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After more than three months, the cross-border M&A case of Huacan Optoelectronics (300323, SZ) has been revived. On November 17, the company announced that it had received the "Notice of China Securities Regulatory Commission Administrative License Application Restoration Review." This marks a significant step forward in its complex acquisition plan.
The matter at hand involves a cross-border merger and acquisition of a listed company. The deal is structured as a complicated acquisition: Huacan Optoelectronics plans to pay 1.65 billion yuan through the intermediary of Harmony Optoelectronics to acquire 100% equity in MEMSIC, while also raising up to 200 million yuan in matching funds.
According to a report by the Daily Economic News, many parties involved in this transaction are closely tied to IDG Capital. If completed, the shareholding of IDG Capital in Huacan Optoelectronics could reach 23.03%, surpassing the second-largest shareholder’s stake of 12.08%. Considering the voting power of Harmony Corelight, IDG Capital would be just one step away from becoming the actual controller of the listed company.
**IDG Capital plays a three-way role**
For Huacan Optoelectronics, the acquisition process has been full of twists and turns. Since the suspension in April last year, the deal has been under planning for over a year, with an official announcement made in early August. The structure of the merger is quite intricate, involving the use of Harmony Optoelectronics as a bridge to ultimately acquire 100% equity in MEMSIC.
According to the revised draft of the “Report on the Issuance of Shares and the Collection of Matching Funds and Related Transactions†issued by Huacan Optoelectronics on November 17, the company intends to purchase 100% equity of its subsidiary, Harmony Optoelectronics, from NSL and Harmony Corelight by issuing shares. Additionally, it plans to raise up to 200 million yuan from no more than five qualified investors, with an issue price of 6.90 yuan per share.
The underlying company, Harmony Optoelectronics, has no real business operations and primarily holds 100% equity in MEMSIC. The total value of this transaction is 1.65 billion yuan.
The Daily Economic News reporter noted that IDG Capital’s relevant shareholders are involved throughout the deal, including as buyers, intermediaries, and even sellers. According to the announcement, Huacan Optoelectronics has no actual controller. Jingtian I and its concerted parties, Jingtian II and Kai Le, hold 18.89% of the company and are the largest shareholders. These entities are controlled by the IDG-Accel Fund, with He Zhicheng and Zhou Quan serving as directors and controllers. Both are members of IDG Capital, along with Yu Xinhua, the chairman of Huacan Optoelectronics.
Not only is IDG Capital the largest shareholder, but the transaction also involves NSL, a shareholder of Harmony Optoelectronics, who is connected to IDG Capital. The four IDG dollar funds that hold 86.96% of NSL's shares are managed by He Zhicheng and Zhou Quan, who are also associated with Jingtian I and Jingtian II, Kai Le. This makes the transaction highly interconnected.
Additionally, prior to this deal, Harmony Optoelectronics acquired 100% equity in MEMSIC held by MZ through a cash transaction via its subsidiary TFL. The previous transaction involved seven IDG dollar funds, including NSL, and 24 natural persons such as Yang Zhao, who held 72% and 28% of MZ, respectively. In other words, the asset seller was also linked to IDG Capital.
**Minority shareholders gain control**
Why did Huacan Optoelectronics design the acquisition so intricately? Why not allow the listed company to directly acquire MEMSIC from MZ through Harmony Optoelectronics and Harmony Corelight?
The Shenzhen Stock Exchange has questioned the necessity of introducing Harmony Corelight and the background of its shareholders. The inquiry letter pointed out that Harmony Corelight has no coordinated actions with NSL or existing shareholders of the listed company. However, one of the general partners of Harmony Corelight is Harmony Excellence, whose limited partners include Aiqi Light Control and Harmony. Key contributors to Harmony Excellence and the penetration of the harmony number include Lin Dongliang, Wang Jingbo, and Yang Fei—investors all connected to IDG Capital.
Huacan Optoelectronics explained that MZ, the shareholder of MEMSIC, is an overseas company. It is difficult for a listed company to directly issue shares to overseas shareholders to purchase assets. Therefore, it needed an intermediary like Harmony Corelight, which can act as a domestic SPV to facilitate the acquisition of MEMSIC.
Although the company did not deny the connection between IDG-related investors and Harmony Excellence and Harmony Number, it emphasized that Harmony Corelight is controlled by China Everbright Holdings through Guangkong Puyi, and is not under the same control as Jingtian I, Jingtian II, and Kai Le.
According to the revised draft, after the agreement, all partners of Harmony Corelight unanimously agreed that Guangkong Puyi and Harmony Excellence would decide partnership affairs based on a 3:2 voting ratio.
The revised draft also shows that the largest investor in Harmony Corelight is Zhejiang Yiwu Industrial Park Development Co., Ltd., with a capital contribution of 45.39%. Shanghai Guangkong Puyi Equity Investment Management Co., Ltd. contributes 0.07%, and Yixing Guangkong Investment Co., Ltd. contributes 36.31%. Harmony Excellence and Harmony Number contribute 18.16% and 0.07%, respectively.
In May 2017, Yixing Light Control transferred its share in Harmony Corelight from Aiqiguang Control, and both Yixing Light Control and Guangkong Puyi are under the control of China Everbright Holdings. Even so, their combined investment ratio is 36.38%, less than that of Zhejiang Yiwu Industrial Park Development Co., Ltd.
Interestingly, according to a report by the Securities Times on June 29 last year, the two sides jointly established an industrial investment fund with a subscription size of at least 20 billion yuan—the “IDG Everbright M&A Fund.†The cooperation model involved Guangkong Puyi and Harmony Excellence jointly serving as general partners and managers of the fund. The registration date of Harmony Corelight was June 27, 2016, and other details also match.
**IDG capital equity ratio rises to 26.7%**
The equity structure of Harmony Corelight is also related to the shareholding of IDG and related parties in Huacan Optoelectronics after the transaction. After the completion of the 1.65 billion yuan stock issuance, Jingtian I, Jingtian II, Kai Le, and NSL together hold 19.96% of the company. Harmony Optoelectronics holds 16.86% of the shares, with about 3.07% controlled by IDG Capital and Harmony Excellence. This means that IDG Capital’s shareholding would rise to 23.03%.
This is significantly higher than the 12.08% held by Shanghai Canrong and its concerted action, Tianfuhuan.
It is worth noting that in the shareholder list of Harmony Corelight, Zhejiang Yiwu Industrial Park, the largest shareholder, does not have decision-making power. Instead, minority shareholders, Guangkong Puyi and Harmony Excellence, make decisions based on a 2:3 voting ratio. This means that after the transaction, IDG Capital’s actual equity interest in Huacan Optoelectronics would be 6.74%, and its total equity control would reach 26.7%, bringing it very close to becoming the actual controller of the listed company.