After a stormy 20-month partnership with CVC Capital Partners, Huang Zhaohui stepped down as general manager of Zhuhai Zhongfu Stock Enterprise Co., Ltd. (SH.000659) this past December. Zhuhai Zhongfu is the world’s largest supplier of PET bottles and a leader in China’s beverage packaging industry, and Huang had held the family’s last seat on the company’s board of directors.

Zhuhai Zhongfu has always been the largest packaging supplier to Coca-Cola and PepsiCo in China. It has about 60% of the domestic market. In a bid to better serve its long-term clients, Zhuhai Zhongfu created a unique production model by setting up its production lines at its clients’ bottling plants. Wherever there is a Coca-Cola or Pepsi production plant, there would be a Zhuhai Zhongfu packaging facility. Over the last 20 years, Zhuhai Zhongfu has established more than 70 subsidiaries across the country. In the first three quarters of 2008, the company’s revenue reached RMB2.4 billion (US$350.9 million).
Zhuhai Zhongfu’s giant operations have largely been built on the efforts of Huang Lefu, the company founder. Huang had a history of dabbling in an assortment of industries including fishing nets weaving, marine battery repairing and manufacturing and spray-bonded cotton production. He is quite sensitive to the market needs.

It was the differences with private investor that caused the Huangs to lose control of their own company.

In the 1980s, when he heard that Coca-Cola would set up bottling facilities in Mainland China, he promptly got a loan to start his plastic packaging manufacturing business. By using advanced imported equipment, he soon won the trust of his customers. In 1996, Zhuhai Zhongfu was listed on the Shenzhen Stock Exchange. As the beverage giants expanded into China’s second- and third-tier cities, Zhuhai Zhongfu earned annual growth of 15% to 20%. With its dominant market position, Zhuhai Zhongfu also planned to gain a foothold in the beer bottling market.

But Huang Lefu wanted more. He believed that introducing strategic investors would help boost the company’s development and lay a better foundation for his son, Huang Zhaohui, to succeed him. After talks with several potential strategic investors, Zhuhai Zhongfu ultimately sold its 29% stake to London-based CVC, Europe’s second largest private equity fund, in 2006. The price was RMB8.27 (US$1.2) per share. The deal made CVC the largest shareholder in the company. The total price tag was more than RMB1.65 billion (US$241.3 million), nearly twice the value of the company’s net assets.

On the surface, it seemed as though Huang had pulled off an awesome deal. Furthermore, CVC could also bring in other resources, in particular, funding. CVC’s capital infusion and credit extension from local and foreign banks could allow the company to buy advanced machines and open up new production lines. The deal also explored more potential international clients since some CVC global acquisitions include international beer giants. Most importantly, CVC promised to retain the existing management team and would not be involved in daily management. The private equity fund would only send auditors to regularly review its financial statements.

However, Huang Lefu’s dreams failed to materialize and before long, his foreign investor was calling the shots. In the initial acquisition talks, CVC said it would appoint only one or two directors while allowing Huang Lefu to take a back seat as the company’s advisor. But soon after the Ministry of Commerce approved CVC’s acquisition of Zhuhai Zhongfu in October 2007, all of the company’s directors and senior executives resigned. This effectively left the Huang family with only one seat on the board, occupied by Huang Zhaohui, while CVC took over three-quarters of the seats on the board and two-thirds of the seats on its supervisory committee. Soon, the company’s human resources, corporate planning and financial department bosses had all been replaced. Suddenly, general manager Huang Zhaohui became a commander with no soldiers. The newly appointed general manager, Wang Yuling, and other executives had all been hired after CVC took over control of the company.

In fact, there were several factors that led to the Huangs being out-maneuvered. The Huangs hold different views with the investor over corporate management Many of CVC’s new strategies and systems for business improvement were difficult to implement. But more importantly, the company’s return on investment was sagging badly, and its business expansion combined with shrinking market demand was cutting into profits. The beverage market was approaching saturation while tough competition was eroding profit margins in plastic bottle manufacturing.

In terms of new business, Zhuhai Zhongfu had invested more than RMB200 million (US$29.2 million) over the past five years but the project failed to produce results due mainly to higher costs for PET beer bottles. Over the past two years, Zhuhai Zhongfu’s growth had slipped by 6.7% and 16% respectively, while rising prices of raw materials, higher labor costs and taxes added to its misery. Therefore, CVC decided it was time to do away with the Huangs’ traditional family management style. As the global economic downturn deepens, CVC plans further layoffs in 2009.

Zhuhai Zhongfu’s transition should be considered a good deal given the current financial crisis. But there are many people who consider the Zhuhai Zhongfu case another example of how foreign capital assimilates quality Chinese companies. In either case, the Huangs will have plenty of time to reflect on the decisions that led to their demise. In the meantime, the remaining 11.8% of the company’s shares currently held by the Huangs will probably continue to be sold off.