REX Global-Yota Devices deal pushed under revised plan

April 22, 2016 18:21
Hong Kong is one of the best places for Russian startups to raise funds, says Yota Devices' Vladislav Martynov. Photo: HKEJ

REX Global Entertainment Holdings (00164.HK), a Hong Kong-based company that mainly focuses on leisure, tourism and entertainment-related businesses, has entered into a new deal in relation to the acquisition of a stake in Russia's Yota Devices.

The company will now hold 30 percent stake in Yota, which is involved in smartphone manufacturing and mobile broadband services in Russia, in a deal worth US$46.5 million, rather than the nearly 65 percent stake that was flagged earlier.

In October last year, the companies announced that REX Global (RG) was buying 64.9 percent of Yota for US$100 million.

The revised plan will see 70 percent stake being held by Yota's existing owners -- Telconet Capital Capital Partnership, Rostec, and Yota's management.

Telconet Capital, a privately-owned Russian investment fund, will hold 34.9 percent, while Russian state firm Rostec will have 25.1 percent and Yota's management 10 percent.

The new deal is subject to an intellectual property licensing agreement, under which China Baoli Innovation Technologies -- a subsidiary of REX Global -- will have the right to market and sell the Russian partner's dual screen smartphone YotaPhone in China, Hong Kong, Macau and Taiwan.

"The new plan, with an intellectual property licensing agreement, will create mutual benefits for both parties and optimizes the value of the deal," Yota Devices' Chief Executive Vladislav Martynov told the Hong Kong Economic Journal.

"As a startup, we need funding to scale our business. More importantly, having an Asian investor is of strategic importance to Yota, which has proven success in Greater China region," Martynov said in an exclusive interview.

In the first nine months of 2015, Yota achieved total revenue of US$15.9 million in the China market, an increase of 11 percent compared to the same period in 2014, according to reports.

Greater China is currently the top market for Yota products, followed by Russia, Martynov said.

According to regulatory filings in Hong Kong, REX Global's previous share acquisition proposal in Yota couldn't proceed on the original terms as "the Yota SPA constitutes a reverse takeover under Rule 14.06(6) of the Listing Rules".

"Buying Yota for US$100 million would have been a big bite for RG," pointed out Paul Serfaty, director of Asian Capital Partners, an independent investment bank that specializes in mergers and acquisitions.

"Yota is almost double RG's asset base, and triple its HK$244 million equity," he noted.

According to Serfaty, Hong Kong stock exchange authorities may have raised objections to Rex Global's original proposal as it was perceived to be posing undue risks for the listed firm's minority shareholders.

With reverse takeovers (RTOs) becoming common, market regulators have been tightening their oversight on such deals, he said.

"To do a deal, RG had to change the size of the deal, perhaps making a smaller investment. Or RG could have been required to raise capital through a rights issue, so that it had the cash to make an acquisition without ceding control of itself -- though even then the size of the deal may still mean it is deemed an RTO by HKEx," Serfaty said.

Hong Kong's allure

Despite some regulatory issues, Martynov considers Hong Kong to be one of the best places for Russian startups to raise funds.

Advanced financial infrastructure and the city's proximity to China are among the biggest draws for foreign firms, the Russian executive said.

As relations have been strained between Russia and the West, Chinese investment has become more important to Russian companies than ever.

But for Martynov, China means more than just investment.

According to him, Yota has a partnership with ZTE which will see the Chinese telecommunications company manufacture the third generation of YotaPhones.

During an APEC Summit in 2014, Russian leader Vladimir Putin gave his Chinese counterpart Xi Jinping a dual-screen YotaPhone 2 as a gift.

Since then, YotaPhone has been referred to as "a symbol of Sino-Russian cooperation".

However, the Yota case appears to be an exception rather than the rule, when seen in the context of the overall Sino-Russian business partnerships.

In the first seven months of 2015, Chinese direct investment in Russia fell by a fifth compared to the same period in the previous year, according to Russian news agency TASS.

While oil & gas and natural resources are often seen as Russia's cutting edge industry, Chinese investors' interest is shifting away from energy, given the slide in prices of oil and other commdities on global markets.

According to a Financial Times publication, energy-related initiatives accounted for 53 percent of China’s outward mergers and acquisitions deals worldwide in 2010. But the figure slumped to 1.3 percent four years later.

Meanwhile, other sectors including telecommunications, media and technology, real estate, leisure and construction, financial services, and automobiles saw their share rise to 47 percent in 2014 from 23 percent in 2010. 

The growing appetite of Chinese investors for technology may offer a good reason for a Russian tech start-up to stay positive.

"Russia's capacity in technology has been undervalued since the collapse of the Soviet Union," says Martynov. "Many people forget that we were the nation which first put a man into space."

"We didn't lose our technological capability. It is just that we stopped making it to the headlines in international media."

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