NEW YORK, April 30, 2015 /PRNewswire/ -- The following is
an open letter sent April 30, 2015 to
the Board of Directors of China Cord Blood Corp (NYSE: CO) from
Jayhawk Capital.
We trust that the special committee of the independent directors
of China Cord Blood Corp ("China
Cord") will REJECT the extremely low privatization offer of
$6.40 per share from Golden Meditech
Holdings Co Ltd ("Golden Med"). Certainly, a going private
transaction at $6.40 per share would
greatly benefit Golden Med and Mr. Kam, the Chairman of both
China Cord and Golden Med. It would
not, however, be in the best interests of ALL shareholders. We are
disappointed you have not acted so far on our proposal to have
China Cord make a $150ml tender
offer to repurchase shares and pay a $125ml special dividend. This
tender offer and special dividend, along with an ongoing share
repurchase program and a consistent dividend would benefit ALL
shareholders, not just Golden Med and Mr. Kam. We are confident
that these actions coupled with the impressive free cash flow
generation (soon to be over $100ml per year) would drive this stock
to above $20 per share, again
benefitting all shareholders, not just Golden Med and Mr. Kam.
Cayman law requires that directors "must apply their minds
and exercise independent judgment in the ordinary course of
business". For the special committee of the independent
directors of China Cord this means
you must ensure you have all the facts to make an informed decision
to support management's initiatives. As independent directors you
must adopt due diligence and care to investigate the real
commercial benefit for China Cord
and ALL its shareholders regarding: a) repeated capital raising by
China Cord, whether from third
parties or from related parties; b) issuing large amounts of new
shares for an employee compensation plan; and c) stockpiling excess
cash with no viable commercial rationale for doing so. Some of the
fiduciary duties owed by China Cord Directors' under Cayman law
include: a duty to act in good faith in the best interests of the
company; a duty to exercise their powers for the purposes for which
they are conferred; a duty of trusteeship of the company's assets;
a duty to disclose personal interest in contracts involving the
company; a duty not to make secret profits from the Directors'
office; and a duty to act with skill, care and diligence.
Many investors believe that Golden Med has a plan to effectively
relist the shares of China Cord at
$50-$60 per share through a merger
with Zhongyuan Union Cell & Gene Engineering Corp Ltd
(Shanghai ticker 600645)
("Zhongyuan"), a Chinese A-Share listed company in the stem cell
business. Golden Med and Zhongyuan were suspended from trading
April 27th (the date the
take private offer was announced). Zhongyuan, through an investment
banker, offered Jayhawk (which Jayhawk rejected) approximately
$8 per share in February 2015. Below are key China Cord and Zhongyuan metrics.
Key Metrics of
Comparable Companies
|
|
China Cord
(CO)
|
|
Zhongyuan
(600645)
|
|
|
|
|
CNY-USD fx
6.21
|
4/24/2015 closing
price (Offer price for CO)
|
$
|
6.40
|
|
79.34 CNY
|
Market Capitalization
(thousands USD)
|
$
|
771,870
|
$
|
4,939,555
|
12/31/2014 Net Cash
(thousands USD)
|
$
|
356,000
|
$
|
56,650
|
Enterprise Value
(thousands USD)
|
$
|
415,870
|
$
|
4,882,905
|
|
|
|
|
|
2014 Revenue
(thousands USD)
|
$
|
99,052
|
$
|
76,728
|
2014 Operating Cash
Flow (thousands USD)
|
$
|
92,973
|
$
|
35,632
|
2014 Net Profit
(thousands USD) *
|
$
|
35,359
|
$
|
5,706
|
12/31/2014
Accumulated Subscriber Base
|
|
425,377
|
|
Est.
200,000
|
2014 New Subscribers
Added
|
|
65,890
|
|
23,377
|
|
|
|
|
|
* CO Net Profit adds
back interest on 7% Senior Convertible Notes
|
From the above table, China Cord
has over twice the cash flow, twice the cumulative subscribers
(babies), and three times the new subscribers (higher growth), and
trades at 1/10th the enterprise value. Clearly,
China Cord at $6.40, with two to three times the operating
metrics and 1/10th the enterprise value, would be valued
at well north of $60 per share in the
A-Share market. Clearly, one can see why Zhongyuan and Mr. Kam
might like to combine the companies or Mr. Kam might want to list
the company on the A-Share market independently. If the plan of
relisting in the A-Share market is true, ALL shareholders should be
allowed to participate and not be squeezed out of such an
opportunity.
Cordlife Group Ltd (Singapore
ticker CLGL) ("Cordlife") (which operates in the stem cell business
and owns 13.8% of China Cord) also
trades at a significant premium to China
Cord. China Cord has almost
three times the revenue, approximately five times the number of
stored umbilical cords, and ten times the free cash flow, yet
trades at a similar net enterprise value to Cordlife. An analyst
for Cordlife at Maybank Kim Eng stated in a report dated
April 28, 2015 (after the
$6.40 per share offer was announced)
that they believe the "ultimate end-game" for Golden Med is to
relist China Cord in China at much higher valuations. They went on
to say they believe China Cord's
Directors "now have a fiduciary duty to invite more offers that are
more attractive" than the $6.40 per
share offer.
This low ball offer is being made at a time when management will
no longer be able to "hide the ball" as cash flow and other metrics
will continue to accelerate rapidly with the ramp up of the
Zhejiang province, the
re-acceleration of Guongdong and the relaxation of the one-child
policy in China. We and other
significant shareholders have sent various letters to the Board of
Directors of China Cord which raised
a number of issues regarding cash expenditures, corporate
governance and related party transactions that have had the
cumulative effect of severely depressing China Cord's stock price. These are issues under
Cayman law which need to be diligently investigated by China Cord's Audit Committee (the independent
directors) in conjunction with its independent auditors, KPMG. The
investigation of these issues become even more pressing if they
were done as part of a scheme or arrangement to artificially
depress the stock price of China
Cord in order for Golden Med to privatize the company well
below intrinsic value.
One of the particularly egregious transactions that helped
depress the stock price occurred October 3,
2012, when China Cord issued
$50ml of 7% convertible bonds with a conversion price of
$2.838 to Golden Med, a RELATED
PARTY. Jayhawk and other investors asked repeatedly to invest at
the same terms and were denied. This transaction was unnecessary
and extremely dilutive, yet extremely profitable for Mr. Kam and
Golden Med. Now, two years later, China
Cord shareholders are effectively being asked to pay $117mm
plus the interest to redeem them.
Jayhawk Capital again requests that China Cord rejects the offer of $6.40 per share. We again request an immediate
announcement and execution of a tender offer by the company
to repurchase shares and the payment of a large special
dividend to ALL China Cord's shareholders. These two
initiatives are for numerous reasons in the best interest of ALL
the shareholders and would result in a markedly increased stock
price.
Yours faithfully,
Jayhawk Capital
Contact:
Michael D.
Schmitz
+1-775-200-1800
mike.schmitz@jayhawkcapital.com
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SOURCE Jayhawk Capital