FountainVest will invest up to HK$720 million ($92.5 million) in China-based LK Technology, the world’s largest manufacturer of die casting machines.
FountainVest is a private equity fund which raised around $1 billion in 2008. It focuses on investments in China and has offices in Shanghai and Hong Kong.
The investment in LK Technology fits squarely within FountainVest’s stated deal parameters. The financial sponsor, which FinanceAsia met soon after the fund closed in November 2008, seeks to identify mid-market capitalisation firms that are privately owned and aspire to become champions in their business segment. LK Technology, which is listed on the Hong Kong stock exchange, has a China market share of around 50%. In addition to its die casting machines business, it has two other businesses in plastics injection moulding machines and computer numerical control machining centres.
The investment is structured in three different parts. FountainVest will immediately buy HK$255 million of new shares and HK$145 million of perpetual subordinated convertible securities. The shares are priced at HK$2.50 apiece, which represents a discount of 9.42% to LK Technology's closing price of HK$2.76 on January 25. The shares represent 9.02% of LK Technology’s enlarged share capital. The perpetual convertibles can be converted at any time, at the same price as the shares, and represent 5.34% of the company's enlarged share capital if fully converted.
FountainVest will route the investment through a wholly owned subsidiary, China Machinery Investment. LK Technology will use the HK$400 million to repay bank borrowings and general working capital.
LK Technology will also issue 25.6 million unlisted warrants to FountainVest. The warrants have a strike price of HK$3.125 per share, representing a 13.22% premium over Tuesday's close. The warrants are transferable, but FountainVest has agreed not to transfer them to a competitor. Assuming all the warrants are exercised, FountainVest’s holding will increase to 15.28%.
Finally, FountainVest has negotiated an option to invest up to HK$240 million in subsidiary companies of LK Technology.
As long as FountainVest holds at least 9% of the equity, it has the right to nominate one director to the board.
“We are very pleased with this investment because: a) this investment gives us a meaningful exposure to China’s rapidly growing domestic machinery industry, which serves a broad-based industrial end market, in particular, the automobile and consumer electronics markets and b) LK Technology has a long track record for being an industry leader with quality product and customer service,” said FountainVest in a written statement announcing the deal.
FountainVest does not disclose many of its investments as this is how its investee companies prefer it. However, in 2009 it acquired a small interest in Henan-based property developer Central China Real Estate.
