The CVC-Qiao Jiangnan Buyout: Zhang Lan in the Spotlight, Public Opinion in the Shadows | Mega M&A

When will China's era of M&A arrive? This frequently asked question in recent years actually contains two directional meanings: externally, people expect Chinese companies to prove their strength, win status, and map out their footprint on the global stage; internally, the bubbles accumulated during the era of growth urgently need to be squeezed out, and we are all waiting for a more quality-driven, orderly, sustainable, and efficient model of development.

Yet arriving at an answer has proven difficult, as countless cases have shown. Not only because M&A involves multiple complex stages and multi-party interest games, but also because the "growing pains" that an industry must endure when entering a consolidation phase, or that a development model must endure when transforming, deeply affect many things and many people.

In a late-2024 article, The Countless Lies and One Truth About Chinese M&A, we wrote: for the M&A wave, dreams lie on one side, reality on the other. And dreams must eventually face reality.

It is precisely for this reason that we are launching this new column — "The Big Deal." "The Big Deal" aims to review past M&A cases, both successful and failed, and distill experiences and lessons worth referencing for today's M&A participants.

The following is the first article in "The Big Deal."

By Muxin Xu

Edited by Zhiyan Chen

After being banned from Douyin, Zhang Lan quickly pivoted to WeChat Channels and TikTok, maintaining a near-daily posting frequency. Compared to her Douyin peak of 8.23 million followers, her current account "Zhang Lan Qiao Sheng Huo / Lan Beauty Life" now has just over 5,000.

Zhang Lan has always been tagged with the label "unwilling to admit defeat." In her previous low points, she always seemed to find ways to turn adversity into business opportunity. This time is no exception. In one TikTok video, the caption reads: "No fear, no retreat — saluting the self that keeps fighting in life."

Looking back, two events marked the starting point of Zhang Lan's livestreaming career. The first was of course her son's divorce from his celebrity wife. The second was the ambiguously black-and-white story between South Beauty, the restaurant chain she founded, and capital. The latter was a decade-long commercial dispute encompassing traps in cross-border M&A, financial techniques of leveraged buyouts, and the collapse of a wealthy family's trust fund that left her suddenly debt-ridden.

In 2014, the globally renowned private equity firm CVC Capital Partners acquired 82.7% of South Beauty for $280 million. But just one year later, CVC sued Zhang Lan at the China International Economic and Trade Arbitration Commission (CIETAC) for "financial fraud," and is still pursuing debt collection to this day. In her livestreams, Zhang Lan has repeatedly simplified this into "foreign investors suppressing and bullying Chinese private entrepreneurs."

This seems to have become the most familiar narrative when overseas companies or capital take Chinese private enterprises as M&A targets. After China's WTO accession, foreign capital poured in, and particularly in consumer industries where local distribution channels were key, multiple cases of foreign acquisitions of Chinese brands emerged — such as Yum Brands acquiring Little Sheep, L'Oréal acquiring Mininurse, and Coca-Cola's proposed acquisition of Huiyuan. But they either aborted or ended badly.

In cases of failed cross-border M&A, "cultural mismatch" is often the easiest attribution. However, hidden within is an easily overlooked force: public sentiment.

CVC, as a storied European institution, has suffered several reputational and financial losses in the Chinese market. Zhang Lan's prolonged legal battle is a microcosm. What appears to be a conflict between a national entrepreneur and overseas capital is, in essence, answering one question: in extreme situations in the business world, which is more effective — appealing to reason or exploiting emotion?

The Success and Failure of Financial Engineering

On the seventh day of the first lunar month in 2015, Zhang Lan received a lawyer's letter informing her that she was barred from entering the South Beauty building she had built with her own hands.

Her first reaction was to rush to the scene. Inside the door stood 16 security guards, CVC management, and their hired lawyers. Even when Zhang Lan tried to squeeze in with the excuse of needing to use the restroom, she was firmly blocked. Amid the pushing and shoving, Zhang Lan was informed that she was no longer chairman of South Beauty. The physical confrontation finally ended with police from Yaojiayuan intervening to mediate.

CVC is headquartered in Luxembourg and is one of the world's well-known private equity and investment advisory firms, founded in 1981. Its business spans Europe, Asia, and the United States. In April 2014, CVC announced its entry into South Beauty, which Zhang Lan founded in 2000, becoming the largest shareholder.

The conflict between Zhang Lan and CVC arose from her discovery that her shareholding had been transformed into a shell company registered in the Cayman Islands, while her actual 13.8% stake in South Beauty had been pledged to a bank.

Here we must address how CVC accomplished this "bait-and-switch" — something entirely outside the wheelhouse of Zhang Lan, who had "built South Beauty one dish at a time."

CVC has a fondness for leveraged buyouts. Data from the US-based site Crunchbase shows that CVC's leveraged buyout transactions exceed 200, accounting for nearly 80% of all its M&A projects. Of the $280 million used to acquire South Beauty, only $60 million came from CVC's own pocket. Another $142 million came from bank loans, with the remainder raised from investors — meaning this was a 5x leveraged acquisition.

After acquiring South Beauty, CVC first established a holding company, which then 100% controlled a shell company, which in turn controlled 100% of South Beauty's equity. The shell company's equity was held by three entities: CVC (82.7%), Zhang Lan (13.8%), and employee stock ownership.

And the collateral for this $142 million loan was the shell company's 100% equity — including Zhang Lan's own shares. CVC did not inform Zhang Lan during this pledge process, but even if she had known, she could not have prevented the controlling shareholder's board resolution. This is a typical leveraged buyout technique: using small money to leverage big money, using other people's money to buy other people's companies.

The Achilles' heel of leveraged buyouts is corporate cash flow, because only companies with good cash flow can repay bank loans on time. And the two sides ultimately fell out because South Beauty's performance in the year after acquisition failed to meet expectations.

South Beauty's revenue problems that year likely had two causes. First, its positioning as "high-end dining" was affected by the tightened "three public expenditures" controls at the end of 2012. Second, CVC had misjudged South Beauty's overall fundamentals due to misleading information — what it later alleged, and what CIETAC ultimately found valid, as "financial fraud."

When initiating the acquisition, the high-consumption boom had already faded. Whether South Beauty could maintain booming business in a deteriorating market environment and find new growth points were questions CVC should have investigated during due diligence. CVC did indeed spend $36 million hiring the Big Three accounting firms and Bain Consulting to investigate.

But ironically, the rules of the mature business world seemed unable to detect the "cunning" born from entrepreneurial practice. The final result: CVC claimed that "Zhang Lan's serious financial fraud led to an excessively high acquisition price." This claim was upheld in final arbitration in April 2019, with Zhang Lan ordered to pay CVC $142 million plus interest.

The "Imaginary Enemy"

Despite CVC winning arbitration support, Zhang Lan, skilled at shaping public opinion, used media interviews and livestreams to construct an alternative "reality": "CVC's goal was to take South Beauty through an empty-handed white wolf scheme," "financial fraud is a false accusation," "Chinese entrepreneurs are immature, Chinese lawyers are immature, suffering bullying from foreign capital," "CVC Asia Pacific has blood-washed every Asian enterprise it invested in."

Over the decades of foreign capital entering China, cases of established foreign institutions and groups conducting cross-border M&A of Chinese local enterprises, only to end with "reputational and financial losses," have repeatedly emerged. Some naturally stand on the opposite side of Wall Street, denouncing them as barbarians at the gate, even elevating this to the national and ethnic level.

Yet the causes of failed cross-border M&A are in fact far more complex.

For example, CVC's cultural mismatch in China partly stemmed from misjudging policy directions. Its acquisition of EIC Education coincided with strict regulation of the tutoring industry; its acquisition of Zhuhai Zhongfu ran into environmental rectification of the plastic packaging industry. Repeatedly stepping on the gas at industry inflection points was an important reason for CVC's poor performance in China.

Data shows that before 2014, CVC invested in 8 companies in mainland China, and 6 of them saw performance decline after CVC's involvement. The most notable failure was Da Niang Dumplings.

In the same year that Zhang Lan accepted CDH Investments' funding, 2008, many things happened — especially successful cases of capital combining with the restaurant industry, such as Yum Brands investing in Little Sheep, IDG investing in Tea Station, and Quanjude going public. Wu Guoqiang, founder of Da Niang Dumplings, who had firmly refused investment, gradually began to waver.

In 2013, Wu Guoqiang turned 60 without a suitable successor. After careful consideration, he decided to bring in CVC, retaining only 10% equity himself.

But after CVC-assigned management entered, they implemented a series of cost-cutting and efficiency measures. For a brand whose selling point was "handmade fresh dumplings," the capital-favored approaches of "standardization" and "scaling" became destructive: machines replacing handmade processes, reducing dumpling weight (from 20g to 17.5g), raising prices while cutting service costs.

After extracting short-term cash flow, the two sides fell out. At the 2015 company annual meeting, founder Wu Guoqiang was blocked from entering and was injured in a conflict with security guards when forcing his way in. He then published an open letter accusing CVC of "hollowing out the brand," while CVC responded forcefully that "founders have no right to interfere with operations."

CVC then exited, with GreenTree Hospitality Group taking over. But the new owner couldn't save this already depleted brand. The only measure that could be called reform was frequently changing the logo, eventually simplifying the human figure to a "D" character, becoming a laughingstock for a time.

In 2022, Da Niang Dumplings — whose annual revenue had reached 1.5 billion yuan a decade earlier — had all its equity sold to its parent company for only 399.8 million yuan.

Replacing management after acquisition is standard practice for overseas PE firms, with the core pursuit of efficiency and scale maximization. But it cannot be denied that at that stage in China, the replaced management was usually first-generation entrepreneurs, allowing stories of "overseas capital squeezing out self-made founders" to be packaged beyond business logic conflicts as the most传播able content.

With more such conflicts, business disputes could easily be escalated to public trials.

For example, in the 2012 NVC Lighting control battle, despite concrete evidence of Wu Changjiang embezzling funds, distributors surrounded investors in the name of "protecting a national brand," demanding the expulsion of foreign shareholder Schneider Electric. This farce ended with Wu Changjiang imprisoned, but left behind collective memory of "Wall Street strangling private enterprises."

Another shareholder representative, Yan Yan of SAIF Partners, later summarized this struggle well in Caixin: "Schneider doesn't make light sources, has no business competition with NVC, and it only bought less than 10% equity — there's no way it could gain control... Schneider was completely the 'imaginary enemy' in this mass movement. SAIF never had any intention of selling equity to Schneider. Wu Changjiang's resignation had nothing to do with Schneider either."

Another example: when Coca-Cola offered HK$17.9 billion to acquire Huiyuan in 2008, Zhu Xinli's industrial chain upgrade plan was distorted by public opinion as "selling out the country for glory." Over 80% of netizens opposed the transaction, and the Ministry of Commerce ultimately vetoed it on antitrust grounds. Ironically, Huiyuan's sales team, cut to accommodate the acquisition, could not be rebuilt, and the company eventually delisted with 11.4 billion yuan in debt — while none of the opponents took responsibility for its decline.

Going further back was one of the earliest failed foreign M&A attempts in China — the 2005 Carlyle acquisition of XCMG Group. Carlyle offered $375 million for 85% of XCMG, but XCMG's biggest competitor at the time — Sany Heavy Industry chairman Xiang Wenbo — blogged furiously that this case could cause state asset流失, and declared willingness to bid 30% above Carlyle's price for XCMG. Public opinion tilted against Carlyle. The following month, following a hearing organized by China's Ministry of Commerce, what was then the largest foreign acquisition in early 21st century China was declared a failure.

A Hong Kong financial figure commented on this: "The entire private equity industry learned its lesson from the Carlyle-XCMG deal — never go public with a transaction unless you're 99.9% sure the government will approve. In retrospect, Carlyle was incredibly naive at the time."

Of course, foreign capital has also produced perfect cross-border M&A cases in China, which is why capital continued to pour in for a period. For example, L'Oréal Group's 2003 acquisition of the then-national brand "Mininurse," which had already established sales channels in second- and third-tier cities. L'Oréal spent $120 million to acquire these ready-made channels.

If we look back at failed cross-border M&A cases from the perspective of public sentiment, two key points emerge:

1. The root is the natural conflict between business operation thinking and capital arbitrage thinking. As someone commented on Zhang Lan's spat with her initial investor CDH Investments: Zhang Lan has an industrialist mindset, having "built South Beauty one dish at a time," reluctant to spend even a penny where it wasn't needed. CDH has a financial mindset, managing other people's money — when it's time to spend, you spend. The thinking differs greatly.

2. Overseas capital's confidence in and reliance on mature commercial processes, combined with clear underestimation of private entrepreneurs' propaganda and mobilization capabilities. Especially in consumer industries, successful private entrepreneurs are often masters at reading public opinion, sentiment, and emotion. For example, NVC Lighting's Wu Changjiang was twice expelled from the board and twice "restored to power," both times leveraging distributors' dependence on "Brother Wu" and integrating their self-interest in the crusade against foreign shareholder Schneider. Notably, Wu Changjiang was also skilled at using media. After resigning, he violated agreements and made multiple public statements, using grand vocabulary to express dissatisfaction with shareholders. An anonymous email received by media at the time stated: "Deliberately forcing out a founder shareholder to seize position has become a 'bad precedent' in the investment world." And when disputes and舆论 backlash occurred, foreign capital's standard practice of relying on financial and legal means often left them unable to respond effectively. For example, although CVC won in litigation and continues to diligently pursue debt collection, it still struggles in the舆论 arena against Zhang Lan's narrative of "CVC blood-washing Chinese enterprises."

"They Owe Chinese Entrepreneurs"

Public opinion tactics are a double-edged sword — they also cut against Chinese acquirers.

At the end of 2004, SAIC Motor spent approximately $500 million to acquire 48.92% of SsangYong Motor, a Korean automaker in precarious condition. But after gaining control, SAIC failed due to improper handling of opposition from Korean labor unions. The SsangYong union launched large-scale strikes on grounds of "technology leakage" and "employment security," and through media amplified the negative image of "Chinese enterprises exploiting Korean workers," ultimately leading to integration failure and bankruptcy liquidation.

Additionally, initiators sometimes suffer the consequences themselves.

Shandong Ruyi Group, which went public in 2007, decided to build itself into "China's LVMH" through acquisitions. Over several years, Shandong Ruyi Group spent over 35 billion yuan on acquisitions, earning Bloomberg's praise: "Chinese people aren't just buying luxury goods, they're buying the companies that make luxury goods." This undoubtedly boosted the confidence of then-leader Qiu Yafu, who later explained his aggressive purchasing: "Using the power of capital to make international fashion resources serve us is the optimal path for China's garment industry to catch up to international levels."

However, the business world cannot be conquered by ambition alone. Ruyi Group underestimated the difficulty of post-M&A management, and its fashion empire eventually became mired in debt — a dream of grandeur turned to dust.

If we follow the logic of "business to business, emotion to emotion" and look back at the origins of the South Beauty M&A case, CVC's appearance itself had dual attributes.

For CVC, it found a company that had failed in its IPO attempt — a decent M&A target, because such companies almost qualify for IPO and have undergone securities firm listing辅导, with clear and transparent financial data.

For Zhang Lan, she had accepted CDH's financing and signed an IPO betting agreement. Falling at the IPO threshold left her almost unable to repay CDH's repurchase clause. CVC's acquisition payment was timely rain.

More than twenty years ago, Zhang Lan tended to blur the distinction between business agreements and the world of personal favors in public settings. She publicly blasted CDH: "They brought us nothing, such a small amount of money diluted such a large share of ours. I wanted to buy out this investment long ago, but CDH's return demands were too high, we couldn't reach a deal. Consider it tuition for private entrepreneurs."

And Yan Yan of SAIF Partners immediately saw through this sophistry: "Did CDH put a gun to your head back then?"

On November 2, 2022, according to a Singapore High Court ruling, the shell company established by CVC would take over Zhang Lan's family trust account. This contained the $142 million Zhang Lan received from selling South Beauty.

When this verdict and news of Zhang Lan's massive debt circulated online, Zhang Lan quickly opened a livestream to respond: "They owe me, it's CVC that owes Chinese entrepreneurs, ah baby, I don't owe anyone."

References:

[1] Phoenix Network Finance: "Zhang Lan Recalls Being 'Schemed' by Capital: A Singapore Lawyer Was the Most Fatal"

[2] Tencent Deep Web: "Exclusive Dialogue with Zhang Lan: $142 Million Is Legally Earned, CVC Made False Accusations and Bullied Me | Deep Web"

[3] ChinaVenture: "South Beauty's 'Capital Defeat'"

Image Sources | IC Photo