China Advanced Construction Materials Group (China ACM) (NASDAQ:CADC) announced Thursday it received a letter from hedge fund manager and shareholder Echo Lake Capital, urging its board to reject the recent takoever offer from its CEO and COO, claiming the bid undervalues the company.
At the end of July, China ACM announced that its chairman and CEO, Xianfu Han, and vice-chairman and COO, Weili He, offered to privatize the company by acquiring shares not already held for a price of $2.65 each.
Han and He currently own an aggregate 49.5% of the company's common stock.
In the letter, Ephraim Fields, a partner at Echo Lake, claimed the chairman's offer of $2.65 per share is "grossly inadequate, and noted China ACM's tangible book value of $4.22 per share, adding that the offer represents only 63% of this value.
The letter also pointed to China ACM's $71.3 million in accounts receivable, the company's largest asset, of which the company said it should be able to collect virtually all. The company's second largest asset is a cash position of $15.4 million, including $3.4 million in cash and equivalents, and $12.1 million in investments.
China ACM produces certified, eco-friendly ready-mix concrete for technical infrastructure projects, like high-speed rails. Based in Beijing, the company also offers technical services related to its core concrete business.
Fields said Echo Lake, which holds a stake in China ACM, does not promote the liquidation of the company, as it believes the company is worth far more than book value.
However, the letter continued to claim that if liquidated at only 95% of its tangible book value, China ACM would see gross proceeds of approximately $4.01 per share, 51% higher than the chairman's offer.
Fields also mentioned China ACM's reference to its total combined backlog at a record $87 million during the company's last earnings conference call, where chairman and CEO Han claimed: "We remain confident that our historically strong growth will continue."
Echo Lake said it believes the company's shares will exceed $2.65, as they did in early may 2011, if the low-ball offer is rejected.
Any merger agreement would require the majority approval of China ACM's shareholders, and Fields reminded the board's directors of their fiduciary responsibility to act in the best interest of shareholders.
On the Nasdaq Exchange, shares of China ACM rose 2.76% to $1.85 as of 10:31 am EDT.