Ephraim Fields of Echo Lake Capital Urges China Advanced Construction Materials Group to Reject Chairman's Recent Buyout Offer
September 08 2011 - 8:00AM
- Urges Board to reject Chairman's recent buyout offer
- Believes offer is grossly inadequate and not in best interests
of shareholders
- Notes that opportunistic offer equates to only 63% of tangible
book value of $4.22 per share
- Notes that company recently announced record backlog
- Believes liquidating company would yield significantly more
than $2.65 per share
- Notes that if CADC were liquidated at only 95% of tangible book
value, it would result in proceeds of approximately $4.01 per share
or 51% greater than the Offer
- Believes that if offer is rejected, stock price will ultimately
trade significantly higher than $2.65
- Reminds Directors of their fiduciary responsibility to act in
the best interests of all shareholders
Mr. Ephraim Fields of Echo Lake Capital today announced he had
delivered a letter to the Special Committee of China Advanced
Construction Materials Group, Inc. (Nasdaq:CADC). In the letter,
Mr. Fields explains why the recent takeover offer for the company
is grossly inadequate and urges the Board of Directors to reject
the offer.
The full text of the letter follows below:
September 8, 2011
To Ms. Jing Liu, Mr. Tao Jin and Ms. Yang Wang:
We note that on July 26, 2011, the Chairman and Vice Chairman of
China Advanced Construction Materials Group, Inc. ("CADC" or the
"Company") offered to acquire all the outstanding shares of the
Company not currently owned by them for $2.65 per share in cash
(the "Offer").
As longstanding shareholders, we are very familiar with the
Company's financials as well as its vast and attractive growth
opportunities. We have also spent significant time analyzing
comparable companies and comparable going private
transactions. Based on our analyses, we believe the
Offer is grossly inadequate and that accepting the Offer would not
be in the best interests of CADC's
shareholders. Rather than paying CADC's shareholders
a premium for control, the Offer is a highly opportunistic bid that
fails to provide shareholders fair value for their
investment. We believe the Offer is inadequate for several
reasons. One of the most glaring examples of the inadequacy of
the Offer is that it equates to only 63% of the Company's tangible
book value of $4.22 per share. CADC's largest asset is its
$71.3 million of accounts receivable, and CADC's management has
repeatedly (and most recently on the latest earnings conference
call) said it should be able to collect virtually all of these
receivables. CADC has said these accounts receivables are
"primarily composed of large, highly creditworthy state owned
enterprises." Furthermore, we note that all of the Company's
accounts receivables are listed as Current Assets (indicating
management's belief that these receivables will be collected in
less than 12 months) and that management has taken only very small
provisions for doubtful accounts on these receivables (further
illustrating management's belief that it will be able to collect
these receivables).
CADC's second largest asset is essentially cash of $15.4
million. This includes $3.4 million of Cash and Cash
Equivalents and a $12.1 million Investment, which is cash that has
been invested in various financial instruments. We believe
CADC's remaining assets could be easily monetized and note that the
company has no goodwill or intangible assets. As a
result, we believe shareholders would receive far more value if the
Company were simply liquidated as opposed to being sold for $2.65
per share. Hypothetically, if CADC were liquidated at only 95%
of its tangible book value, it would result in proceeds of
approximately $4.01 per share or 51% greater than the
Offer. Liquidating CADC is not our first choice since we
believe the company is worth far more than its book
value. However, liquidation is clearly a far more attractive
option for shareholders than is accepting the
Offer.
CADC has significant tangible assets that can easily be
monetized. As a result, if you believe the company's SEC
filings are accurate (which we assume you do), we fail to
understand how you could justify accepting the
Offer.
CADC's management has repeatedly spoken about the company's
attractive growth prospects. In fact, according to the
transcript of the last earnings conference call, Chairman Han said
"with our total combined backlog at a record $87 million, we remain
confident that our historically strong growth will
continue." Considering the Company's record backlog, healthy
balance sheet and attractive competitive position, we firmly
believe the Chairman can significantly increase his offer for the
company. We further note the confidence the Chairman expressed
in his Offer letter regarding his ability to raise the capital
necessary to finance the Offer. CADC has very desirable assets
and is clearly undervalued at $2.65 per share. As a result, we
believe CADC would be an attractive acquisition candidate for a
number of financial and strategic investors, so we encourage you to
actively shop the Company.
Importantly, we believe that if the Chairman (or any
other party) is unwilling to pay more than $2.65 per share to
acquire CADC, it would not be in shareholders' best interests to
accept the highly opportunistic and low-ball Offer. We believe
that if the Offer were rejected, over time, the share price of CADC
would significantly exceed $2.65, as it did only a few months
ago.
If and when the Company signs a merger agreement with the
Chairman or any other party who may wish to acquire the Company, we
would expect the merger agreement to contain the customary
provision requiring the transaction to be approved by a majority of
the disinterested shareholders. We wonder if the Offer can
successfully meet this condition given our strong belief that
shareholders would be better served by rejecting the Offer and
instead allowing CADC to remain public or pursuing the liquidation
of the Company (both of which we believe would provide shareholders
greater than $2.65 per share in value).
Since several of you are relatively new members of the Company's
Board of Directors, we felt it appropriate to remind you of your
fiduciary responsibility to act in the best interests of all
shareholders. We doubt that any credible member of
CADC's Board of Directors can honestly state that accepting the
Offer is in the best interests of shareholders. Clearly CADC
shareholders would be best served if the Board rejected the Offer
and implemented a plan to maximize long-term shareholder value by
(i) liquidating the Company, (ii) obtaining a significantly higher
takeover bid for the Company or (iii) allowing the Company to
remain public. We understand that many of you have
personal and professional obligations outside of your positions as
CADC Directors. We hope you will take seriously your fiduciary
responsibilities as Directors and assume you would like to avoid
any adverse publicity that will likely ensue should you fail to
uphold your fiduciary responsibility. We look forward to closely
monitoring your progress.
Should you care to discuss this or any other matters, I can be
reached at (212) 259-0530.
Sincerely,
Ephraim Fields
China Advanced Constr Matls Group (MM) (NASDAQ:CADC)
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