A potential deal for CVC Capital Partners CVC.UL to buy a majority stake in a Chinese restaurant chain highlights a growing willingness by smaller China firms to cede control to foreign private equity amid unfavorable IPO prospects

CVC-South Beauty talks show shift to majority stake sales in China

1:27am EDT

By Stephen Aldred and Prakash Chakravarti

HONG KONG (Reuters) – A potential deal for CVC Capital Partners CVC.UL to buy a majority stake in a Chinese restaurant chain highlights a growing willingness by smaller China firms to cede control to foreign private equity amid unfavorable IPO prospects. London-based CVC is in advanced talks to buy a majority holding in South Beauty Investment Co Ltd for $300 million, sources with knowledge of the matter told Reuters.South Beauty, which operates high-end restaurants that cater to China’s business and political elite, had previously hired banks for a Hong Kong IPO worth as much as $200 million that had been planned for this year.

A successful deal would also be the latest in a string of stake acquisitions in Chinese restaurant chains by foreign private equity.

Owners of China’s small and medium sized companies prefer to exit their investments through IPOs, which tend to generate higher returns.

But stricter regulations for offerings in China, a choppy public market in Hong Kong and tighter credit conditions are helping private equity firms, which are unable to exit minority stakes through public listings, convince owners to give up control, sources have said.

Under the deal being discussed, CVC is buying 69 percent of South Beauty while the restaurant chain’s founder Zhang Lan will own a 31 percent stake, Basis Point, a Thomson Reuters publication, reported on Tuesday.

The deal would follow one this year by Swedish firm EQT Partners to take majority control of RCS Group Co for around $170 million. EQT bought stakes from both the Chinese owner and private equity backer Warburg Pincus WP.UL, sources told Reuters.

RCS has franchise rights for ice-cream vendor Dairy Queen and one of China’s biggest pizza chains, Papa John’s.

Deals done last year include Unitas Capital paying $40 million to buy majority control of Babela’s Group, which runs Italian, Cantonese and Taiwanese restaurants, from investors including Carlyle Group (CG.O: Quote,ProfileResearchStock Buzz). General Atlantic acquired a stake in hot pot chain Xiabu Xiabu from private equity firm Actis.


A successful deal would give Chinese private equity firm CDH Investments an opportunity to exit from its investment, the sources added. CDH bought an unspecified stake in South Beauty in 2008 for $29.3 million, according to Thomson Reuters data.

South Beauty was founded in 2000 and has restaurants nationwide including in Beijing, Shanghai, Shenzhen and Shenyang.

The restaurant chain had earnings before interest, tax, depreciation and amortization (EBITDA) of 308.5 million yuan ($50.7 million) for the 12 months ended July 2013, Basis Point reported.

A deal for 69 percent of South Beauty at $300 million would represent an EV/EBITDA ratio of around 8.5. Listed comparables trade at 7.76, according to Thomson Reuters data.

CVC has hired Bank of America Corp (BAC.N: QuoteProfileResearchStock Buzz) as an advisor, and the bank is arranging loan financing of $140 million to back the acquisition, Basis Point said.

Bank of America and CVC declined to comment. South Beauty did not reply to an email requesting comment. Sources declined to be identified as the discussions were confidential.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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