Wanhua Industrial Group is a product, and a part, of China’s incredible growth story. Over the past three decades, the company, based in the coastal city of Yantai, some 800 kilometers (500 miles) north of Shanghai, has transformed itself from a small regional manufacturer into Asia’s biggest maker of polyurethane, a plastic used in everything from automobiles to carpets. Looking to sustain that growth, CEO Ding Jiansheng has set his sights on Europe, which represents about one third of the global market for isocyanates, the raw materials for making polyurethane.

In late 2009, Ding found a target in BorsodChem, a Hungarian maker of chemical foams and plastics with a strong European distribution network. BorsodChem had gotten into trouble following a €1.6 billion ($2.1 billion) leveraged buyout in 2006 by U.K. private equity firm Permira Advisers and Vienna Capital Partners. When the global financial crisis hit, sales plummeted, losses mounted, and the firm risked collapsing under the weight of its €1.47 billion in debt. BorsodChem snubbed the first overture from Ding and Wanhua Industrial, hoping instead to refinance its debt with 60-odd lenders, so the Chinese fashioned an alternative strategy. Wanhua Industrial quickly bought up €200 million of the company’s debt to get a seat at the restructuring table. It was the first time a Chinese company had used this tactic, a staple of hedge funds and private equity investors seeking to gain corporate control.

“This was a secret strategy,” says Joseph Tse, a Beijing-based partner at Allen & Overy, the law firm that advised the Chinese company. “It was not without its risks or challenges.” Wanhua Industrial, a state-owned enterprise, needed to win approval from government regulators to pursue its gambit; the strategy also could have left it holding loans in a failing business. But in a three-day session in Frankfurt and Budapest, the company opened negotiations that eventually allowed it to convert its debt into a 38 percent stake in BorsodChem; it also provided €140 million in financing in exchange for the right to buy full control. By February 2011 the company had completed a €1.24 billion takeover, becoming one of the world’s three biggest producers of isocyanates, alongside Germany’s BASF and Bayer. Ding, who took over as chairman of BorsodChem in January, said the merger would turn the two outfits “from two regional players into one global company.” He called the deal a “beacon” for other Chinese companies looking to invest in Europe.

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