Harbin Electric shareholders approve MBO
Harbin Electric’s shareholders have approved a privatization bid for the company put forward by chairman and CEO Tianfu Yang and supported by Abax Global Capital. The deal, which received board backing in June, is expected to close within a week.
It is the sixth management buyout of a US-listed Chinese firm in the last 12 months and the third in which a private equity firm has participated. Primavera backed a management buyout of Chemspec International in May, while PAG did the same with Funtalk China in September.
Under the terms of the merger agreement, Tech Full Electric, a Cayman Islands-based company controlled by Yang, will purchase all the Harbin Electric stock it and Abax don't already own at $24 per share. It is expected to pay $463.8 million in total. The transaction will be funded through a $400 million loan from China Development Bank's Hong Kong as well as $38.8 million in equity financing and $25 million in debt from Abax affiliates. The private equity firm will remain a minority shareholder in the company.
Harbin Electric has come under unremitting attack from short sellers, with Citron Research describing it as "a money pit with hidden liabilities that are consuming its cash." Citron has questioned the veracity of the Harbin Electric's US regulatory filings, claiming that revenues from major customers have been grossly overstated; challenged the most recent audit, which was conducted by a firm that has been reprimanded by regulators; and produced documents which suggest that Yang admitted to guilt in a 2004 loan fraud case. Harbin Electric denies the accusations.
The attacks come as hedge funds and short sellers probe the financial statements of overseas-listed Chinese companies for signs of weakness. Harbin Electric listed in the US through a reverse merger, a popular process with Chinese companies because it is cheaper and easier than a full IPO and involves less regulatory oversight. However, a number of reverse merger firms have since exposed for overstating revenues, exaggerating market positions, and shifting cash off the books through related-party transactions.
As a result, all stocks in this class have taken a hit, whether or not they have been implicated in fraudulent activity. Private equity firms are looking to capitalize on these undervalued companies through management buyouts or PIPE deals.
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