Bad Corporate Governance Flag: Sino Biopharmaceutical
On June 1st, the Chairman of Sino Biopharmaceutical (SBMFF.PK) entered into an agreement with the company which gives him control of Beijing Tide, a subsidiary of the company, which is set to list on the A-share market. Had control of the company stayed at the Company, there would certainly be much more value to a potential acquirer.
The key is the byzantine organizational structure of the company. The announcement can be found here. On pages 10-11, the announcement describes the pre and post-restructuring shareholding structure. Via his holding in France Investment Hong Kong, the chairman gains control of the main holding vehicle of Beijing Tide.
Because the chairman has a number of smaller vehicles with smaller holdings in Beijing Tide, he has swapped those out with the company so that, while his effective interest is the same, he actually controls the Beijing Tide.
Currently, Beijing Tide is owned 34% by Sino Biopharm Beijing (wholly owned subsidiary of listco), 24% by France Investment BVI (BVI controlled by chairman), 2% by Beijing Taitongda, 1% by Beijing Decheng Jingwei, and 12% by LTT Bio-Pharma.
The proposed transaction is for the listco to sell 51% of Sino Biopharm to the BVI controlled by chairman, which is equivalent to 17% ownership in Beijing Tide (51% x 34% = 17%)
In return, chairman is selling an effective 71% ownership of BVI to the listco, which is equivalent to 17% ownership in Beijing Tide (48% x 55% + 45%) x 24% = 17%
In 2011, Beijing Tide recorded net profit for RMB 500MM, which at 34% shareholding, makes its contribution to Sino Biopharm's Net Income almost 45%. Control of this company is clearly valuable.
Because the net effect is a swap of 17% for 17%, no cash will change hands. The chairman has nabbed control of the crown jewel for free.
How could the company possibly rationalize this?
Well, they claim that this will more smoothly allow the IPO of Beijing Tide to take place as the Company could be considered to be in competition (page 16 of the announcement). This makes no sense. The Chairman of Sino Biopharm (definitely not a third party) is still in control. Nothing has really changed except moving a controlling stake from public shareholders to the Chairman. The most insulting part is claiming that this is someone in public shareholders benefit so that an IPO can go through.
I have not dug much deeper into this name, but this represents terrible corporate governance, and I expect shareholders in Sino Biopharm to sell. I would watch out in this name.
Disclosure: I am short SBMFF.PK.