KKR Cements First Investment In China

It might not be an outright buyout, but megafirm Kohlberg Kravis Roberts & Co. has secured its first deal in mainland China with the purchase of a minority stake in a cement company.

With help from the International Finance Corp., the private investment arm of the World Bank, Tianrui Cement, the largest cement-maker in Henan province, is launching a $720 million expansion. KKR took part in March with a commitment to buy a 36 percent stake in the company. That interest could rise to 49 percent, which would be valued at about $100 million. Executives at KKR, which is expected to close on a dedicated $4 billion Asia fund later this year, declined comment.

Tianrui Cement is owned by the family of Li Liufa, who has said he wants to retain majority control of the company. The company is among the 10 largest cement manufacturers in China. Tianrui Cement’s 2007 EBITDA is estimated to be $55 million.

Despite holding just a minority stake in Tianrui Cement, KKR is expected to wield a considerable amount of control, according to a banker close to the deal. “KKR is a Tier 1 sponsor and is said to hold significant board voting and vetoing rights in the company,” the banker told Buyouts.

Bookrunner JPMorgan is launching a $388.7 million, five-year term loan in connection with KKR’s investment. A little more than one-third of the loan is earmarked for capital expenditures, while about half is to be set aside to refinance Tianrui Cement’s existing debt. The loan’s syndication is scheduled for mid-May.

KKR entered the Chinese market in January 2006, when it opened its Hong Kong office. The firm lured David Liu, the former co-head of private equity in Asia for Morgan Stanley, to lead the new office.

KKR is one of a number of big American buyout firms placing bets on the growing Asian market. In the last two years, Blackstone Group, Bain Capital and Providence Equity Partners opened branches in Hong Kong, mainland China and India, joining already established firms such as TPG, The Carlyle Group, Warburg Pincus and Advent International.

Even with the focus of resources and capital on the region, foreign firms have found it tough to break into the mainland China market.

Carlyle Group, for instance, has waged a years-long battle to gain control of Xugong Group Construction Machinery Co. and eventually dropped its bid to a 45 percent stake from a proposed 85 percent stake in hopes of appeasing government regulators. The same regulators denied Carlyle Group’s attempt to buy up nearly 8 percent in Chongqing City Commercial Bank, citing concerns over foreign control and a belief that buyout firms seek short-term profits at the expense the national economy.—J.H. & Cong Cong Tang