SINGAPORE (NOV 12): China’s biggest and most profitable conglomerate CITIC and private-equity firm KKR are making a joint takeover offer for all the shares of United Envirotech they do not already own. Through their equally-owned special purpose vehicle CKM (Cayman) Co, CITIC Environment and KKR China Water Investment Holdings will offer $1.65 a share for the wastewater treatment firm, valuing it at $1.9 billion on a fully diluted basis, according to an announcement on Nov 12.
The offer price is a 12.6% premium over United Envirotech’s last transacted share price of $1.465 on Nov 6, the last full trading day before the counter was halted. Shares of United Envirotech received a trading caution about two weeks ago because of a substantial increase in its share price.
“Our investment in United Envirotech provides us a strong platform to develop in China’s water and wastewater treatment sector. Environmental protection is a top priority for China, and CITIC foresees not only commercial opportunity but also societal benefit from this investment,” said Wang Jiong, vice chairman and president of CITIC and chairman of CITIC Environment Protection in a statement on Nov 12. CITIC Environment Protection invests, operates and manages projects in the environmental protection sector. It is a wholly-owned subsidiary of Hong-Kong listed CITIC Limited which is 78% owned by CITIC Group Corp in Beijing. CITIC Limited has a market cap of HKD336 billion.
The offer is conditional upon CITIC getting approval from Chinese government authorities. Following that, the joint venture would make a formal offer with an aim at completing the acquisition by the second quarter of next year.
To be sure, KKR is not new to investing in United Envirotech. The private equity firm started investing in the company in 2011 through the subscription of US$113.8 million in convertible bonds. Last year, it made a $40 million equity investment into the company.
In the latest deal, KKR, which currently owns about a 29.7% stake in United Envirotech, has already provided “irrevocable undertakings” to sell its shares to CKM. Apart from its share stake, KKR owns convertible bonds of United Envirotech, which if converted into shares, would amount to about 10.2% of the enlarged total number of United Envirotech shares.
In addition to the proposed acquisition, both CITIC and KKR will subscribe for new shares to be placed out by United Envirotech at $1.65 each. The private placement will comprise 30.3 million, 60.6 million or 90.9 million shares. The actual number will be determined by CKM. The transaction allows CITIC to become the controlling shareholder of United Envirotech through the holding of a majority interest in the consortium. KKR will be the second-largest shareholder of United Envirotech after the completion of the acquisition. Lin Yucheng, United Envirotech’s founder, chairman and CEO, who owns about 7.5% of the company, and several other substantial shareholders have agreed to accept the takeover offer.
United Envirotech to remain listed
CITIC and KKR intend to keep United Envirotech listed after the takeover. The group will also retain its existing business and management. The offerors say they intend for United Envirotech to become the flagship for CITIC in the water and wastewater treatment business as it develops its business in the environmental protection sector. United Envirotech’s clients include state-owned companies Sinopec, China National Petroleum and China National Offshore Oil Corp.
J.P. Morgan remains positive on the China water sector ahead of the state council’s expected announcement of its RMB2 trillion ($421 billion) anti-water pollution plan in 4Q2014. “Beneficiaries will likely be sewage/sludge treatment operators and industrial wastewater treatment plays,” says Elaine Wu, analyst at J.P.Morgan.
For 2QFY2015 ended September, United Envirotech recorded 144.9% y-o-y increase in earnings to $18 million on the back of 102.8% y-o-y increase in revenue to $105.4 million. Revenue from its recurring water treatment business segment for the quarter grew 63% y-o-y from $15.5 million to $25.3 million while revenue from engineering, procurement and construction (EPC) contracts jumped by 104.7% y-o-y to $74.7 million.
Year to date, United Envirotech’s stock is up 67.4%. At current levels, the stock is trading at 26.9 times FY2014 earnings and the company has a market cap of $1.38 billion. The stock has an indicated dividend yield of 0.19%. OCBC has a “hold” call on the stock while Maybank Kim Eng has a “buy” call with a price target of $1.93.