Tongjitang Chinese Medicine Slims Down

| About: Tongjitang Chinese (TCM)

Tongjitang Chinese Medicines Company (NYSE: TCM) is selling off a few of is divisions, apparently a move to slim down as it prepares to go private. A JV comprised of its founding Chairman/CEO, Mr. Xiaochun Wang, and Fosun Industrial, the Hong Kong conglomerate, offered $4.50 for each ADS in April 2010. Officially, the offer has been neither accepted nor declined. Tongjitang is currently trading for $3.54.

Fosun has been steadily amassing shares until it owned about 24% of the company. Tongjitang staged an IPO on the NYSE in 2007, when it priced its ADSs at $10 each.

Tongjitang’s ongoing operational problem is that it is dependent upon a single product. Xianling Gubao, a TCM for the treatment of osteoporosis, for revenues, and that product’s sales are in decline. Although the company has tried to find other TCMs to provide growth, none of the acquisitions have provided any meaningful increase in its fortunes.

In the corporate restructuring announced Tuesday, Tongjitang said it will sell three divisions for 259.3 million RMB ($38.1 million) to Guizhou Huixian Investment Management Company Limited. The subsidiaries, all of which are combined in Guizhou Tongjitang Asset Management Company Limited, include: Guizhou Tongjitang Pharmaceutical Distribution Co., Ltd., Guizhou Tongjitang Pharmacy Chain Stores Co., Ltd. and a 95% equity interest in Gui Liquor Co., Ltd.

Tongjitang paid 120.6 million RMB ($17.7 million) for Gui Liquor Company in February 2010, even though its 2008 revenues were just 19 million RMB ($2.8 million).

Before the transaction, Tongjitang listed $55 million in cash at its most recent quarterly reporting. The company has a market capitalization of $94 million, and it will now receive an additional $38 million from the transaction to make it even easier to take the company private.

In this latest transaction, Tongjitang will be paid in four installments for its subsidiaries. The company said the payments would be 5%, 5%, 45% and 45%, and that it has received the first 13 million installment RMB ($1.9 million) from the buyer. The two major payments will occur on June 30, 2011 and December 31, 2011, and are subject to unspecified conditions.

CEO Xiaochun Wang positioned the move as a strategy to take advantage of China’s healthcare reform. He did not mention anything about the bid to take the company private.

Disclosure: none.