South China Morning Post
The founder of a Chinese internet company has been detained by police as they investigate a botched overseas acquisition.Although Baofeng Group said in a filing on Sunday night that its chairman Feng Xin was arrested by police, sources close to Feng said that the investigation and informal interrogation had started a few weeks ago, stemming from the failed takeover of London-based sports agency MP & Silva Holding in 2016.The failure of the deal also highlights how a U-turn in national policy can prove to be the undoing of a star company in China after Beijing abruptly tightened its control on capital outflows, reversing an earlier policy that encouraged companies to pursue overseas assets. China's central bank, foreign exchange regulator, economic planning body and the ministry of commerce issued joint guidelines in 2017, blacklisting investment in sectors including sports, entertainment and property.Baofeng, which means "storm" in Chinese, was a high-profile company. The online video service provider's share price jumped 4,232 per cent within two months of listing on Shenzhen's ChiNext board in March 2015, making Feng a billionaire. China sets out grand plan to become world's soccer superpower by 2050In late 2015, Feng decided to capitalise on the company's stock market success and support its valuation by making a move to acquire MP & Silva, according to two people worked for him.Feng was also keen to follow President Xi Jinping's call to make China a soccer superpower since taking power in 2012, believing it would add weight to his business.Xi posed for a selfie with Manchester City striker Sergio Aguero and then British Prime Minister David Cameron during a visit to the UK in 2015.Manchester City striker Sergio Aguero's selfie with Chinese President Xi Jinping and former British Prime Minister David Cameron at the Manchester City football academy in October 2015. Photo: Twitter alt=Manchester City striker Sergio Aguero's selfie with Chinese President Xi Jinping and former British Prime Minister David Cameron at the Manchester City football academy in October 2015. Photo: TwitterSince Feng knew using the listed unit to execute the deal would weigh on cash flow, credit profile and bring it under the gaze of the securities regulator, Baofeng formed a joint venture in 2015 with Everbright Capital, raising 5 billion yuan (US$727 million) from a private equity fund from institutional and individual investors.The deal to buy a 65 per cent stake in MP & Silva was concluded in May 2016, valuing the sports company at around US$1 billion, according to Chinese and British media.According to the terms of the agreement, the joint venture would take over MP & Silva and within 18 months, Feng would use the listed firm to acquire it from the joint venture，if the target met certain conditions.Everbright and Baofeng's acquisition of MP & Silva won deal of the year in 2016. Photo: Handout alt=Everbright and Baofeng's acquisition of MP & Silva won deal of the year in 2016. Photo: HandoutBut the situation in the background was deteriorating.A stock market rout in China that started in June 2015 had wiped out trillions of yuan in market capitalisation. Baofeng's shares were also hammered, and by May 2016 its market cap had been cut by half to around 20 billion yuan.Baofeng's shares fell further on Monday and Tuesday before closing up at 5.27 yuan on Wednesday, giving it a market cap of 1.8 billion yuan. Overseas real estate and soccer clubs in crosshairs as China ramps up investment clampdownSoon after the stock market turbulence and China's U-turn on capital control measures, MP & Silva lost the rights to broadcast top-tier soccer games including the English Premier League and Italian Serie A. The sports firm was sued for delayed payments after it lost follow-up investment from its Chinese investors because of changes to China's overseas investment rules.In their 2018 annual report, Baofeng said "due to the change of policy and regulatory environment, MP & Silva went into difficulties ... so Baofeng decided not to repurchase the programme [shares]". The company recorded a 151.5 million yuan loss impairment. Is China-owned MP & Silva about to become the biggest fail in sports marketing history?But that was only the start of a nightmare for Feng and Baofeng.MP & Silva went bankrupt this February.Investors who contributed funds to the joint venture sued Everbright, as the agreement entailed Everbright to compensate them in the event of losses. Everbright in turn sued Feng and Baofeng for failing to repurchase the shares."Based on the available information, the dispute between Feng, Baofeng, Everbright and other investors is under contract dispute category," said Jason Xu, an M&A; lawyer based in Hong Kong."However, if it proves Baofeng and Everbright had worked out something illegal when marketing the fund for the acquisition, things would be more complicated," Xu said.MP & Silva was set up in 2004 by Italian businessmen Riccardo Silva and Andrea Radrizzani and made most of its revenue from selling soccer rights.This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved. Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.