Heng Ren Rejects SAIF Parnters-Backed Insider Buyout of Sinovac, Citing Failure of Corporate Governance
8/31/2016
U.S.-based Heng Ren Investments L.P., an investment firm focused on investing in U.S.-listed Chinese companies, has rejected a management buyout proposal to take NASDAQ-listed Sinovac Biotech Ltd. private, saying the management and insiders made the bid one business day after the company received approval to produce a groundbreaking vaccine in China.
In February, Chinese bio-pharmaceutical and vaccine firm Sinovac's chairman and CEO Yin Weidong and SAIF Partners IV L.P., proposed to acquire all of the outstanding shares of the company not owned by them for US$6.18 apiece in cash.
Heng Ren says the bid should be raised by 75% to US$10.84, as the newly approved vaccine would bring the company potential annual revenue of US$400 million, compared to the company's annual revenue of US$67 million in 2015.
"The management buyout offer is an epic failure of corporate governance by Sinovac’s insiders, and a red flag for the future," stated Peter Halesworth, managing partner of Heng Ren Investments and a Sinovac shareholder.
On February 4, an investor consortium, including CICC Qianhai Development (Shenzhen) Fund Management and several other Chinese investors, proposed a competing offer at US$7 apiece. Sinovac's board implemented a "poison pill" to thwart the rival proposal.
"Trust is essential for a Chinese vaccine company like Sinovac in the public eye, especially after recent scandals in China’s vaccine sector,” said Halesworth.
In the letter on August 16 to Sinovac’s Board of Directors and the Special Committee evaluating the bids, Halesworth and co-author Thomas D. Grant, CFA provided analysis that revealed the intrinsic value of Sinovac’s stock is $10.84, 75% more than The Insider’s buyout offer of $6.18 per share.
“Heng Ren has studied the management buyout offers since 2015 that have swept through the universe of U.S.-listed Chinese stocks,” Halesworth stated. “The treatment of Sinovac’s shareholders with The Insiders’ proposed buyout transaction ranks among the worst.”
The letter provides a summary of related specifics to support its claim:
- SVA received approval on January 28 to produce EV71 (Enterovirus 71), a breakthrough vaccine to inoculate children in China from Hand, Foot, and Mouth Disease (HFMD). The approval came after eight years of development and regulatory review, which was paid for by shareholders.
- Annual sales of EV71 could eventually reach $400 million, a transformational product for Sinovac, which reported total revenue in 2015 of $67 million.
- One business day after the China Food and Drug Administration (CFDA) approval of EV71’s commercialization, The Insiders proposed to buy out shareholders at a mere 6.6% premium to the previous day’s closing price.
- This is an attempt by The Insiders to cut out patient shareholders from the significant rewards of the long-awaited EV71 vaccine, and the transformation of Sinovac’s business.
- The Insiders betray shareholder support as EV71 would not be a reality today without the financial support of shareholders.
- When a competing, higher bid emerged, Sinovac’s Board of Directors implemented a “poison pill” to prevent being outbid – to the detriment of the stock price and shareholders.
“The events that have unfolded since the approval of EV71 point to a pattern of self-serving Insiders, allied by a Board that is too willing to acquiesce to their every wish,” Halesworth stated. “It is now time for Sinovac’s Special Committee to bring a much-needed rebalancing of priorities to protect Sinovac’s shareholders, and critically, the company’s reputation and public image.”
Heng Ren demanded the Special Committee seek fair treatment of shareholders by having the buyout offer increased and removing the poison pill in order to protect Sinovac’s reputation, and show loyalty to shareholders.
“Trust is essential for a Chinese vaccine company like Sinovac in the public eye, especially after recent scandals in China’s vaccine sector,” said Halesworth. “As Sinovac expands in new markets abroad, it is incumbent upon the Special Committee to now assert its influence and do the right thing.”
To read Heng Ren’s August 16 letter in English and Chinese to Sinovac’s Board of Directors and Special Committee, please visit the links below: