Warburg Pincus in China

Below is from the Financial Times and shows how regulatory matters can mess up investment returns. Note the structure of using convertible bonds as the investment vehicle. We will discuss more.

Warburg Pincus bales out of Huiyuan Juice

By Sundeep Tucker in Hong Kong

Published: June 8 2009 23:42 | Last updated: June 9 2009 06:22

Warburg Pincus, the US private equity fund, has abandoned its investment inChina Huiyuan Juice, becoming the first major shareholder to pull out of the company following the collapse of Coca-Cola’s $2.4bn takeover offer.

Warburg Pincus had declined to exercise an option to swap its convertible bonds for a 7 per cent equity stake in China’s leading juice maker, people familiar with the matter said.

Huiyuan shares in Hong Kong fell as much as 10.3 per cent on Tuesday in reaction to the news.

Warburg Pincus and France’s Danone made cornerstone investments in Huiyuan months ahead of its Hong Kong listing in February 2007. Each stood to collect lucrative returns had Coke’s bid succeeded.

Warburg Pincus had pulled out of its Huiyuan investment through Royal Bank of Scotland, to whom it had loaned its convertible bonds in 2007, people familiar with the matter said. They added that an option held by Warburg Pincus to re-acquire the bonds and convert them into equity had expired in late May. RBS has since sold the holding into the market.

China’s antitrust authorities controversially blocked the Coke takeover in March citing competition concerns, although people familiar with the matter told the Financial Times that Beijing was concerned about losing a leading brand to a foreign group.

The high-profile failure of the deal has triggered speculation over Huiyuan’s future ownership and whether its leading shareholders would attempt to seek a new buyer for the company or divest holdings.

Zhu Xinli, Huiyuan’s founder and chairman, owns 36 per cent of the company, while Danone has 23 per cent.

Global private equity funds recently held talks about a possible minority investment in Huiyuan, although Mr Zhu and Danone are only expected to consider offloading their stakes if they receive a lucrative offer.

Coke offered HK$12.20 a share in cash, almost treble Huiyuan’s last closing price ahead of the announcement of the proposed deal in September last year.

Huiyuan’s shares fell to HK$4.33 in the days after the rejection, but have climbed in recent weeks to HK$6.50, amid hopes of a fresh buyer.

Warburg Pincus and RBS declined to comment.