The use of leverage in M&A reorganizations

In answering questions raised by journalists in January, a spokesman for the Shanghai Stock Exchange (SSE) reckoned that the SSE would take strict precautions against five risks in mergers and acquisitions (M&A), including leverage risk, transaction risk, crossover risk, integration risk and impairment risk.

Among these risks, the leverage risk is the first to be prevented. Listed companies must disclose in key detail information about leverage funds, including their sources, percentages and arrangements for subsequent repayment, and make notice of risk in conspicuous places. Does it necessarily mean that leveraged buyouts have become a high-risk area of M&A regulation? And to what degree do the market and regulators accept leveraged buyouts? This article explores these two questions via two successful cases in 2016.

Xiwang Food’s acquisition of KEER

In September 2016, Xiwang Food, a Shenzhen-listed company, and Primavera Capital jointly acquired the full shares in KERR in cash at US$730 million (80% of shares were delivered in the first instalment at about US$584 million, equivalent to about RMB3.9 billion, and the consideration for the remaining 20% of shares to be paid by Xiwang Food). The transaction structure is shown in the accompanying graphic.

Cui Bai is a junior partner at Grandway Law Offices