Ossen Innovation (OSN) – Going Private – 12% Upside

Current Price: $4.57

Offer Price: $5.10

Upside: 12%

Expected Closing: H1 2021

Merger agreement

 

This is US-listed Chinese firm going private transaction. For more background on these types of special situations, refer to our Analysis of US-Listed Chinese Going-Private Transactions.

Steel materials manufacturer Ossen Innovation has entered into a definitive agreement with its parent company Pujiang International Group to get acquired at $5.10 per ADS in cash. The buyer owns 66%, which guarantees shareholder approval (majority will be needed). Closing is expected in H1 2021. Liquidity is limited.

The downside to pre-announcement price is 19%.

Timeline

  • 16th Sept'20 - non-binding offer at $5 per ADS from Pujiang received.
  • 22nd Sept'20 - a special committee is formed.
  • 17th Dec'20 - definitive agreement is signed with a slightly increased consideration of $5.10 per ADS.

 

Positive aspects of the situation:

  • The definitive agreement is already signed, which signals a very high chance of the transaction closing as expected. So far only 1 similar US-listed Chinese privatization offer with a definitive agreement was canceled.
  • Upside stands at 12%, which is above the average for definitive agreements (7%).
  • Synergies. The buyer expects that full control of OSN will increase business synergies between Pujiang's Cable business and OSN prestressed materials business, while the new structure will be more efficient and more cost-effective.
  • Last year Pujiang International Group has IPO'ed in Hong Kong, and the board decided that keeping the additional Nasdaq listing of the subsidiary is inefficient and intends to streamline the structure to reduce costs.
  • As discussed in CXDC idea comments, a recently signed legislation bill (that would kick Chinese firms off the American exchanges unless they adhere to American auditing standards) might also provide the additional incentive for the offer to go through successfully.
  • The acquisition price is only slightly higher than the IPO price in 2010 ($4.50/share) and seems quite cheap, although, the financial performance of OSN these 10 years wasn't that great - revenues increased only 38%.

 

Risks:

  • The transaction might still get canceled despite the signed definitive agreement.
  • The management doesn't seem to care much about shareholder interest and has low credibility. This is well illustrated by the shady transaction proposed in 2017, where Dr. Tang (owner and chair of Pujiang/chair of OSN) tried to effectively rip-off OSN shareholders by acquiring its business for 0 consideration (other than canceling its 60% stake in the firm), while then reverse merging the remaining shell with a distressed diabetes research company. Fortunately, the offer didn't go through because the America-Asia Diabetes Research Foundation (the target) did not comply with merger conditions.

 

OSN

The company manufactures an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials. 77% of revenues come from rare earth coated PC wires and PC strands. The products are mainly used in the construction of bridges, as well as in highways and other infrastructure projects. OSN has been slightly impacted by the pandemic and in H1'20 revenues fell 16%, net income decreased -7% YoY.

6 COMMENTS

  1. Zulu Investor

    I have no idea why but OSN has shot up 15% in the last half an hour or so to around $5.55. Really strange. Didn’t see anything on their website.

  2. Ilja

    On the 14th of April, it was announced that Ossen Innovation changed its auditor from BDO China to WWC. BDO China has a history of being involved in fraudulent IPOs, while not much information is available on WWC. The change of auditors in the middle of going private transaction looks quite strange, however, OSN claims that it wasn’t done out of a disagreement regarding the accounting practices. Overall, I’m not exactly sure how to view this development yet, although, given the previous track record of the management it probably adds some additional risk that something could go wrong here.

    Spread has increased from 5.5% to 10.6%.

    Press release – https://www.sec.gov/Archives/edgar/data/1485538/000110465921050275/tm2112986d1_ex99-1.htm
    BDO China – https://www.yicaiglobal.com/news/yicai-global-warns-brokers-auditors-and-law-firms-against-falsifying-china-ipo-data

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