Let there be light

KKR takes control of NVC’s China business

Wu Changjiang w

Wu: won struggle with Wang

When private equity firm KKR announced one of its largest ever investments in China this month, it shone new light on an incandescent tale in more ways than one.

The basic terms comprise an agreement to pay Rmb5.5 billion ($778.98 million) to set up a strategic partnership with Hong Kong-listed NVC Lighting and acquire a 70% stake in NVC China, its core China operation.

On the surface, this appears to be a straightforward deal, reinforcing KKR’s commitment to China and a promising sector – despite escalating Sino-US trade tensions.

NVC conducted a strategic review in May after one of its shareholders, LED bulb and home appliances maker Elec-Tech International failed to conclude a Rmb4 billion offer of its own for the group’s Chinese business. KKR’s deal should close in the fourth quarter.

The acquisition gives KKR access to an industry that the Chinese government is prioritising in its efforts to reduce the country’s carbon footprint. Lighting accounts for about a fifth of global electricity consumption and one of the best ways to keep power demand in check (particularly in the face of new construction and growing floor space) is to switch from incandescent bulbs to LED ones. They use 75% less electricity.

KKR also looks like it has got something of a bargain. It will pay a 100% premium relative to the target’s HK$3 billion ($382 million) market capitalisation, but NVC has been trading at distressed levels for several years (its HK$0.70 pre-deal share price is two thirds lower than its HK$2.10 listing price in 2010).

In 2018, NVC reported a net loss of Rmb336.4 million, according to S&P Global Market Intelligence figures. Its failed acquirer, Shenzhen-listed Elec-Tech, has been lossmaking for the past three financial years as well; again according to S&P.

What links those two companies and their recent history is a mutual chairman and shareholder, Wang Donglei. This is a man whose name should be familiar to WiC’s longer-term readers.

As we reported in WiC157 and 249, NVC has been rocked by the repeat efforts of its disgraced founder, Wu Changjiang, to regain control of the company he established in 1998. The first and second time that the board voted Wu out over the space of a seven-year period, he was able to rally NVC’s dealership network in his support and return to the helm.

But the final time he had to contend with Wang, the man he initially considered his saviour (in December 2012, Wang bought a chunk of Wu’s shares in return for the chairmanship and an agreement to reinstate Wu as CEO).

However, just over a year later Wang accused Wu of selling NVC trademarks to three of his family members. After Wu was ousted from the board for a third time in August 2014, he holed up in the company’s Chongqing factory before finally having to concede defeat. In 2016, he was sentenced to 14 years in prison for financial irregularities, only for the punishment to be revoked in 2018. A retrial began last month.

Unsurprisingly there is no love lost between the two men. Huxiu.com quotes Wu as describing Wang as “rough” and someone he “looks down on”. Wang’s verdict on Wu: “the darker side of human nature is very apparent”.

KKR’s acquisition may draw a line under NVC’s internal power struggle and help to refocus its attention on its product line. The news has also had a positive impact on Elec-Tech’s share price – also controlled by Wang – which has risen 12% since news of the deal broke.

Investors may be guessing that NVC will source from Elec-Tech, although it has had separate legal troubles of its own. Wang is a champion of LED technology but he has been accused of stealing IP from former Philips subsidiary, Lumileds. The Dutch company sued its Chinese rival after an engineering employee named Chen Gangyi was accused of smuggling out thousands of data files before joining Elec-Tech. A court in California granted Lumileds a permanent worldwide injunction this summer, preventing Elec-Tech from “using, disclosing, licencing or selling” the Dutch firm’s epitaxy technology.

KKR hopes to eventually exit its investment in NVC China via an A-share listing, according to the Chinese press.

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