Digital China buyout cleared

Regulators had approved the takeover of computer distributor and information technology services company Digital China by its management and a group of venture capital firms, said Andy Yan, the managing director of SAIF Partners, one of the venture capitalists involved in the deal.

01 November 2007
Published by South China Morning Post

Mr Yan said the State-owned Assets Supervision and Administration Commission of the State Council had given its go-ahead for the deal, the largest management buyout in the mainland IT sector.
 
Digital China chief executive Guo Wei, together with SAIF Partners, Hony Capital and IDG, took 42.94 per cent of the company from Legend Holdings and General Atlantic Partners, a US venture capital firm.

The selling price was HK$3.50 per share, taking the total consideration to HK$1.318 billion.

The deal was initiated on August 1. With the deal’s completion, Mr Guo controls about 10.19 per cent of Digital China. SAIF Partners, a venture capital arm of Japan’s Softbank, is the largest shareholder with 20.15 per cent. The second-largest is Legend, which holds 17.83 per cent.

Digital China’s shares closed at HK$5.08 yesterday, giving Mr Guo and his partners a more than 45 per cent gain. The shares have gained 100 per cent this year, outperforming a 57 per cent rise in the Hang Seng Index.

Legend, controlled by the Chinese Academy of Sciences, requires government approval for its asset sales. Management buyouts are rarely approved in the mainland.

The latest endorsement cleared the final obstacle to the deal, signalling a change of government attitude.

“At the end of last year, the Chinese government made several changes that were highly beneficial to management buyouts of Chinese companies,” said David Eich, a lawyer with Kirkland & Ellis.

“One of them is a policy decision - state-owned enterprises are encouraged to ‘equitise’ their management, so that their interests are aligned with shareholders,” said Mr Eich.

“Another is that the limit on foreign exchange held by individuals has more than doubled - making it easier for management to access cross-border investment.”

Legend has many subsidiaries, including venture capital firms Hony Capital and Legend Capital, and property development arm Raycom Real Estate.

“It is common for a subsidiary in a large corporate structure to feel like an orphan. If it can go independent, it might have more resources to grow,” said Mr Eich.

Digital China’s management said in July it planned to increase investment in IT services. The company is competing against other mainland firms, big international rivals and major Hong Kong companies. It expects a 10 to 15 per cent profit growth in the IT services sector next year.