Sunset, a reciprocal image. Photo ET
Cargolux: The Deal with HNCA
Earlier in 2013, no
one in Luxembourg would have known the name HNCA. The Acronym stands for Henan
Civil Aviation Development & Investment Co., Ltd, created in June of 2012.
HNCA has three shareholders: Henan Coal Chemical Industry Group, Henan
Transport Investment Group and Zhengzhou City Real Estate Group. Citing from a
speech translated into neo-Chinese English: "Zhang Mingchao, Chairman of
HNCA, spoke that the HNCA had the glorious mission of developing the civil
aviation of Henan province. The Company will keep learning, innovating,
optimizing operation, and make more contribution to the construction of
Zhengzhou Airport Economic Comprehensive Experimental Zone and Henan
Province."
I had a look at the "Commercial Cooperation
Agreement" between HNCA and Cargolux in the form of the "Updated
draft of 30 September 2013, changes as per meeting HNCA Cargolux 10 December
2013". It has 13 pages, cover page included, and 5 pages of attachments !
The fact that such a short, poor document saw little
improvement over the last 10 weeks, is reason enough that I would be
embarrassed to bring such a document to a meeting.
Apart
from the very little remediation to the text, my analysis fills me with doubt
about the negotiation skills of those who did this, the poverty of the language
which allows for many questions and opens the door for conflicts in the future,
and to open legal questions, which I would ask my lawyer. I have to believe and
hope that CV's lawyers saw those considerable questions, which they didn't want
to detail publicly?
1. Negotiation 101
HNCA
exists since mid 2012. Its mission is to focus on the "
Zhengzhou Airport Economic Comprehensive Experimental Zone and Henan Province."
Did you read "Experimental"? It says further that "The Company
will keep learning, innovating...".
No one at this stage can
say that the parties don't negotiate in good faith. There is an exciting
project: creating an airport, now encroached by several towns, expand it from 1
to 4 runways, create a JV with CV for another all cargo airline in Zhengzhou,
together with all the infrastructure on the ground, including maintenance and
pilot training. Nothing of these exists today. As a young adventurer, not
risking my own money, I would go for it in a minute. And as a broker, I would
sell it as a nice story for a nice fee to anyone who would listen.
But does this
accomplish the "glorious mission" to guarantee CV's future? No one
knows from this Agreement exactly what was agreed to. But essentially, not much
has changed when it comes to CV's extremely low valuation. It was essentially
pre-determined by the undervalued and unfortunate Qatar Airways deal. Now, for
the neutral outside observer, there is maybe a very stupid seller, and a
sophisticated buyer. But it doesn't impede the next steps, if both sides are
happy with the price. The very impatient seller, the Luxembourg government,
seems very happy. The only problem there is, it isn't the seller's money, it is
the tax payer's money.
As for the rest, CV
will be a strategic asset for HNCA in the grandiose adventure of creating a
market, an airport with 4 runways, with infrastructure, a new airline with its
own maintenance and pilot school, and other unnamed JVs. If that is the
exciting project where we want to see CV's future, and where HNCA sees CV as a
strategic asset, the overwhelming question is, why didn't CV become a
shareholder of HNCA? There was enough valuation in CV (the real value of CV) to
get a reciprocal share for CV in HNCA, for no money down. But the opportunity
to get reciprocity and a fair valuation for CV was missed. Who negotiated this?
A pertinent question, as there was and is no real urgency.
2.
The "Commercial Cooperation Agreement" is barely an Executive
Summary.
If you buy or sell a
one family home in an Anglo-Saxon jurisdiction, the contract can easily have
180 pages. Selling 35% of CV, I understand, can be done in 18 pages, cover page
included. It is indeed much easier to read. As I'm not a lawyer, I appreciate
that fact, but I would ask my lawyer, if I hadn't fired him yet for such a
disappointing performance, the following questions:
Page 2: Define in more
detail voting rights and mandatorily convertible bonds
Page 4: Is import +
export cargo 30,000 tons or 60,000 tons?
Page 5: If cargo volume
through CGO doesn't reach 200,000 tons after 36 months, what happens?
Page
5: With so many JVs considered, why isn't there cross ownership CV-HNCA?
Page
5: There is much uncertainty as the Luxembourg government deals with a
non-sovereign Provincial government. What if rules change, CAAC doesn't
cooperate or the Chinese government comes out as bad cop undoing what the good
cop Henan Province seemed allowed to do?
Page
6: Are 4 flights binding? Who covers the losses? CV is a commercial venture,
not a government agency. Page six actually overflows with dictates of a planned
economy for a venture that has to care for the bottom-line in a market economy:
increase flights, additional "traffic rights", scaling up flights,
subsidies and their guarantee over time, etc. But: CV has no veto right, as
again, reciprocity would have demanded.
Page 7: 3.7. The Dual Hub Strategy Fund needs "Unanimous
decisions". Good luck.
Page 7: 3.8. "Reasonable cooperation" means
"best efforts" only?
Page 7. 4.1. "Reputable international consulting
firm". What can that be? At what cost?
Page 8. 5. CV could have had cross ownership in HNCA, at no
other cost than the value of 35% of CV. Or at least get a better price.
Page 9: 9 is boiler plate language. Just mentioning that
there was no excruciating effort in that paragraph.
Page 10: This agreement
is under the laws of England and Wales. Future JV's under Chinese laws. Dispute
resolution will be through arbitration in Hong Kong (HKIAC), a place not known
for its strong pro-Luxembourg bias. It is not impartial territory.
Page 11: 11. Waiver of
Sovereign Immunity. But of course: the good cop - bad cop plays out. Luxembourg
and the Province of Henan waive their rights. Beijing does not. It is not
involved for now. Later it will.
Page 12: 12. Just
standard clerical discipline: Fill in the following missing address for HNCA:
HNCA:
No.8 Shangwuwaihuan Road,
Zhengzhou City, Henan Province, China
Zip Code：450000
Phone: 0371-87519086
Fax:0371-87519086
Zhengzhou City, Henan Province, China
Zip Code：450000
Phone: 0371-87519086
Fax:0371-87519086
Page
12: 13.1. We are talking millions in fees, legal
etc. Does any third party get commissions? How much? Are those commensurate
with service levels provided? Not to a politically exposed person? Beware of international and Chinese anti
bribery laws. CV doesn’t need new fines, jailed managers, if not executed ones.
3. Conclusion. Manage risk. Start over again.
All in all,
the Agreement is a poorly written document, barely a draft Executive Summary
maybe, and an ill-conceived, -negotiated, and poorly defined undertaking. I
guess Shearman & Sterling, which is a sterling law firm, was only minimally
involved in the production of this document, and even worse, was not involved in
advising what the deal could be and should be. They would certainly love to
answer my questions from a lay man and
they have many more of their own.
There is
also some more intangible political risk, as was the case with Qatar. We are
not partnering with a Swiss or German entity. In this case we partner with one
of a newly assertive super power, which leaves the political risk at the level
of politics, preferences, and pragmatic choices for Luxembourg. Locally in
Zhengzhou, CV will be associated with a project that will cover probably about
30km2 or more, going from the present one runway small airport to a multiple of
four. It will have an important impact on zoning, and encroaching populations
will have to be displaced, villages razed. This displacement may not become a
major political issue though, as the local culture provides for a more docile
acceptance for general interest projects, than it would in Luxembourg.
Maybe it is
not too late to make corrections and fill in the blanks in the hollow Agreement,
blanks about which I hope there is at least a consensus between both sides over
answers, that there are common assumptions and verbal commitments at
this stage. HNCA has shown a positive approach, and will be glad to learn and
understand. In particular, that there is no mention, no declaration, no formal
guarantee to alleviate the rightful concerns of the Luxembourg employees, tax
payers and other stakeholders when it comes to their future.
