Written by TradersHuddle Staff
Thursday, 08 September 2011 08:09
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
NEW YORK, Sept. 8, 2011 (GLOBE NEWSWIRE) -- 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