M&A

Drug deal gone wrong

China’s richest man is taking a state-owned firm to court

He’s not happy: Chen Fashu

Hollywood films rarely show characters lighting up cigarettes nowadays. Not so for Hong Kong movie Love in the Puff, with an entire plot built around smoking. A hit across the border in mainland China, the film centres on a city ban on smoking in offices. Of course, the protagonists then meet as they go outside for their daily puff. The dubious message, it seems? To find your soulmate in a crowded metropolis, be ready to light up.

Controversy and tobacco remain persistent bedfellows in China, the world’s biggest producer and consumer of cigarettes. Around 350 million Chinese smoke, and while the government periodically campaigns to discourage the nicotine habit, cynics normally describe the measures as half-hearted.

That’s because the industry pays around $119 billion in tax every year.

But there has been a tobacco controversy of a different sort recently with one of China’s richest men suing a government-owned cigarette firm, after a M&A deal went sour.

The tycoon is Chen Fashu, of whom regular readers of WiC will be familiar (see issue 16 for a profile). Known as China’s Warren Buffett, Forbes ranked Chen the country’s 12th richest in 2010 with a net worth of Rmb27.4 billion ($4.3 billion). He made his fortune in gold mining, thanks to his large stake in Zijin Mining, but his firm New Huadu also owns shopping malls and 7% of Tsingtao, the brewer.

As part of his diversification strategy Chen also attempted to buy into Yunnan Baiyao – and it is this acquisition that has proven so troublesome. Pharma firm Baiyao makes a range of products, including a leading traditional medicine said to staunch bleeding. One of its major shareholders is Yunnan Hongta, which decided to sell its stake in the company to refocus on its core business of making cigarettes. Accordingly it signed an agreement to sell its 12.32% of Baiyao to Chen for Rmb2.2 billion in January 2009.

As CBN points out, the share transfer agreement had a section that dealt with the potential risks. The main danger was that Hongta would fail to get approval to sell its stake from the China National Tobacco Corporation (CNTC), the commercial adjunct of the industry regulator, the State Tobacco Monopoly Bureau.

The risk was real: for almost two years Hongta failed to get the approval. This was strange. Chen’s lawyers claim that other transactions involving the sale of state assets have an average approval period of no more than 99 days.

No matter: as a cigarette-maker, Hongta still needed CNTC permission to sell its non-tobacco assets. And when Chen made a written complaint to Hongta last May, he received this reply: “We have actively reported to the superior competent institutions for relevant approval, and till now have not received any written approval; the share transfer could be approved or rejected, and if there is any change or progress, we will keep you informed.”

Pretty non-committal. But Chen then opted for more decisive action last December, taking the state-owned firm to court. He filed his complaint against Hongta with the Supreme People’s Court of Yunnan.

That got their attention. In January Hongta informed Chen that CNTC had rejected the deal and offered to refund his Rmb2.2 billion. Their reason for scuppering the transaction: the value of the stake had risen by Rmb900 million and as a government-owned firm Hongta could not take a “loss” on the sale of a state asset (by selling at the initially agreed price).

A furious Chen has demanded compensation.

The case, of course, offers yet another example of the difficulties of doing business in China, where even a billionaire local businessmen can get caught out by the legal grey areas. And as things stand, Chen’s prospects don’t look great. On April 27 he petitioned the State Tobacco Monopoly Bureau to overturn CNTC’s decision. But it claimed not to have the administrative authority to take the action that he is demanding.


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