NEW YORK, April 5, 2016 /PRNewswire/ -- The following is an
open letter sent April 5, 2016 to the
Board of Directors of China Cord Blood Corp (NYSE: CO) from Jayhawk
Capital.
It is clear that the Board should accept a privatization offer
only if ALL shareholders will receive the same $15+ per share
($6.40 in cash and $8.68 in Nanjiang Xinjiekou Department Store Co.,
Ltd. ("NXD") shares) at which
Golden Meditech Holdings Co Ltd ("Golden Med") has agreed to sell
its stake. China Cord Blood Corp ("China
Cord" or the "Company") should be negotiating directly with
NXD and no longer allow Golden Med to be the go-between whose sole
intent is to take all the profit for itself.
The pattern of taking value away from shareholders of
China Cord has become standard
practice. Consider the convertible bonds issued in 2012 to
KKR and then to Golden Med at low prices, thus diluting the
existing minority shareholders. The proceeds from the bonds were
never needed or used, and the bonds ultimately eliminated
$525 million of value for
China Cord shareholders (based on
the value Golden Med is receiving for them from NXD).
Consider too the share-based incentive compensation for
management adopted by the Company in December 2014 whereby nearly 10% of the
outstanding shares of China Cord are
to be awarded for hitting modest growth targets management was
already expected to meet. Golden Med has announced plans to vest
these shares immediately as part of the NXD transaction, despite
only being one year in and despite even those modest incentive
goals not being reached. This will cost shareholders over
$100 million (7,080,000 shares x
~$15 per share). Self-interested
transactions like these must stop immediately. However, the
privatization effort by Golden Med is clearly another disaster
waiting to happen for China Cord's
minority shareholders.
China Cord has been performing
strongly and is expected to continue to do so as the effect of the
Chinese Government relaxing the one-child policy begins to be felt
more dramatically. China Cord is
generating cash of approximately $25
million per quarter and has $440
million of cash on the balance sheet. Furthermore, profit
guarantees included in the NXD agreement indicate profits of at
least $46 million in 2016,
$56 million in 2017 and $67 million in 2018. Assuming the convertible
bonds are redeemed by using cash on the balance sheet, these profit
guarantees would suggest a stock price of $35 per share (40 P/E x $56mm / 73mm outstanding
shares, + cash). If China Cord had
not issued the convertible bonds or share-based compensation or
dilutive secondary transactions and bought back shares using the
cash generated during the previous six years as Jayhawk repeatedly
suggested privately and publicly, the stock price could be
approximately $90 per share (40 P/E x
$56mm / 25mm pro-forma outstanding shares).
NXD has purchased 75% of the Shandong cord blood bank for about
$1 billion. China Cord owns the other 25% of the
Shandong cord blood bank license
plus 3 others: Beijing,
Zhejiang and Guongdong. These
three wholly-owned licenses are fully operational with larger
population bases and should theoretically be valued higher. But
applying the valuation of the Shandong license to China Cord's licenses would make the stock worth
$67 per share, assuming the
convertible bonds are redeemed by using cash on the balance sheet.
If China Cord had not issued the
convertible bonds or share-based compensation or dilutive secondary
transactions and bought back shares using the cash generated during
the previous six years as Jayhawk repeatedly suggested privately
and publicly, the stock price using this metric would be well above
$100 per share.
As publicly disclosed by NXD, both the Shanghai Stock Exchange
(on January 20, 2016) and China
Securities Regulatory Commission ("CSRC") (on March 14, 2016) have made inquiries on a number
of topics related to the proposed transactions between NXD and
Golden Med, including a request for an explanation of why the
shares Golden Med already owns are valued at $15+ per share, while
the minority shares are valued at only $6.40. The CSRC also requested an explanation of
the share-based compensation and for the large cash balance so it
appears they are also aware these are unusual and unnecessary. Also
included are several requests related to how fiduciary duties under
U.S. and Cayman laws are being met and how they are addressing the
risks of minority shareholder lawsuits related to the
transactions.
One of the principal fiduciary duties of the Special Committee
is to evaluate the Golden Med offer and require that each
shareholder of China Cord be treated
fairly. Acting in the best interest of China Cord does not mean acting solely in
accordance to the wishes and interests of China Cord's majority shareholder. If the
Special Committee allows the actions taken by the executive board
of China Cord and its majority
shareholder, Golden Med, to go unchecked, the members of the
Special Committee will effectively be breaching their duties as
directors. The Special Committee should also have negotiated with
Zhongyuan Union Cell and Gene Engineering Corp, which indicated a willingness to bid
for the Company at similar prices to NXD. The interests of all
shareholders must be considered. Failure by the Special Committee
to negotiate and reach a price reflecting fair value for all shares
in China Cord will be challenged in
the courts. The Special Committee should investigate the facts
outlined above (e.g. the convertible bonds issued in 2012 and the
share-based incentive compensation for management) and seek fair
value for all shareholders of China
Cord. The Cayman Islands
Court in the Integra decision has held that fair
value is a value that is "just and equitable" and provides
adequate compensation consistent with the requirements of justice
and equity.
Neither the Cayman Islands
Court nor the United States Courts will uphold the actions that
have been taken by China Cord and
its majority shareholder which effectively perpetrate a systematic
fraud on minority shareholders.
NXD has made multiple international acquisitions and has
appeared to act in a professional and ethical manner. The Special
Committee could and should be negotiating directly with NXD for a
sale of 100% of China Cord for the
same cash plus stock deal Golden Med is receiving. This would
provide the minority shareholders the opportunity to participate in
the continued success of China Cord
if the stock price of NXD appreciates as expected. As part of
discharging its fiduciary duties, the Special Committee should
evaluate and pursue competing offers and require equal treatment
for all shareholders. For the Special Committee to allow Golden Med
to hijack the process to keep all the profits for itself would be
an appalling breach of fiduciary duties.
Yours faithfully,
Jayhawk Capital
CONTACT:
Michael D. Schmitz
mike.schmitz@jayhawkcapital.com
775-200-1800
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SOURCE Jayhawk Capital