Most of the attention in the solar sector these last few weeks has been focused on Suntech (NYSE: STP), the former high-flyer that was forced into bankruptcy earlier this month after it defaulted on more than $500 million worth of bonds. But now the similarly struggling LDK (NYSE: LDK) has made it back into the headlines as well, with word that the company has issued more new shares to an outside investor that could potentially take over the company.
This latest wrinkle is interesting because the new investor appears to be an private individual without direct state backing, although he probably has ties to the government at some level. According to the latest announcement, LDK will issue 12 million new shares to the investor, Fulai Investments, for $1.28 per share, or a total price of $15.4 million (company announcement) That price actually represents a 13 percent premium to LDK’s last closing price — a rarity in a market where new investors often get their shares at a good discount.
This latest purchase, combined with its previously announced purchase of 5 million shares, will give Fulai a total of 19 million shares in LDK. As part of the deal, Fulai will also get the right to name 2 directors to LDK’s board. I’ve done a bit of searching to try and figure out just how much of LDK that Fulai will control, since LDK conveniently decided to omit this information from its latest announcement. But based on another announcement earlier this year where a new investor got to name 3 new directors as part of its deal to purchase 20 percent of LDK, we can probably assume that that Fulai’s will now hold about 13-17 percent of the company as a result of this latest deal.
Details about Fulai are quite sketchy in the announcement, saying only that the company is a British Virgin Islands firm is controlled by Cheng Kin Ming, described as “a Chinese merchant conducting business in Hong Kong.” By comparison, the investor that purchased the 20 percent stake of LDK last October, Heng Rui Xin Energy, was described more clearly as a “company invested by privately owned and state-owned funds,” which sounds like a more traditional consortium of government and government-associated entities.
These series of stake sales probably equate to a slow-motion bailout and takeover of LDK, which has received a combined $70 million in new funds and financing over the last few months. That amount has been roughly equally split between Fulai, Heng Rui Xin and a new 440 million yuan loan from China Development Bank, the state-run policy lender that Beijing is using as one of its primary vehicles to keep the struggling industry afloat.
What’s most interesting to me is the shape of this new fast-evolving group of investors that now control up to 40 percent of LDK and could well determine its future. While the Heng Rui Xin group looks like a traditional state-organized entity designed to give LDK a lifeline, the Fulai group looks like a more entrepreneurial entity that might actually want to step in and try to reorganize LDK to put the company back on more solid financial footing.
Such a reorganization would contrast sharply with Suntech, which was forced into a Chinese bankruptcy court 2 weeks ago by the state-run banks that were its primary lenders. The banks took their action after Suntech defaulted on $541 million worth of bonds that came due on March 15. Their decision to force Suntech into the courts may have been partly motivated by a desire to force out Suntech’s stubborn founder Shi Zhengrong, who controls 60 percent of the company’s shares and was refusing to leave.
This recent series of capital injections for LDK appears to indicate the company may be trying to avoid Suntech’s fate by issuing new shares to investors in exchange for desperately needed cash. Of course the issue of so many new shares means that owners of LDK’s current New York-traded shares are rapidly seeing their stake in the company diluted. But they could take comfort in the fact that at least their shares may still have some value when the company finally completes its reorganization.
In many ways, the whole issue of LDK, Suntech and other solar company shares and how much they will be worth after the ongoing industry restructuring is the question most on investors’ minds in the current climate. Based on what we’re seeing so far, it appears that Beijing wants to keep most of these companies as publicly traded entities, which would give them future access to global capital markets.
But I would expect to see some major dilution for shares of the most struggling names like Suntech and LDK, as those companies are forced to issue massive amounts of new stock in exchange for rescue packages from new investors. At the end of the day, holders of the companies’ existing publicly traded shares can probably expect to recoup some of their investment as their stock retains some value. But the returns probably won’t be too big, with people who purchased shares last fall getting back perhaps 20-30 cents on the dollar.
Bottom line: LDK’s new share sale to an outside investor is part of its ongoing rescue, which will significantly dilute its existing shareholders.
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