China’s Control on Deal Cash Flows Could Hinder Solar Privatization Plans

The $1.5 billion privatizations of two of China’s biggest solar companies have been thrown into doubt because of concerns they may run afoul of a government effort to keep more of the nation’s money supply at home.

Trina Solar Ltd. and JA Solar Holdings Co., whose chief executives have separately proposed buying back the shares they listed in New York, both may be affected by the rules on sending money abroad being considered by the government in China. Shares of the two companies have declined since reports over the last week about the curbs on companies’ overseas deal-making being planned.

“If the government tightens management of the rules over the privatization of overseas-listed companies in more detail, the deals may at the very least be delayed,” said Liu Xiaoming, a Shenzhen-based analyst from Industrial Securities Co.

Those concerns help explain why both companies have traded below the offers made from separate buyout groups to take the manufacturers private. While China’s State Council has yet to issue formal rules spelling out how its restrictions will apply, people with knowledge of that proposal have said it will target take-private deals and that special scrutiny would be made of highly leveraged companies with poor returns on assets.

Last month, people with knowledge of the government’s plans said the State Council will issue guidelines on the curbs, at which point it will ask government agencies to draft more detailed rules. The main target is overseas investments of at least $1 billion in industries outside a buyer’s core business and overseas property deals by state-owned enterprises. Go-private deals using onshore capital also at risk.

Trina is most at risk. Its shareholders vote Dec. 16 on whether to accept a $1.1 billion offer from an investor group led by Gao Jifan, the company’s chairman and founder. In a letter dated Dec. 12, 2015, the group offered $11.60 for each American depositary receipt outstanding in New York, a price Trina shares haven’t reached since before the offer. The ADRs close Thursday at $9.52, down 7.8 percent in the past week.

Market Value

“The company’s finances are relatively healthy, but the market isn’t rewarding its performance,” said Wang Xiaoting, a Hong Kong-based analyst from Bloomberg New Energy Finance. “The entire solar industry has experienced many ups and downs in the past several years. Investors aren’t irrationally positive.”

Trina said it’s continuing to work on the buyout.

“As far as we can see, the parties to the merger agreement continue to work towards satisfaction of all closing conditions,” Yvonne Young, Trina’s director of investor relations, said by e-mail. “We will update the market if there’s any significant progress. We are not able to comment on any political/regulatory news or speculation.”

JA Solar Chief Executive Officer Jin Baofang sent his company a non-binding proposal in June 2015 to buy its outstanding ADRs for $9.69 apiece. The proposal hasn’t turned into a binding agreement, and the company said on Nov. 17 there was no more information about the deal. JA Solar shares in New York have remained below that level since January, trading above the offer price only for a few weeks in December 2015.

JA Solar’s proposed group of buyers comprises Jin and closely held Jinglong Group Co., of which Jin is the sole director. JA Solar declined to comment, saying it’s restricted from doing so while the company is involved in such a transaction.

Buying Shares

Alpine Associates Management Inc. has recently been buying Trina stock, anticipating the rules China is working on won’t apply to Trina. The Englewood Cliffs, New Jersey-based investment advisory firm picked up 2.8 million Trina shares during the third quarter, according to a Sept. 30 regulatory filing. That makes it the seventh-largest holder, according to data compiled by Bloomberg.

“People don’t understand the rules completely,’’ said Brad Cohen, an analyst at Alpine. “We’ve had these Chinese ADRs before. You have to ride through the noise.’’

The outlook for the solar industry has darkened since the go-private offers were first made. PV production capacity has surged faster than installations, which are expected to finish at a record this year, according to data compiled by Bloomberg. The cost of solar panels has fallen 30 percent this year alone, according to London-based BNEF.

Investment History

China’s solar manufacturers, including Trina and JA Solar, raised more than $5 billion from Wall Street investors starting in 2006 to expand factories. Those investments both wrested control of the industry away from German and U.S. companies and sent the cost of photovoltaics down more than 80 percent. That gutted margins across the industry, bankrupting at least 30 companies and making most companies unprofitable for years.

The ADR buyback would “help seek better financing channels” for the companies, said Wang Haisheng, former executive general manager of the equity division at Ping An Securities Co. “However, both the capital market and fundamentals aren’t very bright. The timing for Trina to say goodbye to Wall Street isn’t very good.”

Donald Trump’s election victory in the U.S. also is weighing on sentiment. Trump has suggested scrapping support for renewable energy, saying solar is too expensive and takes too long to pay off. To Jeffrey Osborne, an analyst who follows Trina for Cowen & Co., concerns about Trump might make investors more likely to vote for cashing out now.

“The risk profile of solar is much higher now than when the offer was made,” Osborne said in an interview. “I don’t see any reason why anyone would vote against this.”

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