DEALS GOOD!!
Many investors are skeptical about the funding sources for MBOs from companies like CSR, HRBN, and FSIN. But in these three cases and many others to come, the money is coming from the China Development Bank (CDB). The CDP is not like J.P. Morgan, B of A, or even the other banks in China. It is a policy bank. This means it is controlled by the government and used for the purposes of making economic policy. In this way, it is more like the Fed than a regular bank.
The China Development Bank in Hong Kong has a unique problem. It is awash in dollars. It has gotten these dollars through buying U.S. T-bills and other assets. However, it wants to get rid of these dollars before the RMB appreciates any further. If the U.S. pays it 2% on T-bills and if the RMB appreciates 5% a year against the dollar, the CDB loses money. As a result, it is willing to make deals that help it to get rid of dollars at much lower interest rates and on much better terms than other institutions.
In doing an MBO, the China Development Bank is in essence sending RMB to Chinese companies and getting rid of its dollars by paying off U.S. investors. If it charges Chinese companies 8%, this is far better than the -3% return it is getting from holding T-bills. So there is great pressure on the CDB to make these kinds of transactions.
Many investors are skeptical at the delay in the HRBN deal. As we have noted in previous letters, we believe the delay has been caused by the conflict with Morgan Stanley. As you may remember, HRBN announced Goldman Sachs was representing the buyer (management), and Morgan Stanley was representing the seller (the shareholders). Originally, the deal was going to be financed by Baring, but HRBN changed to Abax, with capital from the China Development Bank.
If you go on the Abax Global website and click on “About Us,” you will see the sentence, “Morgan Stanley through its investment management division is a strategic investor in Abax.” This means Morgan Stanley is also part of the buying group. In other words, Morgan Stanley is representing both the buyer and the seller. We do not know how this fact escaped Morgan Stanley, Goldman Sachs, or the lawyers, but in our view something was missed.
We now believe the independent directors, have hired another international investment bank to review this issue and give a fairness opinion that Morgan Stanley is not conflicted because it is only a passive investor in Abax.
We ironically believe the only major issue at this point is the price. Management has the capital and is willing to pay $24. We believe the independent directors would like a higher price, perhaps because it would help them to avoid litigation.
We believe the independents will announce that they have accepted a deal within the next week and that the deal will be completed in three to four months. Assuming 4 months, which we believe is the outside limit, and $24, which we believe is the lowest possible price, investors would have a 203% annualized return from current prices.
We have held discussions with other companies that are currently in negotiations with Abax and the China Development Bank. Each of these companies told us they think the HRBN deal has better than a 95% chance of success.
We have read the short sell reports, but we have also spent a lot of time with management and with other companies currently working on MBOs, we are firmly convinced this deal with happen and happen soon.
