In his book Touching The Void, mountaineer Joe Simpson rescues himself after falling into a crevasse, not by climbing up and out, but by abseiling deeper into the abyss.

Private equity (PE) firm TPG Capital appears to have found itself in a similar predicament, with its long-term investment in Hong Kong-listed Kangji Medical.

The firm, which holds 17.9% of Kangji, will invest a further HKD 697.5m (USD 89.4m) and take the medical devices company private. In trying to take charge of its investment, it appears TPG has been forced to pursue a take-private in the hope it can find an exit in a private setting.

According to the deal agreement, the buyer group, which holds 74.75% of the shares and includes the company’s founders and new entrant Qatar Investment Authority, “evaluated multiple strategic alternatives” and determined that a take-private offers the most “immediate and compelling value for shareholders”.

It is unclear what the alternatives were, but they are unlikely to have involved serious interest from third-party bidders considering both TPG and the founders would surely have been interested in such an opportunity.

Kangji is facing headwinds and needs investment. However, the deal agreement includes a sweetener for founding Chairman Ming Zhong and his wife, Executive Director Yinguang Shentu, who will reduce their combined holdings to around 40% from 53% in exchange for HKD 3.2bn and a HKD 390m convertible note. It signals their interests, at least partially, lie elsewhere.

TPG’s Kangji investment is now in its eighth year. The firm first invested RMB 1.4bn (approximately USD 216m) into Kangji in 2018 in exchange for a 25% stake. Two years later, the company listed in Hong Kong at HKD 13.88 per share and its stock surged to a high of around HKD 24/share. But, by the time TPG’s six-month lock-up agreement expired, the shares had sunk below the IPO price and they have drifted ever since.

The deal agreement unequivocally spells out the firm’s plans: “TPG has the right to cause a public offering… and the right to initiate a sale” within three years of the take-private’s completion, as long as either action delivers an internal rate of return of 8% to other buyer group shareholders.

Trials and tribulations of take-privates

The wrinkle is that TPG has never completed a Hong Kong take-private. Such deals are not easy.

Mergermarket data shows that few PE firms have attempted to take a Hong Kong-listed company private, and fewer still have succeeded. Remarkably, the first successful PE-backed take-private in Hong Kong – CVC Capital Partners’ de-listing of Nirvana Asia – did not occur until as recently as 2016.

A key reason for this stems from the fact that the City’s listed companies are dominated by controlling shareholders in the form of entrepreneur founders or Chinese state-owned enterprises. So, to protect minority shareholders from the will of these powerful shareholding blocks, Hong Kong’s Takeovers Code includes a rule that any scheme bid or tender offer can be defeated if opposed by 10% of shares held by disinterested shareholders.

As such, failed Hong Kong public binding M&A deals are common. In the past few months, three take-private offers by controlling shareholders have been thwarted by minority shareholders, who perceived the deals to be opportunistic.

• On 10 May, the Tsang family, which holds 68.75% of Goldlion, a men’s ties and leather goods and accessories maker, saw their 71.7% premium to undisturbed offer rejected by 26.46% of unaffiliated minority shareholders.
• On 24 May, the Foo family, which controls 74.97% of small-cap property developer Soundwill Holdings, had its 62.84% premium to undisturbed offer knocked back by 16.7% of unaffiliated shareholders.
• On 20 July, the 65.77% shareholder founder of Dickson Concepts, the owner of British luxury department store Harvey Nichols, saw its 50% premium to undisturbed offer narrowly rejected by 10.16% of minority shareholders.

Controlling shareholders can weather such failures, as they are essentially strategic bidders who can wait for a year and try again. But, for financially motivated PE firms, the calculus is a little different.

Consider, for example, Blackstone’s 2014 bid to take Tysan Holdings private via tender offer. The firm secured majority control of the Hong Kong real-estate developer, but never gained the necessary 90% acceptances from unaffiliated minorities to de-list the company.

Highlighting low-balling

If this all paints a rather bearish picture from TPG’s point of view, there is some hope for the firm.

Despite the ostensibly high premium to undisturbed prices of recent failed Hong Kong public deals, the offers were in fact lowballed, says analyst David Blennerhassett of Quddity Advisors, who publishes on intelligence platform Smartkarma.

“Dickson’s offer was below its net cash and financial assets. At the least, the offer price for Kangji is a four-year high. It is not a knockout offer, but it is not blatantly low-balled such as those for Dickson, Goldlion and Soundwill,” he said.

There is one other factor that TPG can cling to. The deal agreement has clearly shown that Kangji’s founders want out. So, if the deal fails, their simple majority holding will represent a major stock overhang. Unlike the deals discussed above, the offer on the table is probably the best minorities can hope for.

Like Simpson, TPG may well find an exit.