Weichai Power Chairman Tan Xuguang finally got his wish

On August 31, 2012, German Chancellor Angela Merkel visited China to promote economic exchanges between the two countries. Perhaps coincidentally, on the same day, Weichai Power set a record of the largest investment in Chinese companies in Germany at 738 million euros (approximately RMB 5.885 billion). In accordance with the agreement reached, Weichai Power will acquire a 25% stake in German KION Group and a 70% stake in Linde Hydraulics.

The purpose of Merkel's trip was to sell European debt to China and hoped to use China to solve the European economy. Weichai Power's investment is even more of a disaster for investors who are insolvent, suffer losses, and the German KION group and shareholder Goldman Sachs.

However, there are two sides to everything: the depression of the economic situation makes M&As worthwhile, but at the same time it also makes Tan Xuguang’s “5-year, 10 billion” target for the hydraulic industry difficult to achieve.

Goldman's Abacus

On September 3, Tan Xuguang stood alongside Goldman Sachs director Alexander on the same platform and declared a strategic alliance with the world.

According to an agreement reached between the two parties, Weichai Power purchased a 25% stake in Germany's KION Group from Goldman Sachs for EUR 467 million and a 70% stake in its subsidiary Linde Hydraulics for 271 million EUR.

This huge investment is by far the largest merger and acquisition case of Chinese companies in Germany. However, Weichai Power spent only four months to complete negotiations with Goldman Sachs. On the surface, the purchase price also has a bottom-up advantage.

The Kion Group, which specializes in the production of forklifts and other commercial vehicles, is the leader in the European commercial vehicle market. With annual sales of more than 4.6 billion euros, the global industry ranks second only to Toyota. In 2006, KKR Group and Goldman Sachs bought the KION Group for a price of 4 billion euros in an attempt to create an empire that could surpass Toyota.

According to the price at that time, the 25% stake of KION Group was as large as 1 billion EUR. But now, only 467 million euros are sold to Weichai Power. In contrast, the shareholders of Goldman Sachs seems to have some "clearing out" means.

However, Goldman Sachs, which has always been known for its savvyness, will not easily trade in losses. This "discount sale" also shows the dilemma of the German Kion Group's insolvency. According to the financial report of the German KION Group, the net assets of the group were -488 million euros in 2011 and reached -532 million euros in the first half of this year. The 2011 net profit was -929.26 million euros.

At the beginning, KKR Group and Goldman Sachs, both of which were the world's top investment institutions, set a plan for listing in Europe after buying the KION Group. However, since then, the impact of the European economy has been declining, KION's performance indicators have been always stalled, away from the two major shareholders, "investment - listing - cash" concept but more and more.

According to public figures, Kion Group's annual revenue in 2007 was about 4.3 billion euros, but in 2011 it was only 4.4 billion euros, and even suffered a loss. This made KKR Group and Goldman Sachs "invested into shareholders."

In the eyes of Alexander, a director of Goldman Sachs in KION, Weichai Power can help KION continue to develop the Chinese market, especially in terms of forklifts, which will greatly improve the company's performance. The CEO of KION Group Gordon is even more outspoken. The cooperation with Weichai Power is to better enter the Chinese market and gain 25% of the market share in China to help Kai Oo achieve the listing.

Both KKR Group and Goldman Sachs Capital Partners stated that all funds will be retained by Weichai Power and will be used for investment purposes of KION without any cash withdrawal. Tan Xuguang, chairman of Weichai Power, said that this investment will reduce Kion's debt from 2.7 billion euros to 2 billion euros, which will facilitate the smooth implementation of listing financing in the future.

According to the contents of the agreement, if Weichai Power helps the KION Group succeed in the IPO listing in the future, Weichai Power shall have the right to increase the holding of KION to 30%, and have the right to further increase the shares of KION hydraulics.

Feng Liang, an analyst at Guodu Securities, believes that KKR Group and Goldman Sachs are both investment bankers and financial investors. Listing financing and liquidation and exit are their usual paths. Although some of Kearou’s shares are sold at low prices, it would still be a successful investment if we can use the alliance with Weichai Power to invigorate the assets of the KION Group and achieve market financing and withdrawal. [next]

Weichai's hydraulic dream

In this acquisition, Weichai Power Co., Ltd. harvested a total of two parts of assets: one is a 25% stake in Kion Group, and the other is a 70% controlled subsidiary of Linde Hydraulics. Obviously, the two assets are mutually conditional.

With the personality of Tan Xuguang, only 25% of the shares can not satisfy its requirements. Although most of the investment was made to purchase shares in the KION Group, as he told reporters, controlling Linde Hydraulics is even more important for Weichai Power.

Linde Hydraulics is the hydraulic business unit of Linde Material Handling Company, a subsidiary of the KION Group. It is mainly engaged in the development, manufacture, production, sales, market development and service of hydraulic pumps, hydraulic motors, hydraulic valves, and gears.

Needless to say, the acquired hydraulic business is not highly correlated with the engine of Weichai Power's core industries. However, since 2007, Weichai Power has stopped all scale expansion and turned to strategic investment. This can be seen from Tan Xuguang’s acquisition of Baudouin, a French parts company, and Ferretti, an Italian company that acquired yachts, this year.

In the vision of Tan Xuguang, Weichai Power will introduce Linde Hydraulics' technology into China and invest and build factories in Weifang. On the one hand, it will change the situation in which high-end hydraulic products mostly rely on foreign imports and compete for the market share of international giants in China; On the other hand, Linde Hydraulic's factory in Weifang can use low-cost advantages to sell back to German KION Group to help it reduce the cost of forklifts and increase its competitiveness.

According to the "2011-2012 Global and China Hydraulic Industry Research Report" released by the Shuiqing Muhua Research Center, China's hydraulics industry has developed rapidly in 2010 and 2011 thanks to the large-scale investment plan launched after the financial crisis. The output value of the hydraulic industry reached 43.6 billion yuan, a year-on-year increase of 24.2%. At present, China's hydraulic industry is second only to the United States in terms of sales, ranking second in the world. However, domestic products can only meet the needs of middle and low-end packages.

Previously, Linde Hydraulics' sales in the Asia-Pacific market has been based on Eaton Hydraulics' sales network and distribution channels. Linde Hydraulics is only providing application support and technical services in the region. Linde Hydraulics' global revenue in 2011 was only 276 million euros.

At present, China's high-end hydraulic parts market is huge, accounting for 12.5% ​​of the world market, ranking fourth behind the United States, Japan, and Germany.

According to the plan formulated by Tan Xuguang, the Chinese factory to be built will realize sales revenue of 10 billion yuan in five years, and will build another Weichai power in the hydraulic field in the next 5 to 10 years. According to Weichai Power's 2011 financial report, last year, Weichai Power achieved sales revenue of 60.01 billion yuan, and sales of complete vehicles and key components were 43.1 billion yuan, accounting for 71.82%. Its main business includes the design, development, production, sales and maintenance of diesel engines and related products.

In fact, as early as 2010, Weichai Power had acquired a hydraulics plant in Qingzhou, Shandong. This factory has been seeking partners in the global field to improve its technical level.

At the press conference held in Jinan on September 3, the mayor of Qingzhou City, Han Hsiao, could not answer whether the future hydraulic plant would settle in Weifang Qingzhou.

As for the largest M&A of German companies in Germany, although industry insiders are generally optimistic about the prospects of the domestic high-end hydraulic market, they are not optimistic about the “5 years 10 billion” rhetoric.

Wang Shuangming, a senior analyst in China's construction machinery industry, said that the upstream customers of hydraulic products are mainly used in the field of construction machinery, while the latter largely depends on the prosperity of real estate, large-scale infrastructure construction and other industries. The KION Group's performance has declined due to the shrinking economy of Europe and the United States. At present, China's real economy is in a sluggish state. After 4 trillion investment in 2009, it is difficult to have a huge investment in "Tie Gongji." Weichai Power's hunters benefit from the economic downturn, but the post-acquisition development will also be trapped here.

Since 2012, the downward pressure on China's economy and the sluggish demand for construction machinery and other industries have caused the growth of the hydraulics industry to show a deceleration.

Although Linde Hydraulics introduced China, it can seize the high-end market, but in the past two years, many foreign giants such as Bosch-Rexroth, Parker-Hannifin, and Kawasaki have expanded their factories in China and accelerated competition for the Chinese market.

Among them, Bosch-Rexroth (Bosch Rexroth) entered the Chinese market as early as 1978. So far, China has established four major production bases in China. In 2011, the company had sales of over 900 million euros in China. The largest hydraulic manufacturer in China, Hengli Oil Tank (601100.SH), has a market share of 23% in China's excavator-dedicated cylinder market, and its 2011 revenue was only 1.13 billion yuan.

Wang Shuangming, a senior analyst in the Chinese construction machinery industry, believes that in the downturn of the economic situation, Weichai Power must achieve the sales target of “5 billion for 10 years”. It will be very difficult for the latter to surpass the hydraulic foreign counterparts operating in China for many years.

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