Shanghai Century Acquisition Corporation (SHA), a special-purpose acquisition company, or SPAC, listed on the American Stock Exchange, reached an agreement to buy Sichuan Kelun Pharmaceutical Co., Ltd. Kelun is the largest producer of intravenous [IV] solution products in China. After completion of the deal, Shanghai Century will become known as China Kelun Pharmaceutical Corporation.
To buy Kelun, Shanghai Century will issue 20 million new shares, which are worth almost $160 million at the present price of $7.98 for Shanghai Century. Kelun and its subsidiary companies produced revenues of $176.7 million in 2006, on which the company made a profit of $14.5 million. The transaction price reflects a price-earnings ratio of 11.
If Kelun makes a profit of at least $23.1 million (RMB180 million), Shanghai Century will pay an additional 5 million new ordinary shares. Another 2 million shares will be issued to the nine owners of Kelun if the company achieves a profit of $33.3 million (RMB260 million) in 2008 and $47.4 million (RMB370 million) in 2009. The potential price is, therefore, $231.4 million.
At the time of the original transaction, the shareholders of Kelun will own 53.3% of Shanghai Century. If they meet all milestones, their stake will increase to 62.4%.
Also, Kelun shareholders will receive $11.5 million in cash when Shanghai Century’s stock price holds a price of at least $11.50 for any 20 trading days in a 30 trading day period. During that time, Shanghai Century must also issue a notice demanding redemption of its warrants or 70% of the outstanding warrants must be exercised.
Kelun shareholders agreed to a 24-month lockup on the shares they receive from Shanghai Century.
Background on Shanghai Century
Shanghai Century floated its IPO on April 28, 2006 with the expressed purpose of buying a Chinese pharmaceutical company. The principal office for Shanghai Century is Hong Kong, but its goal was to buy a mainland Chinese pharma whose fair market value was equal to at least 80% of the assets of Shanghai Century. In the IPO, the company offered 14,375,000 units (including the underwriter’s overallotment), consisting of one share and one warrant at a price of $8 per unit. The IPO netted $115 million for the company.
The Shanghai Century shares trade on the AMEX, though the warrants are not listed. Because the warrants offer the owner the right to buy shares of Shanghai Century at a price of $6, the shares of Shanghai Century dropped to around $7 when they began open market trading. They have subsequently risen to close to the original $8, above the net asset value if the dilutive effect of the warrants is figured in. The warrants have a four-year life, dating from the 2006 IPO.
Shanghai Century spent about $2.5 million in the year from its IPO to the end of Q1 of 2007 while it searched for a suitable company to acquire.
Kelun has been in business since 1996, focusing on IV solutions. Besides drug development and production, its business model includes sales and distribution to hospitals, clinics and other Chinese healthcare facilities. Because of its revenue, Kelun is recognized as one of the top 50 pharmas in China, and Kelun considers itself the biggest selling producer of IV drugs in the entire country.
Kelun’s IV products include electrolytes and acid-base balancing solutions, solutions containing anti-virus and anti-bacterial drugs, and solutions containing nutrients. These products are available in different sizes and packagings, including Kelun’s patented upright-standing polypropylene [PP] soft bags. Kelun also produces generic prescription drugs and over-the-counter medicines that are administered by other delivery systems.
Kelun has an extensive pharmaceutical sales network that covers all of China, including 53 exclusive principal regional sales agents and more than 2,500 sales persons.
The two current Co-Chief Executive Officers of Shanghai Century, Anthony Kai Yiu Lo and Franklin D. Chu, will serve on the board of the new company as non-executive directors. Mr. Gexin Liu, the current chairman of Kelun's board of directors, will become the chairman of China Kelun.
SHA 6-mo. chart: