Description

Investment thesis

We are presenting a merger arbitrage opportunity for those sitting on excess cash in their portfolios. Trina Solar (TSL) is going private in a leveraged buyout led by its chairman for $11.53 per ADS after fees. Shareholder approval was obtained and the company expects the transaction to close this quarter. The current price is $9.83, which represents a potential 17% upside to the net offer price. We believe the wide discount can be attributed to a few issues such as deal specifics (e.g. currency conversion or transaction structure/leverage involved) or the solar market generally being out of favor.

Business description and deal background

Trina Solar is the world's biggest solar panel maker, based in China, with NYSE-listed ADSs and market cap of around $900m. The first discussions of a potential take private started back in December 2015. Following an M&A process during H1 2016, Trina announced on August 1, 2016 it has entered into a definitive agreement and plan of merger led by the chairman, Jifan Gao. To cut a long story short, on December 16, 2016 during an EGM 97.8% of the shareholders voted in favor of the proposal to approve the merger.

The buyout makes sense if management believes their own projections provided for the fairness opinion: $127m of net income for this year, going up each year until it reaches $261m in 2023. That’s an attractive earnings yield on the take-private valuation. While management might have some incentive to be optimistic (e.g. securing third party investors) we think that this is capped by the fact that they are trying to do this MBO as cheaply as possible. Worth noting that various news sources report that the main intention behind the take-private could be to the re-list at a (potentially) higher market value in China or Hong Kong.

Financing

Excluding the rollover piece the total transaction size is approx. $1bn. The source of funding is a mix of equity from the sponsors, cash on hand at TSL and a $665m loan facility secured by the chairman (including a personal guarantee) from Industrial Bank. The sponsor group consists of the chairman, his spouse, entities owned by him and other investors (two related to Industrial Bank).

The chairman will roll his current 5.6% stake and using $400m from the loan facility, with the rest of the obligations met from the company cash balance, his ownership will increase to 42%. Two entities related to Industrial Bank will put up c. $380m new equity for 15% and 20% ownership respectively. The remaining 23% will be owned by three other entities. Additionally, the funding from Industrial Bank and the sponsor group will also cover the buyback of convertible notes worth approx. $320m.

--- Note on the converts: we have focused on the equity for the merger arbitrage analysis but while the convertible notes offer a lower yield they are puttable on June 15, 2017 or October 15, 2017, depending on the issue if the transaction were to fail. Could be another way to play this. ---

One could think of the ownership structure as that effectively Industrial Bank owns or puts up financing for 77% of the pro forma ownership, hence the relationship between the chairman and the bank is paramount, as the chairman is not investing new money. Note, the chairman will be highly levered, not to mention the company that already has c. $1.4bn net debt.

Comparable deals

Chinese take-privates can involve greater uncertainties for US merger arbitrageurs, however we have looked at 25 recent other deals that took place since 2015. While of course this is not universal and each will have their own issues around the sponsors, financing etc of these 25 deals, 21 have closed (and relatively fast) with 4 still pending. The timeline from execution of the merger agreement to consummation ranges anywhere from 84 to 251 days, with an average of 129. Trina is currently on day 164. Worth noting that Trina is an outlier for its low insider ownership (5.5% vs a range of 25% to 80% for the others), we are not aware of any such approved deals falling through in that period. This gives us more comfort about the closing of this deal.

Risks

The two biggest transaction risks we see are, (a) currency conversion and (b) bank relationship.

The remaining biggest hurdle is currency conversion (from RMB to USD) due to China’s tightening control of overseas use of RMB as State Administration of Foreign Exchange of the PRC (SAFE) approval is a closing condition. The buyer group, specifically Industrial Bank, is concerned about currency conversion (and thinks it could take 3 months). They fought extremely hard to exclude currency conversion failure from the reverse termination fee obligation and largely succeeded as they only need to pay an immaterial $5 million in such case. This was among the reasons the recent HNA Group buyout of Ingram Micro took 5.5 months from approval to close. However, we don’t see Chinese investors buying back Chinese assets from foreign stock exchanges as the main targets of this regulation and regulators will exercise discretion.

It’s also worth noting that Industrial Bank is essentially putting up the majority of the funding (loan to the chairman and investment from their two entities) hence the relationship of the bank with the chairman is key as his ownership is relatively low. Additionally, as noted above leverage both at the level of the chairman and the company is already high.

Not related to the transaction but if it drags on, fundamentals such as solar module price declines or the delay of solar power projects could impact the price.

Catalyst

Close of the take private transaction.