Solar panel maker LDK (NYSE: LDK) started its long march to a takeover by the state with a major stake sale this week, but the equally cash-starved Suntech (NYSE: STP) looks like it may put up a bigger fight to maintain its independence. What’s happening at Suntech comes down to a single word: Pride. The latest twist at Suntech also has broader implications, as the kind of pride we’re seeing from founder Shi Zhengrong could foreshadow similar resistance we’re likely to see at many of the nation’s other solar panel makers.
Shi and many of his peers at the helms of other solar companies were once models for others to follow, as they quickly built profitable companies in a high-growth, high-tech area that Beijing had targeted for rapid development. Despite the rapid reversal of fortune for their industry, many of these chief executives remain fiercely proud individuals and thus are unlikely to agree to many of the tough conditions that Beijing wants in exchange for badly needed rescue funds. Perhaps the biggest and most difficult of those terms will be the loss of control of their firms, which many of these executives treat as their own individual fiefdoms.
Before I go any further, let’s review quickly what happened earlier this week with LDK and what’s now happening with Suntech, which was once an industry pioneer when it became China’s first solar panel maker to list overseas with a New York IPO in 2005. LDK announced earlier this week that it would sell about 17 percent of itself to a consortium whose main members included a state-owned firm for a badly needed cash infusion of $23 million. This looks like the first step to an eventual state-led takeover of LDK, which is the weakest of China’s major solar firms and is losing tens or even hundreds of millions of dollars each quarter.
Suntech is in similar need of cash, both to fund its operations and also to pay nearly $600 million worth of debt that will come due early next year. But media are reporting that the company’s proud founder and Chairman Shi Zhengrong is refusing 2 government proposals that would give him the funds he so desperately needs.
One of those proposals would see the government buy the bonds coming due next year and provide an additional capital injection. But a key condition of that package would require Shi to provide his own personal assets to guarantee that those bonds would be repaid — meaning Shi would probably lose the 30 percent of Suntech shares he owns. Those shares once made him one of China’s richest men but are now worth a meager $46 million based on the company’s latest market capitalization. The second plan would see Suntech de-list and become a state-owned company.
Both of these plans would obviously see Shi lose control of the company he worked so hard to build, and the new government owners would almost certainly force him to leave as part of any rescue package. Shi may believe he can negotiate a rescue under any terms he wants, but ultimately I do think that Beijing will also insist on its own conditions for a rescue, including Shi’s departure from the company. The result could be an interesting and entertaining stand-off, which the government will ultimately win but perhaps not before Suntech itself is significantly damaged.
Bottom line: Beijing will insist on nationalization and the exit of Shi Zhengrong in exchange for saving Suntech, resulting in a bitter battle for control of the company that the government will win.
This blog was originally published on Young’s China Business Blog and was republished with permission.
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