December 31, 2013 cash was $123 million and debt was $132 million. In Q1 2013, they collected $140 million, which is normal given the seasonality of the business (huge Q3 sales) and the customary 6 month credit terms. Therefore, the Q1 2014 cash collected almost definitely will exceed $140 million this year due to the fact that sales were 50% higher than last year. Most likely it will be at least $200 million. There’s no reason to believe that debt increased significantly from year end. Even if it did, that would mean that they took additional loans and cash would have increased as well, offsetting and netting any incremental change to zero.
Therefore, $123 million at 12/31/13 + $200 million cash collected in Q1 would put cash in the $323 million range, let’s call it $300 million to be conservative. Back out $132 million of debt and $131 million for the new facility (which is ridiculous but we’ll use it here) and $59 million for preferred stock dividends, and that gets us to a net debt of $22 million. Instead, Houlihan Lokey used net debt of $231 million, essentially backing out a mysterious extra $4 per share from what is already a very conservative calculation I did above.
It just doesn’t add up. I’m contacting FTI and IR today to ask for the calculation of the $231 million. There’s just no way that the 9 month 2014 CF could have a $137 million reduction in working capital (meaning they collected lots in Q1) and, at the same time, for there to be $231 million of net debt, as the model assumes. I don't expect to get a legitimate answer from them.
And despite all of that, Houlihan Lokey's discounted cash flow model still spits out a valuation rage that goes up to $9.20 per share. Any reasonable, still conservative assumptions would value the company at least at $20 per share, and realistically, at more than $30 per share, even assuming a very low P/E for this being a China company that most Americans have never heard of.
Astoundingly, Houlihan Lokey gave a new fairness opinion for the $7.10 offer. And the assumptions made are much more ridiculous than the already crazy assumptions that went into the last one.
See form SC 13E3/A, page 43 filed 4/16 on YONG’s investor relations SEC Filings website.
They increased the amount of money for the "imminent" building a new manufacturing facility from $99 million to $131 million, so they are now backing out nearly $3 per share for for this item. Not to mention that just a couple weeks ago, Yongye's CFO stated in the Q4 conference call that it would only cost $100 million and that it was not imminent and may not be built until 2015.
Additionally, they drastically revised down the revenue growth for all years. In the previous September 2013 fairness opinion, they assumed that revenue would grow between 19-21% per year starting with 2015. Now they have cut that growth nearly in half, to 11-15% per year. What exactly could have happened in the past 5 months to cause management to cut their growth assumptions so drastically? Particularly just after a conference call last month where YONG's CFO said they won't be paying a dividend anytime soon because there are "significant opportunities for growth in China, in our industry".
Also, the 2014 cash flows get clobbered simply by the timing of the analysis because it starts as of April, which means that several hundred million that were collected in Q1 2014 don't count in the first year cash flow, which is discounted the least, resulting in them showing only 16.5 million or about 30 cents per share of cash flow in 2014. At the same time, it doesn't appear that they are counting that cash received in in the bottom section iether.
They are somehow showing net debt of $231 million, so they are backing out almost $5 per share because they claim that the company’s debt exceeds cash by $231 million at the time of this valuation (details in my next message).
Although I sent my letter to the Special Committee last Wednesday, April 2nd, I only received a reply last night from FTI consulting stating that they received it and that they "will confirm for me when it has been sent to the Special Committee". This suggests that a full 7 days after I emailed my letter to both FTI Consulting and Yongye's investor relations email address, in addition to express mailing it to Yongye's head office, and their external legal counsel, it was still not forwarded to the Special Committee.
My guess is that it was intentionally withheld from them because they had a meeting scheduled for today to review the offer and they didn't want the facts getting in the way of making a bad decision.
If anyone on here is still in touch with any lawyers working on behalf of the shareholders, let me know, as this is a clear breach of the companies fiduciary responsibilities.
My newest letter to the Special Committee is on the way. They did confirm that my last letter was forwarded to the special committee back in 2012 when the first offer was made, and I did get a call from one of the class action lawyers that obtained a copy of my letter from management, so we know that if you write a formal, unemotional letter, it will at least get to the right parties.
Anyone else considering doing this should do it soon, just clearly state that $7 significantly undervalues the company, and is not a better alternative to the company remaining publicly traded. I would suggest asking them to get a new fairness opinion for the new offer since it has been so long since the original offer and we've seen that so many of the assumptions and estimates originally used by Houlihan Lokey were very materially wrong. Also request that they not change the voting rules, so that it still requires more than 50% of all minority shares, regardless of whether they voted or not, to approve.
Include any other arguments that you think make sense, such as book value, P/E, etc.
You can email your letters to investor relations and FTI Consulting using the emails on the bottom of YONG's March 13, 2014 press release announcing the date of the Q4 earnings conference call. Also ask them to forward your letter to Cleary Gottlieb, Steen & Hamilton who are the legal counsel to the special committee (I couldn't find an email for them online).
Address the letter to the "Special Commitee of the Board of Directors of Yongye International Inc", be sure to print your letter, hand sign it, and then scan it so you can email a hand signed copy.
I also mailed copies of mine to the company's head office in Beijing (address on YONG website), and Cleary Gottlieb's NY office addressed to the "Counsel to Special Comm of Yongye Int'l Inc", although the email is probably sufficient, just request that FTI consulting confirm that you letter was forwarded to the special committee.
Ha, someone arguing for efficient market theory. I'm pretty sure that was disproven about 50 years ago when they stopped teaching it at universities, and has never been more untrue as it is for smaller cap companies (as per Mr Buffet).
I have no doubt that MS would veto a $20 offer. They're going to get several times that for their shares, whether it be re-listing it overseas after a buyout, or holding tight and and letting the minority shareholders participate. You seem to think the only way for this company to be worth something close to it's true value is for someone to buy it. That's the wrong way to look at it. We just need the company to keep performing and once growth starts to slow, they start paying a dividend. Be prepared to hold for a couple years before that happens, but that's the case with most young, high growth companies, especially in the U.S.
Or you already know that and you're just working with a firm that has an incentive to get the deal approved, which would be my guess if I was a betting man, which I am.
this is pretty horrible, obviously. My friend who is a corporate legal counsel (and also just became a shareholder after the last offer was voted down) is checking for me whether it's legal for a company registered in Nevada to set up the voting requirement like this.
The other longshot we have is that they would need a new valuation for a new fairness opinion. My guess is they are going to claim that it's just a revision of the first offer and one isn't necessary, but we can hope.
Time to write another letter to the special committee, although not sure what good it will do.
There's not much volume so I'm not sure I'd call it consolidation at $6. Seems more like the owners aren't willing to sell at these prices and the stock hasn't found significant new buyers just yet.
one very important consideration if you have these in a taxable account - is that when you exercise your options, it re-sets the basis date, so they suddenly become ST holdings and gains, even if you held the calls for more than a year before exercising. Therefore, exercising and then immediately selling those shares could hit you with regular income, while selling the calls outright gets you LT gains if you held them more than 12 months, so you might still be better off selling the calls for less if your tax savings is significant.
if you don't have margin, then you would definitely have to wait for each lot to settle (e.g. in an IRA). If you do have margin in this account, you probably don't have to wait for them to settle, but you might be dipping into the margin and may get charged interest and fees for the unsettled portion. Better to give your broker a call to confirm.
you also may not need to round up the full $840k at once. If you plan for it a few weeks in advance, you can always exercise some, then sell the resulting shares, and once that trade settles, use the proceeds to exercise another group of calls, and sell the shares, and so on and so forth, if that strategy looks better than selling some of the options outright, or using margin to fund the exercise. Just start a couple weeks prior to the expiration if you need to do it in a few batches. Of course, there could be tax consequences to doing that, so all would need to be considered.
When someone tries to buy a company that is worth well over a billion dollars by only paying $339 million, they are not doing it to help someone they don't know. They were doing it to try to make a billion dollar profit for themselves.
yes, and keep in mind that their opex will continue to scale as they grow, so revenue should increase in line with shipments, but income (and EPS) should increase at a higher percentage.
Granted, they have said that the new product will be lower margin than the core product, so that might offset some of the scaling of expenses.
Hi baron. I think you're looking at it wrong. Even if 100% of the people that voted NO last time vote YES to a new offer, it still doesn't pass, that's not enough yes votes. Also, I believe the majority of the Yes votes were arb firms and they have almost all either bailed out or are in the process of bailing out now. I don't foresee any way that the arb firms would dare risk their capital for another few months with a high likelihood of losing money all over again. I actually believe that an $8 or $9 offer would get many fewer votes than the $6.69 offer did if they tried that again.
At the end of the end of the day, I wasn't trying to express that I think there will be an offer in the $10-12 range, I don't. I actually don't think we'll see another offer of any price anytime soon. I was just saying that it would be highly disappointing to have to take $10-12 for my shares, even with all of the 5 cent $7 calls I own. It would be a huge profit, sure, but nothing compared to what I believe they will be worth if the company stays public for a few more years.
a new higher offer would be pretty horrible in my opinion. I didn't wait out this thing just to have my shares stolen away for $10-12
Hmm, that's interesting. I had assumed we were going to have to pay out these costs regardless if the deal got voted down, but I wonder if "not technically terminating" and just letting it expire prevents that. Regardless, even the full $2 million would only be four cents per share so well worth that price in exchange for not having our shares taken from us.
Granted, it would be nice to see Wu and MS find a way to not make YONG pay this since the acceptance of it at that price was such a ridiculous joke in the first place.
if you really didn't have a position (as you've claimed) or you aren't working for someone with a short position, you wouldn't be posting the same thing over and over again. Most folks on this board have been here for years and you aren't exactly shocking anyone by saying there are huge risks investing in china. We get it. If anyone already knows this, it's us.
Even factoring in a huge china discount (discounting YONG stock 75% or so compared to what it would get in other markets), it still looks really cheap today.
The tone of the call was definitely more shareholder friendly. They emphasized the points that many of us have preached for a long time:
-5 years with Big 4 Auditor KPMG
-MS investment in 2011
-CEO buying $3 million of shares on the open market in 2011
They actually listed these out as reasons to be confident in the company, which I liked.
When asked about the mine, said it's too cold in Mongolia to do any work right now, but once the weather warms up they expect to continue to research to find the best way to pull raw materials from there, which should lower COGS in the future, but (my opinion) I'd expect it will be 2015 or 2016 before we see the benefits of this.
they said they sold 50k lbs of product in 2013 and expect to sell 70k lbs in 2014. I think he said that their capacity is right around 70k lbs right now which should cover them for 2014. I saw in the earnings release that they only spent $1.2m on PPE purchases in 2013 so that "imminent"ly needed new facility as of last summer, that Houliahn Lokey lowered their DCF by $99 million or $2 per share for clearly wasn't that imminent after all. I'm sure the other $90 million of generic cash imminently required was exaggerated too, so that's $4 per share that never should have been deducted in their fairness opinion.
They said that they would need a new $100 million facility to increase capacity, but it was in the "very early stages" and would either be built in 2014 OR 2015.
They said they did hit the targets required for the MS preferred stock agreement last year. He said they hadn't completed the final calculation of the new conversion price (originally $8.80 and I think was subsequently lowered a bit), but they were willing to give a rough calculation. Unfortunately, I couldn't understand the number he said. If anyone thinks they heard it, let me know.
The market likes it. Stock price is up, although a bit lower from the open, the 2016 LEAPS have ASK's much higher this morning
Here's my takeaway from the earnings call. Prob need to split it into a couple messages:
The earnings call just ended. Much more good information came out of this call than any that we've heard in a long time.
Firstly,there were many more questions from investment firms, so it's clear that interest in this company has picked up. Granted some of them had some of the dumber question (e.g. one said they hadn't seen the results of the buyout voting and asked for the numbers). But still this is a good sign.
Regarding the merger agreement not being terminated, at first, it sounded like they said that it was just being closed/finished, which sounded good to me, but when asked to clarify, they didn't want to say that it is "expected" to be terminated. But I'm not too concerned.
The second caller was clearly either an arb firm or someone that made a bad bet selling out of the money leaps. He went on about how "everyone" voted for the buyout to be approved, and that certain dates should have been changed. Sounded pretty bitter. He got the typical "we can't comment on the transaction itself" response.
They got the question about dividends/buybacks, and gave the response I expected, that lots of cash gets consumed in Q1/Q2 preparing for the strong sales in Q2 and Q3 and that they don't plan to pay a dividend right now. He went on to say that they don't expect to pay a dividend "in the near future"..."especially considering opportunities in our industry". I am not complaining as I'm not in favor of them paying a dividend right now either. Based on the way this was phrased, I wouldn't expect on in the next year at least. Given that they think they can again hit nearly 30% of growth in shipments, they will need most of that cash.