Investing in The Next China

Activist Insight

China Cord Blood ditches management buyout

13th April 2017

The board of China Cord Blood (NYSE: CO) has abandoned negotiations over a management buyout as its controlling shareholder is set to sell its stake in the company. In a Thursday statement, the Chinese umbilical cord blood banking operator said that the decision was taken in light of Golden Meditech Holdings' 764 million yuan sale of shares to Nanjing Xinjiekou Department Store, as well as of the buyer's "future plans regarding [China Cord Blood] after the acquisition is completed."

Golden Meditech was founded by Yuen Kam, who serves as chairman and CEO of the company and is also the chairman of China Cord Blood.

In 2015, Golden Meditech submitted a proposal to buy the umbilical cord blood company, causing protests from shareholder Jayhawk Capital Management.

Two months later, Nanjing Xinjiekou submitted a $6.40 per share offer for China Cord Blood's stock which for a while seemed to be tempting Golden Meditech.

In January 2017, Nanjing Xinjiekou made an improved $10.50 per share offer for Golden Meditech's 65% stake in China Cord Blood, and Yuen's company caved in. However, the new offer was not extended to the entire stock of the Chinese company.

Activist Heng Ren Investments, who had joined the fray in December 2016, praised the deal, which proved its claim that China Coord Blood was undervalued.

On Thursday, Heng Ren told Activist Insight that the announced termination of the negotiations over the management buyout vindicated its belief that the $6.40 per share bid was inadequate.

Last year, the activist called on on China Cord Blood to "disband" a special board committee created to consider the proposed go-private transaction and to focus on increasing shareholder value instead.

On Thursday, the investment firm's managing partner, Peter Halesworth, told Activist Insight that he believed Nanjing Xinjiekou may still pursue a buyout of the company at a higher price, although there is no clear indication of its plans.

The new controlling shareholder may also use China Cord Blood as "a publicly-traded entity in a global capital market to strengthen the new parent's reach and brand, perhaps through M&A," Halesworth argued, adding that "a more proactive investor relations effort is sorely needed, and all involved will benefit from a fresh start."

Finally, the activist said that a $379 million special dividend he called for in December 2016 "should be seriously considered to signal there are better days ahead for shareholders.