2.8% Upside In Going-Private Transaction Of China Nepstar Chain Drugstore Not Attractive Enough

| About: China Nepstar (NPD)

Summary

Taking maximum ADR cancellation fee into account consideration is 2.57.

Upside of 2.8% from today’s price.

Approval is certain due to major shareholder acquiring the whole company.

China Nepstar Chain Drugstore (NYSE:NPD) is a retail drugstore chain in China. It has about 1,965 directly operated stores and 15 distribution centers in China. Nepstar sells pharmaceutical products and services and a wide variety of other merchandise, including OTC drugs, nutritional supplements, herbal products, personal care products, family care products, and convenience products. The IPO was in November 2007

Major shareholder approves deal

Chairman and founder Mr Zhang beneficially owns, in the aggregate 79.5% of the total issued and outstanding ordinary shares of the Company, including Shares represented by the American depositary shares. He will vote his shares in favor of the authorization and approval of the merger agreement. This means a two-thirds majority is already given. He is the owner of the acquiring companies.

Merger Consideration

The consideration is 2.62 in cash per ADS. One ADS represent two shares. From the 2.62 up to 0.05 ADR cancellation fees pursuant to the terms and conditions of the Deposit Agreement have to be subtracted. This means the effective consideration is 2.57 per ADS.

Termination Fee

There is a termination fee of 2.5m if e.g. the company enters into an alternative acquisition agreement with respect to a superior proposal. That is about 1% of NPD's market capitalization. If the acquirer breaks the deal the termination fee is 5.0m.

Financing

"The Buyer Group intends to fund the merger consideration through the proceeds from a senior secured term loan facility in an aggregate principal amount of up to RMB360 million (or equivalent in U.S. dollar) provided by Ping An Bank Co., Ltd. (the "Lender") pursuant to a debt commitment letter dated as of March 16, 2016 by and between Parent and the Lender."

Time-Frame

If the merger is not consummated by August 5, 2016 either party can terminate the merger. Therefore I believe the company and acquirer expect the merger to happen before that date. Additionally on March, 16th they expected The merger to close during the third quarter of 2016.

Depending on the effective date of the merger the expected annualized return is about 3-4 times the gross return.

Valuation

You find more easy readable information in this presentation from March, 2016. Here is an excerpt of the multiples used to come to the "fair" value of NPD based on the selected companies analysis:

Selected Multiple Range

Multiple Description

Low

High

Enterprise Value as a multiple of:

LTM 2015 EBITDA

10.0

12.0

Estimated 2016 EBITDA

8.0

10.0

Estimated 2017 EBITDA

7.0

9.0

Click to enlarge

Implied Per ADS Reference Range for the Company

Consideration

$2.15 - $2.47 (based on LTM 2015 EBITDA)

$

2.62

$2.12 - $2.51 (based on estimated 2016 EBITDA)

$

2.62

$2.10 - $2.55 (based on estimated 2017 EBITDA)

$

2.62

Click to enlarge

Source: sec filings

Book value was 0.68 per share or two times that per ADS. The going-private is no balance sheet steal deal, but one has to look at the company as a going concern.

Even if you think the company is worth more than the deal price it is difficult for the individual investor to realize it. Dissenter rights cannot be exercised for the ADRs. One would have to convert to the common shares.

Conclusion

At the current price of 2.50 per ADR the gross upside is 2.8% in 3-4 month. This may be interesting for some. For me the spread is too low for a company based in China. Nevertheless, the deal looks safe. If you think otherwise please comment.

You can find more information on the transaction here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.