Hawking assets

Hawker Beechcraft

In 2009, Chinese entrepreneur Cheng Shenzhong acquired Superior Air Parts, a small manufacturer of aviation components in Texas on the verge of bankruptcy.

The $7 million deal was mostly financed by loan sharks, and more than half the money was spent on legal fees, reports NetEase Finance.

But although the deal was a tiny one, the acquisition stirred Cheng’s business blood. On the night the buyout was approved, he was so excited that he couldn’t sleep, he later told media.

So Cheng’s current, much larger, acquisition in the United States must be causing some sleepless nights too, with his company Beijing Superior Aviation in exclusive talks to buy bankrupt aircraft manufacturer Hawker Beechcraft.

This time the purchase price is $1.79 billion.

The deal is raising eyebrows. For a start, little-known Superior Aviation has come from nowhere to bid for an established (albeit financially distressed) aviation brand.

Hawker Beechcraft has been making aircraft since the 1920s and currently produces business, training and military models. But the company went bankrupt in May as $2.5 billion worth of debt became too much to bear in tough credit conditions, and amid poor market demand.

By constrast, Superior Aviation is just two years old, and is one of a number of aviation outfits owned by Cheng, who has only been in the industry for five years.

He has made a name for himself in that short period, primarily as the “Helicopter King” or China’s major private manufacturer of helicopters.

Superior hopes that this latest deal will help it to secure the technology to make business jets. “There could be lots of opportunities for us if the government opens up the private jet sector,” a company spokesman told Reuters. The news agency also reports that Brazil’s Embraer is preparing for a new push in the same marketplace, having recently received approval to build jets in the mainland. Embraer is predicting that China will need to buy 635 business jets worth $21 billion over the next decade.

Superior’s ownership structure looks like being both a blessing and a curse for the Hawker deal. It is 40% owned by Beijing Yizhuang International Investment Development, a government-owned investment platform. And it is this substantial government stake that is helping to finance the bid. “With a background of 40% state-owned equity, it does not seem much of a problem to receive government support,” is how NetEase Finance puts it.

On the other hand, there is anxiety that the state shareholding will mean that national security concerns could be brought up to block the deal in the US, where it has to be cleared by the Committee on Foreign Investment.

“It’s aircraft. It’s China. I have no doubt that it will be scrutinised very closely,” Timothy J Keeler, a lawyer at Mayer Brown, told the Wall Street Journal. Keeley also told the newspaper that Washington may require proof that strong controls are in place to prevent sensitive technology being exported to the new Chinese owners.

This could be why Superior has decided not to bid for Hawker’s defence business, which produces light attack aircraft in the US and overseas. This unit could then be sold separately, which would result in Superior being refunded as much as $400 million.

The final offer made by Superior will also be subject to an auction process handled by a bankruptcy court and there is speculation that other bidders may yet appear on the scene. Reuters reports one possibility is US aviation conglomerate, Textron.

Superior has been trying to sound nonchalant about the potential competition. When a company spokesman was asked by Reuters about the threat of other companies coming in with a larger bid, he replied that money is not the biggest issue. Probably wisely, the executive admitted that he thought that regulatory approvals “could be a bigger issue for us,” according to the newswire.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.