- Believes $2.65 offer is grossly inadequate
- Encourages Board and shareholders to reject the buyout offer
- Doubts offer representing only 54% of book value is in best interests of shareholders
- Believes liquidation value significantly greater than current buyout offer
- Demands Board explain why shareholders would not be better served if company were liquidated
NEW YORK, Jan. 19, 2012 (GLOBE NEWSWIRE) -- Mr. Ephraim Fields of Echo Lake Capital today announced he had issued the following letter to the Board of Directors of China Advanced Construction Materials Group, Inc. (Nasdaq:CADC).
January 19, 2012
To the Board of Directors:
We are writing to (i) encourage all CADC shareholders to vote against the Chairman's proposed buyout of CADC at $2.65 per share (the "Offer") and (ii) encourage CADC's Board of Directors (the "Board") to reassess its actions and reject the Offer.
As we have previously expressed, we believe the Offer is opportunistic, insufficient and not in the best interests of shareholders. The Offer equates to a paltry 54% of book value and seems meager relative to company's attractive prospects. We remind CADC shareholders that in order for the deal to be approved, among other things, a majority of the disinterested shareholders must vote in favor of the deal. We believe that by voting against the Offer, shareholders will ultimately be rewarded with a significantly higher stock price. If the Offer were rejected, we believe the Chairman would increase his buyout offer. If he does not, we would expect the Board to explore other opportunities to maximize shareholder value, including liquidating the company. If neither of these scenarios occurs, we believe that if CADC were to remain public, its stock price would eventually trade significantly above $2.65. We encourage all parties to study the proposed buyout of Fushi Copperweld, Inc. ("FSIN"). In that situation, the company's board of directors rejected as inadequate a $9.25 per share buyout offer by its chairman, and subsequently the chairman raised his bid to $9.50 per share. While it is too soon to tell if FSIN's board and shareholders will approve the increased offer, FSIN's stock is now trading at levels higher than it was before the $9.25 bid was rejected.
We believe that if CADC's Board and/or shareholders reject the Offer, CADC's Chairman will raise his offer. We believe his current offer is so low that he can easily raise it and still make a significant profit on the buyout. We also believe he has spent millions of dollars on legal and financial advice to arrange the buyout, so he would be unlikely to abandon the deal simply because he had to offer additional consideration to shareholders.
We would also encourage CADC's Board to study the responsible and commendable actions taken by FSIN's board of directors. FSIN's board seems determined to uphold its fiduciary responsibility and act in the best interests of shareholders. As a result, the Board refused to accept an offer that did not clearly provide fair value for all FSIN shareholders. This appears to be in stark contrast to CADC's Board which appears to be readily giving into what we consider to be an inadequate offer. As a result, we are calling on CADC's Board to uphold its fiduciary responsibility to act in the best interests of all shareholders and to reject the Offer.
While CADC's Board claims the Offer is in the best interests of shareholders, a close reading of the proxy statement reveals the Special Committee twice asked the Chairman to increase the Offer by 13% to $3.00 per share. We believe this indicates that the Committee may have had reservations about the fairness of the $2.65 offer….and we can understand why.
One of the reasons we believe the Offer is inadequate is that it equates to only 54% of book value. Any experienced investor can attest that one way of valuing a company is by assessing its liquidation value. In our previous letter to the Board we specifically asked that it conduct a liquidation analysis to determine if the Offer was in the best interests of shareholders. As a result, after reading the proxy statement, we were disappointed to read that "Neither the special committee nor our board of directors considered the liquidation value of Company's assets because it considers the Company to be a viable going concern where value is derived from cash flows generated from its continuing operations." We feel this is a pathetic excuse designed to help the Board justify an inadequate offer. It also reinforces our concerns that the Board is not acting in the best interest of CADC's shareholders. If the Board were seriously interested in maximizing shareholder value, then considering the value of liquidating the Company must be one of the options the Board considers.
According to the proxy statement, the Board believes "it would be difficult to determine the actual value of the Company's assets relative to the book value as well as how achievable it would be to convert the assets to cash." We find this statement laughable and reflective of a board which appears more interested in rubber stamping a deal than in fulfilling its fiduciary responsibility. A vast majority of the Company's assets are cash, accounts receivable, prepayments, advances, and other quasi cash items which should all be relatively easy to value (and should be valued close to 100% of book value). CADC's other large asset is PP&E, which had a stated book value of $1.61 per share. We understand it is more difficult to value PP&E, so let's take a ridiculous and draconian scenario and assume the PP&E is completely worthless and could not be sold for anything. If this were the case, the Company would still have a book value of $3.29 per share or 24% greater than the Offer. Now, it is ridiculous to assume that the PP&E is worthless, especially since Management has repeatedly discussed the strategic value of these assets. However, based on this simple and draconian scenario, you can see that CADC should be worth at least $3.29 per share. CADC's Board should explain why shareholders should accept less than $3.29 per share. Then CADC's Board should explain why shareholders should accept an offer that equates to only 54% of book value. Perhaps the Board should consult with its audit committee because we find it difficult to believe that any credible board can both attest to these audited financials and at the same time believe the Offer is fair. We believe that either the CADC's financials are materially incorrect or that shareholders are being asked to accept an offer that is grossly inadequate.
It is ironic that CADC's Board states "it would be difficult to determine the actual value of the Company's assets relative to the book value as well as how achievable it would be to convert the assets to cash" considering the Board used a discounted cash flow analysis (using projections that go out for 5 years) to assess the fairness of the Offer. Does any reasonable investor really believe it is harder to value CADC under a liquidation scenario than it would be to value the company using (highly uncertain and potentially biased) DCF projections that go out 5 years?
Speaking of this DCF, we are highly skeptical of the projections that were used and believe this is yet another example of why shareholders should have grave concerns about the Board's process. We were alarmed to see that, buried in a footnote in the proxy, is the disclosure that on October 17, 2011 Management updated the 5 year projections that it had previously provided on October 10, 2011. We were amazed to see that the revised projections reflected an 11% increase in total capital expenditures and a dramatic change in the timing in which they would be incurred, yet no change in projected EBITDA. In other words, in one week Management, who has been running CADC for many years and planning this buyout for several months suddenly decided that in order to achieve its EBITDA projections it had to spend more money on capital expenditures and make the expenditures earlier on. This late, dramatic and atypical change by Management to its projections should certainly raise questions in the minds of all investors regarding the fairness and credibility of this process.
We believe the Board has acted shamefully regarding the Offer and your actions do not reflect well on your individual personal and professional reputations. We hope the Board will finally act appropriately and take the steps necessary to ensure that value is maximized for all CADC shareholders.
Sincerely,
Ephraim Fields