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Air Products' Chinese bid deserves to fly
February 22, 2017 / 9:08 AM / 10 months ago

Air Products' Chinese bid deserves to fly

HONG KONG (Reuters Breakingviews) - Air Products’ bid for Yingde Gases deserves to fly. The U.S. giant has been stuck in a bizarre battle over the Hong Kong-listed company, which it wants to buy for up to $2.8 billion including debt. The target’s board finally seems to be seeing sense. Bravo: the suitor is ready to pay a fair EBITDA multiple and a fat premium for shareholders.

An employee works at a steel factory in Dalian, Liaoning Province, China, June 27, 2016. Picture taken June 27, 2016. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. EDITORIAL USE ONLY. CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA. - RTX2J5R3

Air Products turned up while Yingde was in a mess. A majority of the board had relieved Chairman and Chief Executive Sun Zhongguo, and Chief Operating Officer Trevor Strutt, from their executive roles. Both were founders of the group and significant shareholders, but they were voted out at a November board meeting in their absence. The duo has since been fighting to be reinstated.

The majority board initially tried to deflect Air Products with a shareholder-unfriendly private placement, and then by demanding the Americans sign a standstill agreement, stopping them buying shares. To make things stranger, Yingde later said it was working with Air Products on due diligence - which was contradicted by the U.S. company.

This seemed like another instance of Hong Kong’s flaky governance hurting minority shareholders. But things are looking up. On Tuesday, CEO He Yuanping offered to step down after just three months. OriginWater, where He is chief financial officer, says it will not try to buy more of Yingde. And the latter will open a data room to Air Products and other suitors, and drop its standstill demands. It will also not issue new shares without fresh approval from shareholders.

That is good news for investors. Air Products’ timing may be opportunistic but it has put a decent deal on the table. A maximum price of HK$6.0 a share, subject to due diligence, represents a 109 percent premium to Yingde’s undisturbed stock price.

The enterprise value translates to 6.8 times trailing EBITDA, according to Yingde. That seems fair too: South Korea’s OCI Materials was sold at 6.4 times last year, Eikon data shows. And OCI boasts improving earnings and a customer group including Samsung Electronics, while the Chinese market is in a dire state amid troubles at big gas users, such as steel firms. With that in mind, it’s hard to see Yingde fetching a more inflated price.


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