This write-up on Bright World (BW) is divided into 2 parts. It contains my deductions based on publicly available info on the takeover of BW. Before I begin, please take note that i am vested in BW and my views may be biased. What is mentioned in this posting cannot and should not be taken as professional investment advice.
Lets recap what has happened so far:
On 21 July, China Holdings Acquisition Corp (CHAC) announced today that it will make an offer to acquire all the shares of Bright World Precision Machinery Limited. CHAC has entered into a definitive agreement with World Sharehold Limited (World Share), the majority shareholder of Bright World, pursuant to which World Share will tender all the shares it holds in Bright World in the offer to be made by CHAC. Bright World, together with its subsidiaries, is an established Chinese manufacturer of conventional and high-performance metal stamping machines that serves industrial companies in rapidly growing manufacturing sectors — automotive, home electrical appliances and computer and telecommunications. The transaction, which has been unanimously approved by the board of directors of CHAC and is expected to be completed in the fourth quarter 2008 (barring any unforeseen circumstances), values Bright World at a minimum of approximately US$263 million (assuming CHAC acquires all issued Bright World shares, the initial shares of CHAC issued to World Share are valued based on the estimated redemption value of the CHAC shares and CHAC assumes Bright World’s existing debt).
Under the terms of the definitive agreement, CHAC will issue to World Share, which is controlled by Mr. Wang Wei Yao, the nonexecutive Chairman of Bright World, a promissory note automatically convertible into a minimum of 19.9 million initial shares of CHAC in exchange for World Share’s 77.42% equity ownership position in Bright World. For the remaining 22.58% of Bright World’s shares held by other shareholders, CHAC will offer SG$0.70, or approximately US$0.51, per share in cash. If 90% or more of Bright World’s shares are purchased, CHAC will increase its offer priceto SG$0.75, or approximately US$0.55, per share in cash. Also under the terms of the definitive agreement, World Share is eligible to receive additional CHAC shares, up to a maximum award of 3,765,000 shares, based on Bright World’s realized profit for Fiscal Year 2008, provided such maximum award will be reduced, share-for-share, by the number of initial shares in excess of 19.9 million. World Share also will be eligible to receive an additional 1,000 CHAC shares for each 0.001% increase in Bright World’s Fiscal Year 2008 net earnings (in Renminbi or RMB) above 20% compared with a base net earnings of RMB 144,863,000, up to a maximum award of 12,000,000 additional CHAC shares if Bright World’s Fiscal Year 2008 net earnings exceed a base net earnings of RMB 144,863,000 by 32%.
The total number of initial CHAC shares plus additional CHAC shares that will be awarded to World Share shall not exceed a combined maximum total of 35,665,000 CHAC shares. If Bright World achieves the specified 2008 financial performance benchmarks, CHAC acquires all issued Bright World shares, the CHAC shares issued to World Share are valued based on the estimated redemption value of the CHACshares and CHAC assumes Bright World’s existing debt, the transaction will value Bright World at approximately US$404 million. Under this scenario, the pro forma, fully diluted ownership of World Share in CHAC would be approximately 64% under the treasury stock method, assumingUS$10.00 per share. World Share also may receive a contingent payment as compensation for the foreign exchange impact on the funds in CHAC’s trust account if the US dollar weakens against the RMB between signing and closing of the transaction.
Upon completion of the transaction, CHAC will seek to list its shares on the New York Stock Exchange. Messrs. Wang Wei Yao and Shao Jian Jun, non-executive Chairman and Chief Executive Officer, respectively, of Bright World, will continue in those roles with the combined company. With a gross plant production area of over 230,000 square meters, Bright World’s product line includes over 100 models of metal stamping machines, with an emphasis on high performance metal stamping machines. Its product line also includes board cutting machines, bending machines, Computer Numeric Control (CNC) metal stamping machines and other complementary heavy machine tools. The company’s vertically integrated structure allows it the flexibility to fulfill custom design stamping machine requests at competitive rates.Since 2005, Bright World has successfully refocused its product portfolio toward high-performance metal stamping machines that yield higher prices, enhanced margins and superior growth prospects.
From 2004 through 2007, in US dollar terms, Bright World achieved a revenue compounded annual growth rate (CAGR) of 33.5%, a net profit CAGR of 28.3% and an EBITDA (earnings before interest, taxes, depreciation and amortization) CAGR of 31.1%. For the first quarter of 2008, Bright World’s revenues grew by 46.8% and its net profits increased by 57.9% inUS dollar terms versus the comparable period in 2007. The definitive agreement between CHAC, on the one hand, and World Share, Mr. Wang Wei Yao and Mr. Shao Jian Jun, on the other hand, also provides the newly combined company with a right of first refusal to acquire four other companies controlled by Mr. Wang Wei Yao that manufacture agricultural machinery, auto parts and components, lawn equipment and construction equipment. The new company plans to be able to grow through the use of cash flow from operations and cash available from CHAC’s trust fund.
Source: Level13 Financial Ramblings
Further Reading: My view on Bright World takeover (Part 2)