Newater Technology (NEWA) – Going Private – 16% Upside

Current Price: $3.16

Offer Price: $3.65

Upside: 16%

Expected Closing: TBD

Merger agreement

 

*Important. Some important developments happened since the initial posting of this write-up. For the overview of recent events, please refer to this comment.

 

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

Manufacturer of water membranes Newater Technologies has signed a definitive agreement to get taken private by its chair/CEO and CFO at $3.65/share. Shareholder approval should not be an obstickle as buyers' own 44% of NEWA. Closing is expected in Q2 2021. Stock liquidity is limited.

The downside to pre-announcement price stands at 39%, however, the actual downside in case transaction fails might be significantly lower due to very positive H1'20 results.

 

Timeline

  • 12th May - non-binding proposal at $3.10/share received from the management.
  • 3rd June - the special committee is formed.
  • 29th Sept - definitive agreement signed. Consideration increased to $3.65/share.

 

Positive aspects of this case

  • The definitive agreement is already signed, which signals a very high chance of the transaction going through. So far only 1 similar US-listed Chinese privatization with a definitive agreement was canceled.
  • As discussed in CXDC idea comments, a recently signed legislation bill (that would kick Chinese firms off the American exchanged unless they adhered to American auditing standards) might provide the additional incentive for management to close the transaction.
  • Price seems favorable to the buyer (cheap) and should incentivize the management to proceed with the privatization. The offer comes at 6.6x LTM P/E and 9x 2019 P/E. The company IPO'ed in 2017 raising $7m at $5/share. Since then NEWA gas significantly improved its performance - revenues grew over 3x and profitability increased 2x. Moreover, the company saw no impact from the pandemic and, in fact, its performance only improved as the company expanded into new markets - revenues went up by 17% YoY in H1'20.
  • Financing matters for the transaction have already been settled.

 

Risks

  • Some risk of cancellation still remains.

5 COMMENTS

  1. EvP

    The stock price has been trading around 3.65 on Friday (with a high of 3.69!). Is there any upside holding it at the current levels or it is a huge sell now?

  2. Ilja

    Something strange is happening to the stock. Yesterday it jumped up to $5.53/share on a 30x volume. The trading was temporarily halted. It might be related to the other short squeezes in the market.

    As the price is now stands above the offer, we are closing this case with 9% return in 3 weeks.

  3. g4734g

    Down 6% today to 3.84, 20 cents above the 3.65 that is on the table. I am assuming last nights announcement of special shareholders meeting next month is dampening thoughts of a higher offer? any one following?

  4. Ilja

    Over the last few weeks the spread to management’s offer increased to 15% and at the same time a new competing offer has appeared.

    Shareholder meeting was supposed to take place on the 19th of March. The definitive agreement has already been signed, management owns 44% of the shares. It seemed likely that the offer will close shortly after the voting. However, it appears that on the 22nd of February, Fulcan Capital Partners placed a competing offer for NEWA at $4.90/share, a 34% premium to the management’s offer. Fulcan’s proposal at $4.90/share marks 8.9x TTM P/E and 12x 2019 P/E vs 6.6x LTM P/E and 9x 2019 P/E in the management’s proposal. Fulcan’s offer is also much closer to $5/share IPO price (2017), while the company has grown quite substantially since then.

    Of course, management has “carefully reviewed” the offer and threw it away:

    In arriving at its conclusion, the Independent Committee considered various aspects of the Fulcan Proposal, including, without limitation, the feasibility and legality of the Fulcan’s proposal, the higher purchase price offered by Fulcan, the likelihood of Fulcan’s obtaining regulatory approval for its plan for financing the proposed transaction, the likelihood of Fulcan’s obtaining majority shareholders’ approval for its proposed transaction, potential costs and business risks to the Company that may be associated with Fulcan’s proposal, and potential impact on the Company’s business prospects if Fulcan’s proposal is accepted.

    After that, Fulcan filed a suit against the company in the Eastern Caribbean Supreme Court. The court has ordered to adjourn the shareholder meeting until further decision on Fulcan’s claim is made.

    There is absolutely no information on Fulcan, so it’s not clear whether the proposal was/is legit. Despite a significantly higher price, I don’t see how Fulcan could seriously believe to takeover NEWA, when management holds 44% of the company. Quite likely, this is could be an attempt to provoke the management to increase their bid, but then again, it doesn’t look like Fulcan has any ownership in NEWA. Moreover, usually, such attempts don’t end up in court, which adds some chances of this being a serious bid.

    If the management eventually wins, they should just resume proceeding towards finalizing the current privatization. The definitive offer has already been signed and there are just a few formalities left to close the deal. The spread to $3.65/share now stands at 15%.

    In case it appears that Fulcan’s intentions are legitimate and they manage to back up some kind of a financing plan in court, it’s difficult to see how management would argue that their $3.65/share proposal is superior to $4.90/share. In this case, maybe we might see the management raising the price in order to fend off the competing buyer.

    Given the size of the spread, the market obviously sees some serious risks here. Part of it is likely attributed to uncertain timing, however, the major risk seems to be a scenario where management blocks Fulcan’s offer and terminates their own proposal as well. This seems rather unlikely.

    Offer rejection – https://www.sec.gov/Archives/edgar/data/1678022/000121390021013854/ea137178ex99-1_newatertech.htm
    Litigation and meeting adjournment – https://www.sec.gov/Archives/edgar/data/1678022/000121390021016289/ea137979ex99-1_newatertech.htm

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