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Fushi Copperweld: Buying Opportunity with Offer to Go Private

December 29, 2011 | About:
The board of directors’ Special Committee, Fushi Copperweld (FSIN), has announced that it has received a revised proposal from the chairman and Co-CEO Li Fu, Abax Global Capital and TPG Growth Asia for taking the company private by acquiring the rest of the shares they haven’t owned for $9.50 in cash. The new price is higher than the $9.25 per share offer previously submitted by Mr. Fu and Abax. However, initially, Mr. Li Fu and Abax Global capital had an offer of $11.5 per share in cash dated back in November 2010, when the shares were traded as high as around $10 per share. And now, when it was traded at $7.5, the offer came at $9.5.

FSIN is in the business of producing bimetallic wire products, mainly copper-clad aluminum and copper-clad steel products. Those can be used as a substitute for solid copper conductors in electrical or physical attributes. Currently, the company sold to 590 customers in 34 countries around the world, with the main concentration China, taking 79% of total sales revenue for the fiscal year of 2010, then North America accounted for 15%, Europe was for 3% and the rest was 3%. The top five customers represented 14%, 15% and 18% of total revenue in the last three years of 2010, 2009 and 2008. In terms of supplies, the raw materials consisted of copper, aluminum and steel which represented 63%, 32% and 3% of total raw material purchases.

In the financial statements, FSIN was the cash generator, keep having operating cash flow and, except in the year of 2008, where FSIN made large advance to suppliers and increase the level of account receivable substantially, pushing the CFO to zero. In addition, FSIN got quite liquid and conservative balance sheet, whereas it got nearly 40% of total asset in cash, with the amount of $164 million, $6 million both short and long-term debt. Adjusting that with the market capitalization of $285 million, the enterprise value was staying at $127 million. The offer of taking the company private at $9.5 per share, prices the whole company at nearly $205 million enterprise value.

The current offering price values FSIN at P/E 8.5x, P/CF 3x and P/B 0.5x if we take the enterprise value number. For me, it seemed to be quite undervalued price and it was the right move, beneficial for Mr Li Fu and Abax Capital to take the company private. Additionally, GMT Capital, the 10% owner of the company, has consistently bought nearly $4 million worth of shares in 2011.



So at the price of $7.5, it was 14% cheaper than the insiders' significant buy, and it was nearly 27% cheaper than the offering price to take the company private. That signals the buying opportunities right here. However, by the time of writing this article, the market might open much higher than $7.5. Then an arbitrage opportunity might present itself if the spread is high enough. The initial offer a year ago at $11.5 didn’t go through, so personally I think the lower price of $9.5 has little probability of closing either.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.5/5 (13 votes)

Comments

BEL-AIR
BEL-AIR - 2 years ago
They have been talking about this buyout for over a year now...

It is likely just another scam....

No disrespect to you Anh Hoang, thank for the effort in writing this, but you ever been to China lately, or at all.?

If you have you know about the books and fraud their, under the table deals etc.

I used to go to China lots, and you can't trust anyone their believe me.

You cannot trust the books in China or the auditors, even cash statements might be bogus, what many companies do is payout the bank manager to give false bank statements direct from the bank...

Buy another company or assets from other companies for $10 million but assets owned by brother in law and really worth only $1 million

Happens all the time in China...

I lost money last year by investing in some fallen knives in China that looked real cheap, it latter turned out to be scams.

Just ask Paulson about his Sino forest investment and how that went.

Even MOHNISH PABRAI knows better, just watch this video interview.

http://www.youtube.com/watch?v=oaL2v1nVokw

So run don't walk away from any company in China, listed in China or even having any office in China.

Adib Motiwala
Adib Motiwala - 2 years ago
Ann,

I did not follow your conclusion? What is the arb if you think the deal may not go through?
ken_hoang
Ken_hoang - 2 years ago
oh Adib, sorry if having any confusion, the arbitrage happens only when the deal is going through, if the spread is large enough, otherwise the price would fall back into , I think, $7 range.

Belair, thanks for your advice, if they mislead the numbers, then investors should just stay away. Of course there are majority of Chinese backdoor IPO has mislead the numbers, as Sino Forest case you mentioned. So the investors, only know their circle of competence, understand china might initiate any positions in Chinese operating companies.

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