Current Price – $13.22
Merger Consideration – $13.5 and competing big at $14.5
Upside – 9%+
Expiration Date – Q3 2018
This is one of those tails I win and heads I win even more type of situations.
EHi Car is a fast growing car rental company in China with 4.5k rental locations and 62k vehicles. Since Nov 2017 a number of groups have shown interest to acquire it. In April the ‘Teamsport’ consortium led by company’s CEO and Chairman Mr. Zang announced proposal to take the company private at $13.5/share and shortly thereafter the Board approved this despite superior offer (at $14.5) from another ‘Ocean Link’ Consortium.
Transaction needs to be approved by 2/3 shareholder votes (present or by proxy). And now we have a situation where Teamsport consortium has 37.5% voting power and Ocean consortium has 43.9% voting power (although 10.7% of ‘bought’ votes are being contested by management). Shareholder meeting date has not been set yet.
This letter from Burford Capital (not affiliated with Ocean consortium) nicely sums up the situation:
We write to express our disappointment with eHi’s Board of Directors’ (“Board”) decision not to pursue a competitive and fair sales process. We believe that this stems, at least in part, from your consortium’s declaration that, as controller of 37.5% of the Company’s voting power, it is “interested only in pursuing the Acquisition” and is “not interested in selling their shares in any other transaction involving the Company.” Unfortunately, in recent years this has become a well-trodden path among companies incorporated under the laws of the Cayman Islands: An insider with super-voting shares, backed by handpicked sponsors, squeezing out minority shareholders at below fair value to pursue a transaction with no independent business purpose. <…>
The Board still has the opportunity to do right by eHi shareholders and deem the competing bid “reasonably likely to lead to a Superior Proposal.” We hope that it does so.
But if the Board instead continues to ignore a conspicuously Superior Proposal—despite its duty to shareholders—and the current Agreement and Plan of Merger is subsequently consummated, we plan to exercise dissenters’ rights to receive payment of the fair value for our Class A shares.<…>
These iniquitous transactions are typically struck with the endgame of relisting in China’s A-Share IPO market shortly after squeezing out minority shareholders at a fraction of the anticipated IPO valuation.
This scheme has proven immensely profitable thus far: Research has pegged the average relisting premium at several hundred percent compared to the “fair value” paid to erstwhile minority shareholders who were unceremoniously squeezed out. The most recent relisting in this vein was that of Qihoo 360 Technology Co. Ltd (“Qihoo”). After being taken private in July 2016 for $9.3 billion, Qihoo relisted in February 2018 at a valuation of more than $60 billion. Qihoo’s CEO, who had spearheaded the take-private, reportedly made $12 billion alone upon relisting, more than the valuation afforded to the entire company just 18 months earlier.
To get full grasp of the developments I recommend reading through the latest filling by the Ocean Consortium.
I am unable to comment on Cayman Island regulation or whether EHIC insiders might find a way to circumvent the 2/3 vote requirement and take EHIC private at $13.5/share. But as it stands now both parties seem to have a blocking power over the transaction:
If the ROFO Purchases are consummated, the Class A Common Shares and the Class B Common Shares beneficially owned by the Filing Persons represent approximately 43.9% of the aggregate voting power of the total outstanding Common Shares, thus giving the Ocean Consortium a blocking right to all corporate matters of the Company that requires a special resolution, which is a resolution passed by not less than two-thirds of votes casted by the Company’s shareholders.
Worth noting that Ocean consortium proposal is preliminary and non-binding as they were not given access to perform due diligence yet. However, if management starts treating Ocean proposal fairly, then a bidding war might start pushing the price beyond $14.5/share.
Burford Capital has started to invest in EHIC (here and here) since mid-April and has already accumulated 2.5m ADS shares at $13.17 average price (I am deducting short hedges). I think this is a pure $33m bet on the exact special situation I am writing up here. Interestingly, this would also be the largest public investment carried out by Burford (public portfolio as of March 2018).
Burford Capital is not a traditional asset manager, rather it is a $4.2bn London listed litigation financing company that has done very well in recent years in terms of financial as well as share price performance. So we have litigation experts who have made a $30m+ bet on a merger arbitrage with considerable legal aspects. Seems to be a good company to be joining. Obviously, on the negative side we have Burford’s absence of any public equities investing track record.
The main risk here is that management outright cancels the sale of the company. EHIC traded at c. $11/share before the November ‘Goliath’ proposal was received. However, keeping in mind that a number of parties seem to be in pursuit, I do not think the price would revert to these levels.
Also any legal battle might extend this for considerable time, by which EHIC performance might start deteriorating and any potential suitors might loose interest.
EHIC currently trades at EV/Operating Profit=24 with 78% growth in operating profit during 2017. Company continues to burn cash due to fleet/location growth investments.