China Marine Food Group (OTCPK:CMFO) is in negotiations to purchase the algae-based beverage company Xianghe Food Science and Technology.
Similar to China Marine, Xianghe has developed a network of distributors in the Fujian, Zhejiang, Guangdong and Hunan provinces which sell its branded product to stores, restaurant food supply dealers and the hospitality industry.
Preliminary 2010 estimates of revenues from Xianghe are over $20 million with net profit margins anticipated at 20%. Through integrating the product into China Marine's distribution network and expanding distribution to untapped provinces in China, management expects revenues can accelerate significantly during 2010 and beyond.
Source: PR Newswire (December 2, 2009)
We are not sure how much this positive development will add to earnings per share figures. Much of it depends on whether or not the Company will use existing cash balances or raise equity. We have calculated that in a worst case scenario, if China Marine raised all the proceeds via an offering at $6, the transaction would be slightly accretive.
The use of existing cash balances would be the best case scenario, one in which we have calculated that the transaction will add $0.17 to EPS. In this scenario we feel that investors may push shares to a range of $7.95 to $8.80, an increase of $1.70 to $2.55 from yesterday's levels. Investors also need to consider the eventual synergies from this transaction due to opportunities to push respective products trough new distribution channels.
The purchase price to complete this deal is $27.8 million which the Company anticipates will be recovered in 4 years. This implies that Xianghe could experience exceptional growth in net income in subsequent years. (With no growth in net income the pay back would be about seven years).
China Marine commented that contributions of the potential acquisition are not included in its current 2010 guidance of $80 million in revenues and $18 million in net income, giving us room for upside.
Disclosure: Long CMFO