M&A

Frozen out

State shareholder cuts its stake in air-con giant

Dong-Mingzhu-w

Determined: Dong Mingzhu

In imperial China, the emperor always had to watch his back, making sure that none of his court could make a play for his throne.

In a more corporate context, the parallel risk is that a key executive becomes so indispensible that a company’s owners lose their authority. Something akin to this situation has seemed possible for several years at Gree Electric, China’s leading air-conditioning maker. The Zhuhai branch of Sasac – the asset manegement entity that holds equity stakes in the country’s state enterprises – is the biggest shareholder at the Shenzhen-listed firm, despite selling down its original stake for years. However, most of the management shots have been called by chairwoman Dong Mingzhu.

Local media says Zhuhai Sasac and Dong have been stuck in a loveless relationship in which the two have “shared the same bed but dreamed differently for 20 years”. Indeed the chairlady and the major shareholder are no longer trying to hide their differences. Zhuhai Sasac failed to oust Dong as chair in 2016 (see WiC347). Last year it failed again to rally investors behind a plan for a more generous dividend (see WiC408). Rather than handing back a large chunk of the cash – at least Rmb100 billion ($16.5 billion) – Dong steered the company towards investing in new businesses such as electric vehicles and semiconductors.

Apparently Zhuhai Sasac has finally had enough. Last week investors were stunned by a stock exchange circular advising that the Zhuhai Gree Group, which is fully owned by Zhuhai Sasac, is putting 15% of its 18.22% stake up for sale.

Gree’s major rivals in Guangdong – including Midea and TCL – were generally privatised in the past, evolving into different forms of family-run businesses over the years. This has seen former SOE managers, such as Midea’s He Xiangjian, take over from the state as the biggest shareholder, and become billionaires along the way.

Gree Electric was the odd one out in staying as an SOE (in the sense that the Zhuhai government was still the single biggest shareholder).

Dong is employed as a professional manager and her direct holding in the company is believed to be less than 1% of its shares (although her longevity at Gree implies that she has the backing of a majority of its institutional shareholders).

The sheer size of the firm – it employs 90,000 workers and has revenues of Rmb200 billion – means the number of serious suitors for the stake is relatively limited. Both Alibaba and JD.com have ruled out bids this week, although other big names such as contract manufacturer Foxconn, chipmaker Tsinghua Unigroup and even telecoms giant Huawei have been mentioned.

Fang Fenglei’s Hopu, one of China’s leading private equity firms (see WiC25), is regarded by some as the frontrunner to do the deal. Citing people close to the matter, Caixin magazine said Hopu’s proposal was attractive because of its pre-existing portfolio of investee firms in integrated circuits, AI and logistics. That could make it easier to build “an Internet of Things industry chain”, the magazine thinks, allowing Gree to diversify beyond the air-conditioner business.

How about a management buyout led by Dong herself? These are relatively rare in corporate China and all the more challenging if they involve state-owned assets, as is the case with Gree.

However, the 64 year-old Dong is well respected in her industry and hardly averse to a power struggle. She should be able to find the financial backers she needs to take control of a company that she has been running for two decades.

Such an outcome might be seen as encouraging for Chinese entrepreneurs in general, who feel they have been sidelined in recent years by government policies that favour the SOEs.

But then again, officialdom could still choose to curtail a bid with Dong’s name on it, simply because of the long history of antagonism.

“Zhuhai’s government and the parent company disapprove of Dong’s ‘aggressive’ management style,” Caixin also noted, again citing insiders.


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