energy will benefit enormously from government initiatives. A good example of the magnitude of these policies is NDRC’s target for biomass energy capacity of 30 GW, to be reached by 2020 and policy of guaranteeing some producers of renewable energy higher, predetermined purchase prices of their output.
Figure 2 – Beijing Enterprises’ EV breakdown by business segments (%) (Source: BSPE’s estimates)
Another important driver of the deal are the potential synergies that can be achieved by applying EEW’s technologies in the energy and steam generation processes of the third biggest beer manufacturer in China, Yanjing Beer, owned by Beijing Enterprises. Energy costs amount for up to 10% of total cost of beer production and even a small improvement in its energy efficiency could lead to remarkable boost in profitability.
Beijing Enterprises’ acquisition of EEW
Following the clearance of the deal by the German Foreign Trade and Payments Ordinance, Beijing Enterprises Holdings, advised by Lazard and UBS, will acquire via dedicated SpVs a 100% stake in EEW, which was instead advised by Morgan Stanley. The Enterprise Value and the Equity Value of the transaction are, respectively, €1.8bn and €1.4bn, implying an EV/Sales multiples of 3.3x, an EV/EBITDA multiple of 9.4x and a P/E multiple of approx. 22.0x, which appear in line with the ones paid by Cheung Kong Group, back in 2013, to acquire AVR, an energy-from-waste company in the Netherlands, at 3.7x EV/Sales and 9.1x EV/EBITDA.
Table 1 – Details of the EEW transaction, compared with the AVR transaction (Source: Company data, Reuters)
The transaction will be mainly debt funded, having BEHL secured a €2.5bn bridge facility to finance the acquisition via an SpV and conditioned on a full recourse clause granted by the holding company. Accordingly, Moody’s has estimated the bidder’s adjusted debt to rise by approx. 36%, reaching a ratio on the EBITDA around 4.5x-4.8x, compared to the pre-acquisition 3.9x. As a consequence, the rating agency has placed the bidder’s Aa3 issuer rating on review for downgrading, reflecting the concerns over the realization of synergies arising from the acquisition, as well as BEHL’s limited track record in managing energy-from-waste business overseas, exhibiting different regulatory frameworks as well as business dynamics from China’s.
Originally, EQT acquired a 51% stake in EEW in March 2013, and developed the business in partnership with E.ON, to then commit to purchase the remaining 49% stake in April 2015. Both the deal considerations were not disclosed.
Sources: Business Wire, Mergermarket, Thomson Reuters, EQT website, Wall Street Journal, Moody’s Investors Service, Beijing Enterprises Holdings website, Deutsche Börse Group, EEW website, World Bank, Merics