Honeymoon's Over for Sweethearts of SOE Reform
BY 2013-05-22 20:21:54
Corporate wedding bells were ringing in 2011 when a trust controlled by insurer Ping An Insurance Group forged a partnership with a Shanghai-based cosmetics maker called Jahwa Group and its listed subsidiary Jahwa United.
The tie-up was duly praised for diversifying Jahwa's ownership in line with a Chinese government push to reform the shareholder structures at state-owned enterprises (SOEs).
China Ping An Trust Co. paid the Shanghai government's Municipal State-owned Assets Supervision and Administration Commission some 5.1 billion yuan for 100 percent of Jahwa Group. It also got a 27.8 percent stake in Jahwa United.
But what looked like a match made in corporate heaven – and a model for SOE reform – is now on the rocks.
Ping An Trust and Jahwa officials have been squabbling over, for example, money management and the shareholder's influence in company decisions. Jahwa's chairman last fall blasted the shareholder for meddling, and a few months later Ping An officials accused company managers of hiding an embezzlement scheme behind talent retention and retiree pension plans.
The dispute reached a new peak in mid-May when Ping An ousted Ge Wenyao, 66, as Jahwa Group chairman and general manager. Trust officials lacked the power to have Ge removed from a parallel post as chairman of Jahwa United, but they've done all they can to make him uncomfortable.
In a May 13 statement announcing Ge's dismissal, Ping An claimed "some executives at Jahwa Group have been suspected of being involved in an embezzlement scheme involving huge amounts of money." Details of the alleged plot were not revealed.
Through social networking, though, Ge fired back. His words drew widespread attention and carried weight not only by virtue of his rank but also because he's been with the company for nearly 30 years.
On his personal Sina Weibo microblog, Ge wrote that Ping An's sole objective was to sell off holdings and thus downsize Jahwa, which makes products ranging from lipstick to skin cream to household cleaners. The company reported 3.6 billion yuan in total assets last year.
"Since Ping An joined" as an investor, Ge wrote, "Jahwa Group has existed in name only. The only thing they do is sell assets."
Ping An officials brushed off the claim. A company source who spoke with Caixin called the Jahwa deal a strategic, long-term investment.
News of Ge's angry weibo post spread quickly among equity investors, triggering that same day a 9 percent decline in the price of Jahwa United shares traded on the Shanghai Stock Exchange.
Investors pushed the stock price higher again after Ge softened his stance May 16 at a Jahwa United general shareholders meeting. Offering a partial apology, he admitted making mistakes by failing to properly manage Jahwa-Ping An Trust executive relations. He also took some blame for the share price slump.
But Ge rejected accusations of financial mismanagement, insisting the controlling shareholder had misjudged management's compensation mechanism, which he said was designed as an employee incentive plan and a way to attract new talent.
The next day, Jahwa United's share price closed 3 percent higher.
The dispute has already done damage to the company that won't be easy to repair. The stock price's recent rebound, for example, barely made up for the more than 4 billion yuan decline in market value after Ge's weibo post in May.
During their honeymoon months, Ping An's commitment helped Jahwa United share values more than double. That was a good deal for Ge and the rest of the management team, who benefited from Ping An-arranged equity incentives.
Moreover, the agreement by the Shanghai government to sell Jahwa was seen as the city's most successful shareholder reform maneuver involving any local, state-owned company.
Ping An could also count on consumer support: Jahwa's brands such as its Liushen body wash, MAXAM skin cream and Herborist hair and skin products sell well. In 2012, the group reported a 610 million yuan profit.
A local official who worked on the Jahwa ownership change is Yang Jianwen, an economist at the Shanghai Academy of Social Sciences. He said Shanghai government officials were willing to sell the company because Ping An promised a long-term commitment. They rejected other bidders for Jahwa including private equity funds and HNA Group, which runs Hainan Airlines.
Ping An promised no changes in the group's ownership structure or at Jahwa United within five years of the transaction. It also pledged to help the company diversify its business by, for example, investing 7 billion yuan for new initiatives in tourism, hotels, luxury watches and fashion businesses.
On the management side, Ping An promised not to interfere with management decisions regarding Jahwa United's assets and personnel.
For its part, Jahwa Group executives agreed to let Ping An maintain its status as the controlling stakeholder for at least three years. During that time, management agreed not to attempt any new equity financing.
Signs of a marriage on the rocks surfaced last November, when in a weibo complaint Ge claimed Ping An executives had blocked a company management investment decision. He said the decision broke a previous promise to support luxury watch investments.
Ping An had indeed vetoed a Jahwa United proposal to take over an upscale, tourbillon watch maker called Tianjin Seagull Watch. A company source said its risk control department had raised a red flag over Seagull's financial health.
"During the evaluation on the Seagull deal, we warned of some risks and asked the team in charge of the investment to do a more prudent evaluation," the source told Caixin. "That's what we should offer the company, as the largest shareholder and a professional investment institution."
A source close to Ge who works in the private equity sector told Caixin that the Jahwa chief had been following Seagull for years before enthusiastically pursuing a takeover. So when Ping An interfered, he took it personally.
Another factor that contributed to the souring relationship was a Ping An proposal to sell some Jahwa Group stakes in an office building in Shanghai and a Marriott Hotel in the resort city of Sanya, Hainan Province. These proposals, strongly opposed by Ge, were later dropped.
Sources said Ping An officials were aiming to improve Jahwa's financial condition and position the company for future growth. But Ge's supporters read these asset sale proposals as cash-out maneuvers by the company's largest investor.
At the shareholders' meeting, Ge said he had hired a lawyer to fight Ping An's claim that he and other executives had embezzled huge amounts from the company, steering the cash into private bank accounts.
Ge built the defense around a claim that the funds were legally set aside for an employee incentive mechanism and to boost retired employee payouts. His defenders included a former Shanghai state-owned company executive who told Caixin that Jahwa has indeed attracted and held many talented staffers through the years, even when the state company's salary structure was rigidly managed before shareholder reform.
Ping An officials say they are continuing an investigation into the embezzlement charge, which focuses on executives. Ge said the shareholder has hired PricewaterhouseCoopers to conduct an audit.
Many small Jahwa United shareholders, meanwhile, are siding with Ge. Thanks to their support, according to a recent Guangfa Securities report, Ping An officials may find it impossible to dismiss Ge from the listed entity.
"At this point, removing Ge would hurt both Jahwa and Ping An," said the report.
Yang, the economist, warned that "if the situation gets worse, it will have big, negative impact over the next several years for Ping An and SOE reform."
No wonder the Jahwa-Ping An spat is also being closely monitored by the Shanghai government.
"The transaction involving Ping An and Jahwa was seen as a model of SOE reform in Shanghai," said Zhao Yugang, a lawyer at the city's Co-effort Law Firm. "The government is unwilling to see it conclude with a joke."
What happens next is unclear, but the Shanghai government would like to mediate an end to the squabble as soon as possible. Ge told Caixin on May 21 that executives on both sides had agreed to take a calmer approach while working to settle the dispute.
Ge traveled to Shenzhen with an olive branch of sorts May 17 for meetings with Ping An Trust and Ping An Insurance Group executives. The meetings were arranged by the Shanghai government.
Four days later, a Ping An Trust source told Caixin that the investor's chief investment officer in charge of the 2011 Jahwa deal, Chen Gang, had resigned for "personal reasons." Market watchers speculated there may have been a link between Chen's departure and the turmoil surrounding Jahwa. But Ping An officials denied that speculation.