Potential Bidding War – Upside TBD
CPMC, a Chinese manufacturer of food and beverage cans, has recently received a takeover bid from a state-backed consortium at HK$6.87 per share (2% spread currently). Shortly thereafter, a large CPMC equity holder, also a government-backed entity, announced its intention to submit a separate buyout offer. The bidders together with CPMC are the three largest players in China’s food/beverage packing industry and the eventual acquirer would become a market leader by far. While it is puzzling that two separate state-sponsored entities are vying for control of the same company, an overbid seems quite likely.
Below is a brief timeline with recent developments:
- June 2: CPMC’s largest shareholder China Foods (owns 30%) announced that it had entered into preliminary discussions with “a potential buyer” regarding the sale of its stake in CPMC. Both parties signed a non-binding memorandum of understanding.
- December 6: A buyer consortium led by Chinese steel giant Baowu announced intentions to acquire CMPC at HK$6.87/share. The launch of the offer is subject to several regulatory ‘pre-conditions’. Baowu owns Baosteel Packaging which is a close peer of CMPC and holds an 18% share in China’s two-piece can market (vs 17% for CPMC). The tender is pre-conditioned on various Chinese regulatory approvals and includes a 50% minimum participation threshold. China Foods entered into the Irrevocable Undertaking agreeing to sell its stake to Baowu.
- December 12: Shortly threafter, CPMC’s peer and major shareholder, ORG Technology (24% stake), revealed that it is interested in making a separate buyout offer for the company. No further details have been disclosed. ORG Technology is the largest player in China’s two-piece can industry, with a 22% market share. ORG boasts several state-owned enterprise shareholders on its register.
- December 22: CPMC hired a financial advisor to evaluate Baowu’s acquisition proposal.
After the announcement by ORG Technology, the spread to Baowu’s offer has narrowed from high-single-digits to around 2% as the market is expecting an overbid. There is a clear strategic angle for both bidders – the eventual acquirer of CPMC would become an undisputed leader in the Chinese two-piece can market. Given overlapping businesses, the merger would likely lead to substantial synergies for either acquirer.
It seems that the outcome here might hinge on CPMC’s third-largest equity holder, Zhang Wei (21% stake), who has yet to voice an opinion. Any acquisition attempt would need support from Zhang Wei to gather a sufficient amount of votes. I would expect Zhang Wei to side with the highest bidder – his stake in CPMC was accumulated back in 2020 at prices 30%-40% below the current levels and just after the bid by Baowu, Zhang Wei reduced ownership from 22% to 21% (see here, here and here) at HK$6.32-HK$6.56 prices. This marks the first time he has reduced investment in CPMC.
Superficially looking, CPMC is trading in line with peer ORG Technology – 12.9x vs 11.7x TTM EBIT respectively. But that is before any cost synergies for the acquirer. Assuming ORG Technology or Baosteel Packaging could eliminate 50% of CPMC’s administrative expenses, the multiple would be reduced to 10x. I have not been able to access the financials for Baosteel Packaging but FT data suggests that the company is trading at 26x TTM EBIT.
Estimating the potential downside in case no transaction materializes is not straightforward. CPMC shares have gradually climbed upwards since the announcement that China Food is looking to sell its stake in the company – from HK$4 back in June to HK$6.5 before the Baowu’s offer announcement. I am tempted to think that in a no-deal scenario, CPMC shares would settle in the HK$6-6.5 range, but that is more of a guess estimate rather than anything else. I do not think regulatory approvals would pose any issues as both bidders are backed by government-owned enterprises.
it looks like one of the potential bidders, ORG Technology (owns 24% of CPMC), is about to make an offer for CPMC. The buyer recently announced the formation of a limited partnership with another party. This partnership will acquire equity interests in one of ORG’s subsidiaries, with proceeds expected to be used for the purpose of implementing the acquisition offer for CPMC:
CPMC share price has went up a bit since the announcement and now trades just above the HK$6.87/share bid made by the competing buyer consortium led by Baowu.
https://staticpacific.blob.core.windows.net/press-releases-attachments/1632705/HKEX-EPS_20240206_11064466_0.PDF
Another confirmation that ORG technology (owns 24% of CPMC) is getting ready to make an offer for CPMC. The target company announced The company announced a change in its Independent Board Committee due to a potential conflict of interest. Two IBC members, Mr. Zhou Yuan and Mr. Shen Tao, resigned due to their ties to ORG.
CPMC trades slightly above HK$6.87/share bid made by a competing consortium led by Baowu.
https://www1.hkexnews.hk/listedco/listconews/sehk/2024/0312/2024031200682.pdf
Baowu received approval from the National Development and Reform Commission (NDRC) of China for their proposed offer for CPMC. This approval constitutes one of several preconditions that need to be met. Other approvals, including antitrust clearance, are still pending.
https://www1.hkexnews.hk/listedco/listconews/sehk/2024/0415/2024041501077.pdf
Another regulatory hurdle appears to have been overcome as Baowu has secured antitrust clearance from the Germany Federal Cartel Office. However, further approvals, including from the Vietnam Competition Commission, are still pending.
https://www1.hkexnews.hk/listedco/listconews/sehk/2024/0426/2024042603631.pdf
https://www1.hkexnews.hk/listedco/listconews/sehk/2024/0516/2024051600843.pdf
What price is this at? I’m not too familiar with interpreting this.
Baowu has secured two additional approvals for its proposed takeover. These approvals come from China’s State Administration of Foreign Exchange (SAFE) and the Vietnam Competition Commission. While this is progress, the crucial approval from China’s State Administration for Market Regulation (SAMR) is still pending.
https://www1.hkexnews.hk/listedco/listconews/sehk/2024/0516/2024051600843.pdf
ORG has finally submitted the bid for CPMC. The offer came at HK$7.21/share, or just 5% above the previous bid from Baowu. ORG has secured backing from 46% of shareholders. This includes an irrevocable commitment from major shareholder Zhang Wei, who holds a 21% stake and had not previously supported Baowu. The spread to the latest bid is a narrow 1.5%.
The deal stipulates a minimum acceptance condition of 50%, identical to Baowu’s terms. Although ORG is likely to secure the necessary votes to meet this threshold, reaching the 90% threshold required for a squeeze-out remains uncertain. This uncertainty primarily stems from China Foods, which controls 29% of the shares and is currently bound by a support agreement with Baowu. This agreement only terminates if Baowu withdraws or their offer lapses, with the long-stop date set for July 18. Should Baowu not increase their offer by this date, it is anticipated that China Foods will shift their support to ORG, as they have shown a willingness to sell at these levels. Following this, ORG is expected to achieve the 90% threshold needed to squeeze out the remaining minority shareholders.
It remains to be seen whether Baowu will counter ORG’s new offer. However, any further increases in the bid are expected to be minimal, especially since ORG’s slight increase swiftly garnered support from nearly half of the shareholders.
https://www1.hkexnews.hk/listedco/listconews/sehk/2024/0607/2024060701658.pdf
Baowu has now secured all required pre-conditions. The Offeror will dispatch the offer document on or around July 22. The spread to the HK$7.21/share offer stands at just below 3%.
Offer document dispatch deadline has been pushed back to July 30.
Baowu has dispatched its offer of HK$6.87 and China Foods has maintained its support to Baowu.
What will ORG do in response?
ORG’s bid is higher at HK$7.21, but squeeze-out can be blocked by China Foods’ 29% stake.
Baowu’s squeeze-out can be blocked by Zhang Wei’s 21% stake.
ORG has secured an irrevocable commitment from Zhang Wei, who owns 21%, while China Foods, owning 29%, has entered into an irrevocable commitment with Baowu.
Neither bidder can currently achieve squeeze-out, but both have minimum acceptance thresholds at “only” 50%. ORG, with a 5% higher bid price, has better odds of reaching the minimum threshold. Or this could end in a stalemate. Either way, upside from current levels seems too small.
It will take more time for ORG to secured all of the preconditions.
ORG may need to raise bid price for the wait and to keep shareholders from tendering to Baowu.
By Aug 29, ORG has secured Chinese and New Zealand anti-trust clearances, as well as financing.
A bidding war is a real possibility now.
CPMC is trading just 0.5% below ORG’s higher bid of HK$7.21.
The potential bidding war thesis for 0906.HK seems to have fallen apart. Baowu failed to meet the 50% acceptance condition for its HK$6.87/share bid, and rather than raising the price or extending the offer, they’ve just let it lapse. It appears that Baowu is no longer interested in the buyout. As a result, the tendered shares will be returned to shareholders. ORG now remains the sole bidder, with the spread to its HK$7.21/share offer currently sitting at 3%.
Not sure whether significantly more shareholders will tender to ORG’s HK$7.21 offer for just a 5% bump from the Baowu offer.
ORG’s bid has already garnered support from 46% of CPMC’s shareholders. Additionally, China Foods, which holds a 29% stake, is no longer tied to a support agreement for Baowu’s offer and is now expected to back ORG. With this alignment, the bid is highly likely to meet the 50% minimum acceptance threshold.
ORG is still working on pre-conditions (a) and (b).
After meeting the pre-conditions, ORG will dispatch offer documents and it will take another about 1-1.5 months to close the deal?
(a) (1) the filing, registration or approval, as applicable, with or by (i) NDRC, (ii) MOFCOM
and (iii) SAFE in relation to the Huarui Offer having been completed and/or obtained
(where applicable) pursuant to the provisions of relevant laws and regulations in the
PRC; and (2) the Shenzhen Stock Exchange having expressed that it has no further
comment on the responses to its enquiry in respect of the material asset restructuring
report (which will be published by Huarui Parent on the Shenzhen Stock Exchange
pursuant to the MAR Measures, as the Huarui Offer will constitute a MAR of Huarui
Parent, whose shares are listed on the Shenzhen Stock Exchange);
(b) approval by the shareholders of Huarui Parent of the Huarui Offer and the transactions
contemplated under the Huarui Offer which is conditional on the approval by the
shareholders of Huarui Parent of the loans and guarantee proposed for the financing of
the Huarui Offer at the general meeting of Huarui Parent as required under the laws,
regulations and regulatory requirements of the CSRC and the Shenzhen Stock Exchange;
and