KKR invests $114 mln in United Envirotech convertible bonds: Update 2

Kohlberg Kravis Roberts (KKR.N) has agreed to invest US$113.8 million ($136.7 million)  in convertible bonds of Singapore-listed Chinese water treatment firm, United Envirotech (UEL) (UNIT.SI), as the U.S. private equity fund seeks to tap the mainland’s fast-growing water treatment industry.

KKR’s investment comes as global funds hunt for buyout opportunities among so-called “China orphan” stocks, mainland firms listed overseas whose stocks underperform due to indifference among investors and which have been hammered by recent accountancy and governance scandals.

 

UEL’s shares jumped as much as 15.7% on the news, outpacing a 0.9% rise in the benchmark index <.FTSTI>. The stock is still down about 10% for 2011.

 

If the bond is fully converted, KKR will be UEL’s largest shareholder with a 38.4% stake on a fully diluted basis. The bond, which offers a 2.5% coupon, can be converted into equity shares at $0.45 each at the end of a five-year tenure, representing a 29% premium to Friday’s close.

 

“The China water sector’s macro outlook is still positive, with the government still focusing on environmental protection as evident from the 12th five-year plan,” said Selena Leong, an investment analyst at DMG & Partners. “Thus, it is not a surprise that KKR would want to invest in the sector,” she added.

 

UEL, with a market value of about US$140 million, provides engineering services using membrane technology to municipal and industrial waste-water treatment projects in China. It also operates a portfolio of waste-water treatment plants across China.

 

UEL’s customer base includes petrochemical giants like China Petrochemical Corporation (600028.SS), China National Petroleum Corp, China National Offshore Oil Corp and Sembcorp Industries (SCIL.SI) in Singapore.

 

China provides huge potential for growth in water-related business because per capita water resources in China are less than one-third of the world’s average, according to the latest World Bank statistics, the companies said in a joint statement.

 

“In addition to bringing in capital to support our growth, KKR’s global network, strong operational capabilities and extensive local knowledge will add significant value to our future development,” Lin Yucheng, chairman and CEO of UEL, said in the statement.

ORPHAN INVESTMENTS

KKR’s investment in UEL is the latest in series of private equity investments in China orphan stocks in the United States and Singapore. KKR previously considered investing in Singapore-listed Oceanus (OCGL.SI), banking sources said.   

 

Blackstone Group (BX.N) has invested in China Animal Healthcare (CAHC.SI) through a convertible bond and the company has held talks with investment banks about delisting from Singapore to relist in Hong Kong.

 

Other deals in this trend include Primavera’s privatisation of U.S.-listed Chemspec (CPC.N), PAG Asia Capital’s planned buyout of Funtalk China Holdings (FTLK.O), Bain Capital Partners’ bid to buy China Fire & Security Group Inc (CFSG.O) for US$265.5 million, and TPG Capital planned take over China insurance firm CNInsure (CISG.O) with its CEO.

 

Harbin Electric (HRBN.O) recently agreed to be taken private by its CEO in a deal backed by Hong Kong-based hybrid fund Abax Global Capital.

 

Morgan Stanley Asia Private Equity recently took a direct bet against hedge fund short-sellers when it invested US$50 million in Nasdaq-listed Yongye International (YONG.O), sending the shares up.  

 

Such buyouts, known in banking circles as "take China privates," involve delisting companies from the United States or Singapore and eventually relisting them in Hong Kong or China to increase their market values.

 

These deals are pushing ahead even as a series of accountancy and governance scandals that have tarnished the reputation of China companies listed overseas in recent months have hammered stock values.

 

Stirling Coleman Capital is the arranger for the UEL transaction and Credit Suisse (Singapore) is the adviser for KKR.