Shareholder blasts ‘ridiculous’ Migao Corp offer that would take company private

Once again shareholders are complaining about being given short shrift over a deal to take a Canadian company private via an insider bid.

In about two weeks, shareholders of The Migao Corp. will be asked to vote on a transaction whereby the chief executive plans to acquire the company, which owns and operates fertilizer production plants in China, for $0.75 a share.

Prior to the offer, chief executive Liu Guocai owned 34.2 per cent of the company, which was taken public via a reverse takeover transaction more than a decade back. (Since then it has completed two equity financings raising a total of $65 million.) At the time of the reverse, Guocai was also the chief executive. Buying out the minority — and the offer price does represent a premium to the shares’ recent trading price — will cost him about $26 million.

About six years back, the shares traded as high as $8.59. Compagnie Financière et de Participations Roullier is the company’s second largest shareholder with an 11 per cent stake. To get over the line the transaction requires support from holders of two-thirds of the shares voted at the meeting plus the majority of the minority.

“I have great reservations about the going private transaction. It’s a ridiculous offer, it’s a low-ball offer and the timing seems opportune given that the Chinese government has deregulated the potash market and reduced export taxes,” said Chris Damas, a shareholder and the editor of The BCMI report.

“Given the conditions imposed we are not sure whether the transaction will be completed. I won’t be tendering,” added Damas who is in the processing of organizing a challenge to the offer.

For its part, Migao said in the 120-page circular sent to shareholders, that the offer “was fair to minority shareholders from a financial point of view.” Migao based that conclusion on the work done by a three person special committee — which was advised by Houlihan Lokey (China) Limited. Four of Migao’s nine directors have no direct ownership in the company. Seven of its nine directors have options, all of which are exercisable at a price above $0.75 a share.

Damas’ objections boil down to four main points:

1. The lack of an auction

In other words there is no guarantee that shareholders are receiving the highest consideration possible. In the circular we are told the arrangement originated from an offer by the chief executive. “The Corporation did not formally solicit third parties to make a proposal to the Corporation for a business transaction similar to or in lieu of the Arrangement or otherwise run an ‘‘auction’’ process.”

2. The lack of certainty

One of the conditions of closing the deal is “the completion of the purchaser’s arrangement for financing to pay for the common shares.”

3. The low price

At $0.75/share the price represents a considerable discount to book value. At March 31, 2016, the company had $310.8 million of equity — or $5.92 per share. By a similar calculation, working capital per share amounts to $3.09. Houlihan Lokey, used two methods to determine fair value: discounted cash flow and selected companies analysis. It concluded the range of “fair market values” was between $0.32 — $0.98 per share.

4. The low break fee

Under certain circumstances, if the agreement is terminated, the company is required to pay the purchaser $500,000.

Messages left with Migao seeking a comment weren’t returned.

Financial Post
bcritchley@nationalpost.com 

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