Monday, December 24, 2012

Fushi Copperweld: A Christmas present from the China Development Bank and Abax Captial to arb funds

For the record: I lost on this one. See SEC filing...

Fushi Copperweld - a small cap Chinese stock specializing in bimetallic wire - is going private - purchased by "Green Dynasty" - a vehicle funded by Abax Capital and China Development Bank. The deal was supposed to close in the week of 11 December 2012 according to a press release filed with the SEC.

It never closed.

The following Monday (before market) Fushi released an update regarding the merger. The press release has so far not been filed with the SEC. To quote: "[b]ased on information provided by Green Dynasty, the Company anticipates closing of the transaction by or on Monday, December 24, 2012."

If the deal closes it will be a nice Christmas present from the Chinese to various arb funds because this deal has had a fat spread for much of its existence.

History of this transaction

This transaction has history. It was first proposed by the chairman in November 2010 at $11.50 - but later withdrawn. The Chairman came back with a $9.25 offer and revised that offer to $9.50 which was accepted.

The stock is not without controversy. Muddy Waters (of Sino Forest fame) has alleged Fushi is a fraud. Bronte was short a small amount well before the Muddy Waters announcement (and shorted the original $11.50 offer) because the accounts were a little unusual. This was a stock on which we won-some, we lost some.

Even if the company is a fraud that does not mean the deal will not close. There were credible allegations of fraud against Harbin Electric and the accounts were decidedly funky - but the deal did close and many shorts (including Bronte) received a nastier than usual flogging.

Moreover Harbin was taken private by Abax Capital backed by China Development Bank. The same combination taking Fushi private. That I am short again (and in this time in quantity) indicates that I am some kind of masochistic sucker for punishment.

Why fraudulent Chinese companies were taken private

There is a theory as to why some Chinese companies with fraudulent accounts were taken private. About a decade ago you could not buy industrial land around Shanghai and other cities unless you had a business to put on that land.

So people invented fictional businesses to buy real land.

Later they reverse merged those fictional businesses into the US and sold shares in the fictional businesses. In some cases the land appreciated enough to make the stock worthwhile even though the accounts are fictional. I know this to be true in at least one case (a case on which I lost money). I am not sure whether it is true of Harbin but Harbin Electric did own lots of land.

There is another reason why Chinese companies are taken private. And that is the operation was originally the children of Chinese elites ripping off Western stock markets (by selling fraudulent stocks). When that no longer worked they had no shame. Now they ripped off Chinese banks by getting them to finance LBOs. I know of at least one fraud run by a child of a central committee member that received a bid from a well connected Chinese private equity fund.

Back to Fushi Copperweld. 

The Fushi Copperweld saga is long running. Now it is a simple question of whether the deal will close and today is the day of truth.

It is likely to close. It is not over until the fat-lady sings - but she is clearing her throat.

But imagine it does not close. Then it will likely be because the fraud allegations are substantially correct and the stock should eventually trade at pennies. There will be a few arb funds with some 'splaining to do. (See this disclosure from Centaurus Capital for an example.)

Boiler plate

When examining situations like this its best to read the boiler plate.

The boiler plate in various disclosures has changed recently.

A press release dated 28 June 2012 and filed with the SEC says categorically:
There is no financing condition to completion of the merger. Mr. Fu and Abax have secured fully committed debt financing from China Development Bank Corporation Hong Kong Branch to finance the transaction.
The press release of 11 December 2012 says that the deal will close "this week" (a week now well and truly past). However it introduces a new paragraph into the boiler-plate forward looking statements.
A number of the matters discussed herein that are not historical or current facts deal with potential future circumstances and developments, in particular, whether and when the transactions contemplated by the Merger Agreement will be consummated. The discussion of such matters is qualified by the inherent risks and uncertainties surrounding future expectations generally and also may materially differ from actual future experience involving any one or more of such matters. Such risks and uncertainties include: any conditions imposed on the parties in connection with consummation of the transactions described herein; satisfaction of various other conditions to the closing of the transactions described herein; and the risks that are described from time to time in the Company's reports filed with the SEC.

The press release of 17 December 2012 - the one not filed with the SEC - but which postpones closing until 24 December says:

"As previously announced, on December 11, 2012, the Company's stockholders approved the Merger Agreement.  Green Dynasty has advised the Company that it is in the process of effecting the satisfaction of all conditions to draw all necessary funds pursuant to the facility agreement with the China Development Bank in order to consummate the proposed merger.  Based on information provided by Green Dynasty, the Company anticipates closing of the transaction by or on Monday, December 24, 2012."

"Effecting the satisfaction of all conditions necessary to draw all necessary funds" is a somewhat weaker statement than "there is no financing condition to completion of the merger".

All I can say for the arb funds involved. This better close. Or you are holding a very weak hand indeed.

But then I have never seen a deal fail so near the line. It should close and by close of business today the stock will have disappeared and shareholders will be entitled to receive $9.50 per share from the clearing corporation. And I will have lost a few pennies on my short (just in time for Christmas).

Whatever happens - I hope you all have a merry and safe Christmas (or festive season if Christmas is not your thing).


PS. After market now. So far the fat lady has not sung...

PPS: On Friday - just before closing - the market got a little jittery about this. Check out the one-day chart. Someone panicked. (I was shorting earlier in the week.)


Anonymous said...

Have you ever wondered why so many PE funds are participating in the taking private of these 'fraudulent' public chinese companies?

John Hempton said...

Abax - not sure but the relationship to CDB is family.

Carlyle - well - Sun Yee On Triad.

Bain & Co. They did a really good deal where land was the underlying value - even though company was a fraud.

TPG - serious due diligence. Offered for a fraud. Walked out.

CITIC Capital - do deals to bail out friends of the communist party. Suckers game for investors.

Beyond that I have no opinions.


Mike T said...


any chance at this point that Focus Media can fall through?


Anonymous said...

FSIN has always been a bit creative with the boilerplate. Remember this hilarious bit, under Risk Factors, in the 10k?

Techniques Employed by Manipulative Short Sellers in Chinese Stocks May Drive Down the Market Price of Our Common Stock

Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. While traditionally these disclosed shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firm and independent research analysts. These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base. Issuers with business operations based in the PRC and who have limited trading volumes and are susceptible to higher volatility levels than U.S. domestic large-cap stocks, can be particularly vulnerable to such short attacks.

These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and the opinions they express may be based on distortions of actual facts or, in some cases, fabrications. The financial information contained in the Company’s PRC subsidiaries’ filings with the State Administration for Industry and Commerce (SAIC) are consistent with the financial information contained in the Company’s SEC filing. However, the Company believes there may be fabricated SAIC reports which may be used by the short sellers to attack the Company.

While we intend to strongly defend our public filings against any such short seller attacks, oftentimes we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy – oftentimes blogging from outside the U.S. with little or no assets or identity requirements – should we be targeted for such an attack, our stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.

That little bit was one of the oddest bits of 10k legal nonsense I've ever come across, basically the closest you will find to a giant blinking red neon "Fraud Is Here" light.

Anonymous said...

Hi John,

Yes - any follow up planned on FMCN given the events from this weel

Look forward to it - thanks.

jimidean said...

Hey John, Could you please go into great detail as to why you originally thought FSIN accounts were unusual so we can learn to see what you see? Thanks

Shawn said...

Maybe our host is missing the Family connection part on Focus Media

The buyout was set to be mostly financed by a $400 million loan from China Development Bank ... Oshodi said ... the price being offered for the U.S.-listed Chinese electric-motor manufacturer was too high. Harbin Electric’s share price had plunged more than 50 percent in one day .. short sellers who questioned the accuracy of its financial statements.

Then the deal went through

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