China Consumer

Too spicy for CDH

Ownership dispute at Sichuan restaurant chain

Zhang Lan w

Not ready to wok away: Zhang

When it comes to Chinese firms falling out with their investors, few cases have been as acrimonious as Yahoo’s spat with Alibaba.

“Why do we need a financial investor with no business synergy or technology?” David Wei, former chief executive at,complained to Bloomberg at the height of the row. Relations were frosty for quite some time, although a peace was later brokered (Yahoo will finally exit – with a big profit – after Alibaba’s much-anticipated IPO).

Relations between another Chinese company and its investors have also soured recently.

In January, Chinese media reported that the anti-monopoly Bureau of the Ministry of Commerce (MOFCOM) had approved plans by La Dolce Vita Fine Dining Group – an entity owned by European private equity fund CVC Capital – to acquire a majority holding in South Beauty, an upscale Sichuan restaurant chain (see WiC85).

But after the news surfaced, South Beauty chairwoman Zhang Lan hotly denied that she was selling the company that she founded in 2000. Zhang told Sina, a news portal, that she didn’t send any application into MOFCOM and had never even talked about such a deal.

“I definitely intend to make South Beauty into a world-level brand and a century-old restaurant,” Zhang is reported to have insisted. “That’s a dream I have been chasing all my life.”

So what happened? Industry insiders suspect that domestic private equity firm CDH, which paid Rmb200 million ($33 million) for a 10.5% stake in South Beauty in 2008, is the party that wanted the sale to happen, says Beijing Times.

“CVC taking over is most likely CDH’s behind-the-scene’s manoeuvre. The private equity firm has invested in South Beauty for almost six years. There is a lot of pressure to exit,” an unnamed investor told Money Weekly.

Relations between Zhang and CDH have hardly been harmonious. In 2012, Zhang said that her decision to accept CDH money was “South Beauty’s biggest mistake”.

“It has been completely pointless. CDH didn’t add anything to us,” she told Tencent Finance.

But Money Weekly reckons Zhang is now fearful about CDH selling its stake because she thinks that the buyer CVC will try to split the company up.

According to the South China Morning Post, when the PE firm invested in South Beauty, there was a contract clause dictating that if South Beauty failed to go public before the end of 2012, Zhang would have to buy back CDH’s shares for about Rmb400 million, or twice their original valuation. If she couldn‘t come up with the money, the investor was entitled to extract financial concessions.

And that’s what appears to have happened. South Beauty has tried and failed to IPO (its application was rejected by mainland regulators in 2011) and then it moved its listing plan to Hong Kong in 2012 where its hopes of raising $200 million were dashed.

After six years, CDH seems to have run out of patience.

Worse, the outlook for South Beauty looks a lot less rosy than when it first invested. As WiC has reported, higher-end restaurants are struggling as the government cuts back on banqueting. Beijing XE Flavour, which is listed on the Shenzhen Stock Exchange, is typical, reporting a Rmb82.8 million loss in the third fiscal quarter of 2013.

“For a long time, the CSRC hasn’t allowed restaurant firms to IPO. And even though regulators seem to be relaxing the rules, so far not a single restaurant firm has successfully gone public,” Li Junhua at Zhejiang Venture Capital Investment told Money Weekly.

“The truth is very likely that CDH reckons that South Beauty’s IPO is virtually hopeless. So in order to protect its own interests, they have decided to sell their stake in South Beauty to another investor,” surmises Xinhua.

© 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.