By staff reporter He Huafeng         

U.S. private equity firm Blackstone chose Beijing’s famous Great Hall of the People for the ceremonial announcement of its long-anticipated investment in BlueStar, a Chinese chemical giant. The US＄ 600 million investment, for a 20 percent stake, was unveiled September 10. 

Caijing learned that, during negotiations that included talks with government leaders, Blackstone originally proposed paying US＄ 500 million for 18 percent of BlueStar shares. But the PE firm later agreed to boost its stake by 2 percent for an additional US＄ 100 million. 

Moreover the deal – which now awaits regulatory approval -- has triggered controversy over costs incurred by state-run BlueStar tied to PE management fees and a recent government ruling on valuation.  

Long courted foreign investors, BlueStar was established by businessman Ren Jianxin in 1984 and, 20 years later, became a subsidiary of newly formed ChemChina. ChemChina is a large-level enterprise directly controlled by the government’s State-owned Assets Supervision and Administration Commission (SASAC). 

Ren predicted that, with Bluestar under its wing, ChemChina would become one of the world’s top 500 companies within three years. His forecast complemented an SASAC campaign to strengthen and expand mid-level, state-owned enterprises. 

SASAC Director Li Rongrong has called on the agency to create 30 to 50 large enterprises that, by 2010, can compete internationally and rank among the top three global players in their respective industrial sectors. 

BlueStar’s expansion echoes Li’s theme with a blueprint that calls for attracting strategic investors, carrying out reforms and going public. The company contacted several PE funds before choosing Blackstone, the world’s largest, for which BlueStar is its first business in China. 

According to one PE expert, attracting PE funds can draw investment capital and help an enterprise carry out strategic restructuring – two steps BlueStar seeks. The deal is also expected to boost BlueStar’s ongoing efforts to expand internationally. 

BlueStar’s thirst for global expansion was highlighted by its interest in buying Korean Sangyong Motor Co. in 2004. But Shanghai Automotive Industry Corp. won the deal. 

Two years later, BlueStar grabbed a European prize with the purchase of France’s Adisseo. The deal made BlueStar the world’s second largest manufacturer of methionine, a food supplement. Nine months later, it bought an organic silicon business from the French company Rhodia, becoming the world’s number three manufacturer of organic silicon. 

But BlueStar’s latest business deal has sparked some controversy. The main benefit is that the deal will encourage the enterprise’s transformation to a market oriented company. It’s also expected to improve management incentives and compensation. A downside, however, is that the deal will lead to costs linked to currency appreciation of the Chinese yuan. In addition, BlueStar will pay substantial management fees and dividends to Blackstone. 

In the course of negotiations, BlueStar and Blackstone had hoped to reach an agreement by the end of June. But their schedule was scrapped after the two sides disagreed on a price. 

BlueStar’s three subordinate, public companies announced June 21 that the parent was in talks with overseas investors about possible strategic cooperation, but that no deal had been reached. 

Meanwhile, China was tightening its foreign exchange policy, casting a shadow over a BlueStar-Blackstone deal. 

SASAC on July 1 changed the basis for currency valuation. A new regulation said future stock transactions would be based on the average value of the previous 30 days’ share price, instead of the net asset value per share. The decision slowed deals involving foreign capital buyouts such as Schneider’s plan to buy Baoguang Corp. and Carlyle’s scheduled buyout of Shandong Haihua. 

Now, despite the current regulatory delay, the BlueStar deal appears to be progressing more smoothly than others. One reason is that Blackstone has no plans to become a majority shareholder, and BlueStar management initiated the transaction. 

One possible roadblock, however, is China’s foreign exchange policy, which limits the introduction of foreign money and encourages its outflow.  

Despite new currency rules and other hurdles, Blackstone has seemed unfazed by the deal’s bumpy progress. Indeed, the PE firm’s officials have enjoyed top-level access in Beijing. 

After the market lowered expectations of a Blackstone-BlueStar deal in July, the PE firm’s Chairman and CEO Stephen Schwarzman visited SASAC’s deputy director Li Wei. According to SASAC’s Web site, “During the meeting, Li Wei discussed his views on the strategic cooperation of Blackstone Group and mid-level enterprises. Mr. Schwarzman expressed that Blackstone was willing to use various methods to cooperate with mid-level enterprises, speeding up the pace of their internationalization.” 

The Shanghai Securities Journal outlined the deal in late August. “The plan for cooperation between Blackstone Group and BlueStar Group is as follows,” the newspaper said. “Three companies under the BlueStar Group flag -- Shenyang Chem, BlueStar Cleaning and New Star Materials -- will each sell a portion of shares to Blackstone.” 

Each subsidiary suspended trading September 7 and, three days later, BlueStar and Blackstone announced their agreement. 

Under the deal, Blackstone executives Ben Jenkins and former Hong Kong financial secretary Antony Leung will serve on BlueStar’s board. UBS served as financial consultant on the chemical company’s end of the deal, while Merrill Lynch worked for the PE powerhouse. 

Based on past PE deals, the two sides may be bracing for change while the transaction awaits approval from Beijing regulators. 

Years ago, a plan by PE behemoth Carlyle to buy Xugong Construction Machinery Group met with heated debate over China’s strategic industries and national economic security. Although the two sides reached an agreement in early 2005, the deal has yet to be approved by the Ministry of Commerce.