Power and money dispute between Hougu Coffee and PE

Hu Zhongbin

Since June 28th, Yunnan Dehong Hougu Coffee Co., Ltd. (hereinafter referred to as Hougu Coffee), the largest local instant coffee manufacturer in China, has finally returned to the negotiating table after months of stalemate with its PE investors.

Recently fell into the capital chain breaking crisis of Hougu Coffee rumors continue, but also the contradiction between the company and PE investors to the foreground.

A few days ago, the person in charge of Hougu Coffee told reporters that the PE institution introduced last year was swallowed by the intention of seizing control of the company, resulting in the enterprise being unable to obtain bank loans. Subsequently, the PE side clearly denied the "equity contention theory" of Hougu Coffee, and pointed out that the legal representative of Hougu Coffee Xiong Xiang or suspected of misappropriation of funds, position embezzlement, loan fraud and so on.

This has become an extreme case of disputes between the invested enterprises and PE institutions. Industry insiders say that as the economy is in the doldrums, many companies favored by PE are under obvious operating pressure, cases of substandard performance begin to appear on a large scale, and the relationship between PE and the invested companies has become more subtle.

Contradiction eruption

On June 20, Zhang Ruijing, the legal representative of Hougu Coffee parent company Dehong Hongtian Industrial (Group) Co., Ltd. (hereinafter referred to as Hongtian Group), looked sad. He told reporters that the company's capital chain was in an emergency. According to the current situation, it can only maintain normal operation for one month.

Hougu Coffee, as the first large-scale coffee planting and processing enterprise in Yunnan, accounts for 20% of Yunnan coffee output. In the second half of 2009, Hougu Coffee began to press ahead with its planned listing plan, which it planned to list by 2014 after the introduction of PE last year; but now the listing plan has been shelved, and Zhang Ruijing pointed the finger at Hougu Coffee's PE institution, which was introduced last year.

In early 2011, six PE institutions, including Xinjiang Beichen Dexin Equity Investment Co., Ltd., Beijing Naqi Jiaye International Trade Co., Ltd. And Hohhot Zhongxiang Trade Co., Ltd., jointly invested in Hougu Coffee.

It is understood that at that time, the investor invested 280 million yuan in Hougu Coffee and obtained 36.25% of the equity, as well as 27 million yuan of investment, through the transfer of the equity of Hongtian Industrial, and the total investment of the investor was 307 million yuan. However, the transaction has not yet been completed, but the company has actually formed a claim on Hongtian Industrial.

After the introduction of the above-mentioned equity investment companies, Hongtian Group and the original entrepreneurial team hold a total of 63.75% of Hougu Coffee. Hongtian Group is still a major shareholder with a shareholding ratio of 59.74%.

But half a year after PE entered the enterprise, the contradiction began to break out. "after PE came in, it sent five directors of finance, quality control, and marketing. At first, they were not alert. Later, they found that the intention of PE institutions to control the company became more and more obvious. Later, they even came to the conclusion that Hougu Coffee owed a huge amount of money to the group company, and even forced us to transfer more shares to them through various means." Zhang Ruijing said.

Since October last year, the two sides have been deadlocked, and the contradiction has intensified. The reporter of the enterprise direction hinted many times that the background of the investor was deep, which made the enterprise unable to resist, but the enterprise was evasive when asked about the specific reference.

Hu Lu, deputy secretary general of Yunnan Coffee Industry Association, told reporters that Hougu Coffee tried to negotiate with PE through various means, but no final settlement was formed. Relevant departments in Yunnan Province also tried to mediate, but the effect was not obvious.

Crucially, Hougu Coffee's capital chain is in jeopardy because of discord with investors. According to the contract signed by both sides, the company loan must be approved by two (or more) directors of the new investor before it is valid, but at present, two directors assigned by PE to the company refuse to sign it, which directly leads to the failure of the bank's new credit approval to take effect even if it has been completed, forcing the enterprise to fall into the awkward situation of "only repaying the loan".

PE denies holding intention

Unlike Hougu Coffee, PE investors explicitly denied its intention to control the company. "We didn't want to control the company before, now or in the future, we're just financial investors," he said. Guo Rui, an investor representative of six PE institutions, said.

Guo Rui told reporters that the reason for the fund's delay is that investors have not seen that the funds are really used for the normal operation and development of the company. Through the continuous in-depth understanding of the enterprise after the entry of investment, it was found that Hongtian Industrial and Xiong Xiangzhong were suspected of embezzling Hougu coffee funds and misappropriating the company, but they were worried that the whereabouts of the original special investment funds were unknown.

To this end, from the end of October 2011 to November 2011, investors asked Lixin accounting firm to audit Hougu Coffee. According to the audit results, Xiong Xiangjin made payments to Hongtian Industry in the name of previous payments, but no actual business behavior took place. The true whereabouts of the money is unknown. PE investors suspect Xiong Xiang of entering fictional contracts, misappropriating company funds, and suspected of inflating assets, for example, they found that some woodlands were not planted with coffee trees.

The investor also presented to the reporter a letter of commitment on solving the problem of capital occupation of Dehong Hougu Coffee Company, which was jointly signed by 6 PE and Hongtian Industry and Xiong Xiangjin on October 21, 2011. According to the commitment letter, Xiong Xiangjin and Hongtian Industry, which is actually controlled, signed a letter of commitment on solving the problem of capital occupation of Dehong Hougu Coffee Co., Ltd. The letter confirmed that Xiong Xiangjin and Hongtian Industries occupied a total of 349.08 million yuan of Hougu Coffee due to historical reasons (finally based on the amount confirmed by an independent third party) and promised to return it before December 31, 2011, and the related parties would no longer occupy the funds. It also promised that if Hongtian fails to repay all its debts to Hougu Coffee by the end of 2011, Hongtian must transfer part of its stake in Hougu Coffee to six PE in a renegotiated and reasonable way to adjust the company's valuation. But Guo Rui said Xiong Xiangjin has not fulfilled this promise.

"Xiong Xiangjin has many other industries, and there is also a big clubhouse in Kunming, which has been losing money." A PE person who has conducted due diligence on Hougu Coffee said, "Xiong Xiangjin is relatively unruly. We went to the enterprise to make the best adjustment before, and Xiong also pointed out that we need to bet 500000 yuan before we can go, which is not the case in other companies."

The reporter saw in a listing project of "10.59% equity interest in Dehong Hongtian Industrial (Group) Co., Ltd." issued by Yunnan property Exchange on May 29th, 2012, that as of the end of 2011, Hongtian Group had total assets of about 1.985 billion yuan and liabilities of about 1.691 billion yuan. As of March 31 this year, the net profit was-7.4108 million yuan. This seems to confirm the unsatisfactory financial situation of Hongtian Group.

The company did not directly deny these claims, but only responded: "if the investors have no other ideas, why did we propose to buy back shares with more than 390 million yuan when there was a dispute between the two sides last year, and the investors did not discuss with us at all?"

What is the solution to the contradiction?

For both investors and Hougu Coffee, wealth creation was a shared vision of the agreement, but just a year later, such expectations have come to naught. Zhang Ruijing said that the company had planned to complete the listing by 2014, but now it is impossible to talk about the listing plan in the short term. Investors had predicted that Gu Coffee would make a net profit of 40 million yuan in 2011 and 100 million in 2012. As a result, Hougu Coffee has been valued at 1.33 billion yuan. According to the above-mentioned PE institutions who have been to Hougu Coffee, this valuation is a bit too high. However, Hougu Coffee said that such a valuation was put forward by investors.

Things have become more complicated. Guo Rui provided a description of the case filed by the Economic investigation Detachment of the Dehong Prefecture Public Security Bureau on June 4, 2012 against the Xinjiang Beichen Dexin Equity Investment Co., Ltd. Partnership, saying that Xiong Xiangjin, the legal representative of Dehong Hougu Coffee Co., Ltd., was suspected of embezzlement, embezzlement and loan fraud reported by the enterprise. The detachment was put on file for investigation on April 26 of the same year, and the case is still under investigation.

In recent years, there have been more and more cases of deterioration of the relationship between enterprises and investors. Yanhuang Health Media, Kuxun, Zhongxuan Biochemistry, Sarah Flower Network and many other enterprises have caused conflicts between enterprises and investors, resulting in a break-up between enterprises and investors. the result is that the founder is helpless to be kicked out, or both lose. In particular, due to the current economic downturn, many enterprises invested by PE have encountered lower-than-expected or even declining performance growth. How to deal with the relationship between PE and enterprises has become an unavoidable proposition.

Industry insiders said that PE institutions and enterprises often sign gambling agreements, and at present, many enterprises have triggered gambling provisions because of performance problems. As far as the reporter knows, a number of PE/VC institutions, such as Junlian Capital and Jiuding Investment, have made it clear that they will not exercise the relevant safeguard clauses because of economic cyclical fluctuations.

China Coffee Trading Network: www.gafei.com