Harbin Electric: The Abax Daisy Chain of Unanswered Questions

Aug.10.11 | About: HARBIN ELECTRIC, (HRBN)

Hong Kong-based hedge fund Abax’s interlinking ties to Chinese reverse-merger battleground stock Harbin Electric (NASDAQ:HRBN) is a matter of record: It has contributed almost $64 million to Harbin’s proposed management buyout and a former director of its funds is chair of the company’s audit committee.

New information, however, suggests that Abax and Harbin’s ties are so deep that you can’t tell where the hedge fund ends and Harbin begins.

Evidence the first is a corporate finance transaction chronology on the webpage of Tokyo-based Skadden, Arps, Slate, Meagher & Flom partner Michael Mies. Buried deep on the page, it notes his role in advising Abax Lotus Ltd. on a personal $25 million “bridge loan” to Harbin Chairman (and sole MBO bidder) Tianfu Yang’s Hero Wave Investments Limited, a British Virgin Islands-domiciled entity that he is the sole owner of.

The Skadden lawyer confirmed that the loan was structured in 2007 but declined to discuss the matter further, citing client confidentiality. That’s unfortunate because there are a universe of questions that want for answering. The first off is what exactly was the loan bridging? There doesn’t seem to be any public record of Yang buying or investing in anything, let alone for that much money, in the following year. As such, what was that money for? Second, was this loan open when Boyd Plowman came into the equation for Harbin?

Most importantly, the loan is apparently not disclosed in any Harbin filing, then or now, despite Abax being the company’s most important investor and source of funds.

The issue of disclosure is crucial in that it is highly unlikely Abax did not demand ample collateral for a loan amounting to around 4% of its then $600-$650 million under management in 2007, the year of its launch. Though Yang likely had some hard assets to pledge to Abax, it is a virtual certainty he had to put up at least some of Hero Wave’s 2.7 million shares as collateral.

To that end, the only document that might connect the Abax loan to Hero Wave is a registration statement from January 30, 2008 where Harbin registered 700,000 shares of Hero Wave’s previously restricted shares for transfer to Abax Lotus. Though Harbin’s share price closed at $23.14 on February 1, 2008, the almost $16.2 million in value block seems mighty thin collateral for a loan that size.

It should be noted that if any of that loan money found its way into Harbin’s coffers, the company is done for, since at least four year’s worth of financials would have to be recalculated.

Whatever the use of the loan, it’s not clear that it terribly much matters to Abax because it is not clear that there is any real difference between the fund and Harbin.

When Harbin, a company that is content doing business with a tragically amusing reverse merger cast-of-characters like Benjamin Wey, Frazer Frost and Loeb & Loeb, needed an investment banker to solicit potential suitors, they hired Morgan Stanley, whose investment management unit is a big investor in Abax. When they needed a management buyout loan, they got one from China Development Bank, the “strategic partner” for Abax’s private equity investment unit; CDB also took them out of a toothache of a five-month loan from, of all places, Abax with a $35 million working capital facility. [CDB took a more direct view of collateral and required seven million of Yang’s 9.6 million shares as collateral for the loan.] Skadden Arps had represented Abax in the undisclosed loan above but Yang hired them to advise him. When Harbin needed a “financial expert,” or a former chief financial officer of a collapsed manufactured housing company, after a director’s death they lifted one from Abax. [Perhaps at this juncture, given the clear connections between Abax and Harbin and Plowman and Ajax, it is best to drop the pretense that he is an independent director in any meaningful sense of the word.]

If a little more proof is wanted, then consider the often overlooked Special Committee Discussion Materials, filed in June by Morgan Stanley. To the uninitiated it is a hodge-podge of notes from what must have been one hell of a frustrating M&A assignment; to a more experienced reader it is a roadmap for litigation.

As seen on pages eight and nine, this was no ordinary attempt to gin up a deal.

Of the 73 “financial” or “strategic” targets Morgan identified and approached, Harbin only received a single bid: Abax. That’s because, as one suitor noted to Morgan Stanley, “Management, with the support of the board, was unwilling to share information.” Another noted, “It’s difficult to conduct [due] diligence without CEO support.”

In non-Wall Street jargon this means that executives who were being asked to pony up hundreds of millions of dollars for Harbin were prohibited from analyzing the company’s internal operations, see its bank accounts or speak to its customers. So they walked away.

The man who put a stop to all of this was, in the words of the investment bankers and the suitors themselves, Tianfu Yang.

Which is odd behavior from a man who had made a very big deal of seeking the best possible purchase price for his investors.

If Yang had honestly wanted a deal done, he would have negotiated with the prospective suitors. Instead, he refused to even start a dialogue with them. Despite taking the phrase “good faith effort” in a bold new direction, it does suggest one final question for regulators and investors in both Harbin and Abax: “Why?”

The likely answer is because there only ever was one suitor Yang could safely share Harbin’s real financials with.

Disclosure: I do not have any sort of investments in the securities of any company I write about, nor for that matter, in anything at all (save for my house).