 SINGAPORE-LISTED Cordlife shares today closed at a 52-week high of $1.44, which is also a record closing high. The previous high was $1.38 achieved in Sept 2013. Cordlife owns a 13.4% stake in China Cord Blood Corp. The following is an open letter sent September 9, 2015 to the Board of Directors of China Cord Blood Corp from Jayhawk Capital. |
We reiterate our conviction that the special committee of the independent directors of China Cord Blood Corp ("China Cord") should REJECT the extremely low privatization offer of $6.40 per share from Golden Meditech Holdings Co Ltd ("Golden Med"). There are rumors in the marketplace that Golden Med will raise their offer to $9 or $10 in response to the significantly higher offers by two outside bidders. We urge you to reject all three offers. We reiterate our recommendation outlined in our letter dated March 19, 2015 that a $125mm special dividend and a $150mm tender offer by the company to repurchase shares, coupled with significant annual dividend payments, would result in a stock price in the $20-$25 range. Moreover, if the company achieves subscriber growth of 10%-15%, as anticipated in your generous employee share grant program, and you increase dividends each year, it is very conceivable that China Cord could achieve a $75-$100 stock price on the New York Stock Exchange in the next 4 or 5 years (much like China Biologic Products Inc. ("CBPO") has done, a company with very similar cash flow characteristics). Moreover, this plan would BENEFIT and be fair to ALL shareholders: Mr. Kam; Golden Meditech; and the loyal, long-term MINORITY shareholders.
On June 17, 2015, a dealReporter article referenced an announcement made by Zhongyuan Union Cell and Gene Engineering Corp (600645.SS, "Zhongyuan") that it had hired Citic Securities for a US$1.6 billion acquisition, which would value China Cord at $13 per share. Zhongyuan received board approval on August 28th to make a foreign acquisition and has also been pushing to have an auction of the China Cord assets in China. Zhongyuan, a publicly traded stem cell company with a market cap of US$5 billion, understands that an acquisition of China Cord would be incredibly accretive to their business and have great synergies. On August 6, China Cord received an offer from Nanjiang Xinjiekou Department Store Co., Ltd. (600682.SS, "NXDS"), a subsidiary of Sanpower Group Co., Ltd. ("Sanpower"), a large private conglomerate run by one of China's richest men, YUAN Yafei. Medical and Health Care companies make up one of Sanpower's five primary investment categories. Jefferies analyst Brian Tanquilut put out a note that day where he raises his price target to the $11 per share value of NXDS's initial offer. At a MINIMUM, China Cord's special committee should allow Zhongyuan and NXDS to compete in an auction for China Cord.
As we pointed out in our April 30, 2015 letter, the special committee has a responsibility to act in the best interests of all shareholders. Rejecting higher bids in favor of a lower one proposed by insiders would be in direct conflict with these responsibilities. Cayman law requires that directors "must apply their minds and exercise independent judgment in the ordinary course of business". It is the duty of the special committee and the board of directors to not allow Golden Med to privatize the company at below competing offers. Again, any process for selling the company should be open to all interested parties through an auction.
If Golden Med forces through a privatization offer, they must realize that many minority shareholders will exercise their legal rights under Cayman Islands law as a dissenting shareholder and demand fair value. The Cayman Grand Court has recently, for the first time, set clear guidance on the factors to take into account in assessing fair value. The Cayman Grand Court approved the principle that a shareholder buys into a company as a going concern, not in anticipation of participating in a liquidation, and it follows that, when he elects to dissent from a merger or consolidation brought about at the behest of the majority, he is thereafter deprived of his proportionate share of an active enterprise and is entitled to be compensated for it. Fair value does not include any minority discount. The minority shareholders of China Cord will show very clearly that their shares are worth significantly more than the initial offers from Golden Med, Zhongyuan and Sanpower. Therefore, Golden Med and Mr. Kam will ultimately be forced to pay a higher price plus interest for the shares of dissenting minority shareholders.
Golden Med struck a favorable deal with KKR, which was then appropriated by Mr. Kam, when the deal was changed to allow him to personally purchase the KKR notes. With his increased ownership of China Cord, hopefully he will do what is right for himself and ALL minority shareholders. Jayhawk Capital again requests that China Cord rejects the offer of $6.40 per share and any other offers from Golden Med or others. Furthermore, rather than negotiating to sell the company at $13-$15 per share, we repeat our requests from our April 30, 2015 and March 19, 2015 letters, to immediately announce and execute a tender offer by the company to repurchase shares and pay a large special dividend to ALL China Cord's shareholders. These two initiatives are for numerous reasons in the best interest of ALL the shareholders and we believe the stock price would quickly climb to the $20-$30 range.
Yours faithfully,
Jayhawk Capital
