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Arbitrage Opportunity

The $3.00 tender offer made by HDS Investments LLC on November 11, 2011 to take WSP Holdings (NYSE:WH) private has been largely forgotten. Minimal trading volume over the past year suggests a fundamental misunderstanding of the company, its shift in international focus, and the current arbitrage opportunity presented to investors.

The Financial Times takes a bullish stance on the recent surge of US-listed Chinese companies going private: "As long as financing is available on attractive terms, we expect to see most of these transactions going to completion." HDS is providing financing in-house here. Note WH tops the list in terms of deal value.

The Company

Wuxi Seamless Oil Pipes Company Limited, the core enterprise of WSP Holdings Limited, is a leading manufacturer of oil country tubular goods (OCTG). Headquartered in Wuxi, China, WSP is third largest manufacturer of such goods in China, and exports products to more than 30 countries worldwide. It is the largest non-SOE (state owned enterprise) OCTG supplier in China, one of the top three suppliers to CNPC, and one of the two non-API suppliers to Sinpec (NYSE:SHI).

With currently more than 4,800 employees, WSP is expanding production at its Thai-Chinese Rayong Industrial Zone facility (Thailand), as evident by these job posts and on the ground due-diligence observations of a flier calling for 100 job positions to be filled. WSP partnered with Schlumberger (NYSE:SLB) to distribute their OCTG product in the US under the trademark "Wilson," which was a subsidiary of Schulmberger. Wilson has since been acquired by National Oilwell Varco. In addition to China and Thailand, the company also has a production facility in Houston Texas (United States). To avoid the nearly 30% anti-dumping tariff imposed on Chinese OCTG imports to the US (in early 2010), WSP has been ramping up production at its Houston and Thai facilities, and renewing focus on it's South American customers.

Share Structure

WSP IPO'd on the New York Stock Exchange in December of 2007 for $8.50 ($42.50 reverse-split adjusted). The outstanding share count of WH stands at 20.4 million shares, and the estimated public float is a mere 3.16 million shares. CEO Longhua Piao holds a (majority) 50.9% of the O/S, or 10.4 million shares.

UMW Holdings maintains a 4.6 million share position in WH, which is 22.5% of the O/S. Their cost basis is approximately $7 per share. Group CEO and President of UMW, Syed Hisham Bin Syed Wazir, is also Vice Chairman of WH. UMW shareholders will likely support the deal, as it has been mentioned a special dividend could be issued if the WSP privatization goes forward. Multiple public statements imply UMW supports the going private transaction, including their latest quarterly statement: "The impending privatization of WSP will negate the need for impairment losses."

Oaktree Capitol (NYSE:OAK) holds 6.9% of the O/S, or 1.41 million shares. Oaktree Managing Director Dennis Zhu is also a WH Director, and is on the independent committee to review the going private proposal. Oaktree Capital is the world's largest manager of distressed debt. Other than Sina (NASDAQ:SINA) and Melco (NASDAQ:MPEL), Oaktree currently has no other US-listed Chinese investments.

Other institutional holders of include Credit Suisse (269K shares), Wellington Management Co LLP (268K shares), Prescott Group Capital Management LLC (142K shares), and other various funds holding small amounts totally 149k shares.

Going Private

WSP has appointed Houlihan Lokey as financial advisor for evaluation of the going private proposal. They have retained Kirk & Elis and Convers Dill & Pearman as legal advisors. David Zhang of Kirk & Ellis represented the company in 2007 (then with Latham & Watkins), taking them public. He is now helping advise the company as they negotiate going private. David's list of accomplishments in the sector is mind boggling.

Jubao Xie, President of HDS Investments LLC (who made the tender offer), is branching out into America as mentioned in this article. He is in good company, as #14 on the list of top entrepreneurs in Jiangsu Province.

Power Grab

As WSP has restructured to bypass steep tariffs, they are poised to take advantage of the current white hot demand for OCTG in North America:

Spending has already accelerated far faster than many expected. A year ago, the Interstate Natural Gas Association of America (INGAA) estimated North America would add 19,000 miles of oil pipelines at a cost of $31.4 billion by 2035 as production surged 50 percent to 12.7 million barrels per day. But industry monitor IIR Energy now estimates that $10 billion a year will be spent on crude oil pipeline projects in 2012 and 2013, four times the average of the previous seven years.

U.S. demand for OCTG and line pipe products is growing rapidly due to the development of unconventional shale (oil and gas) reserves and the resumption of deep-water drilling operations in the Gulf of Mexico.

WSP has a leg up on other players scrambling to meet this demand, with their Houston facility online and fully operational. Tianjin Pipe, the largest OCTG producer in China, is currently constructing a similar facility in Texas (also in Houston). Luxembourg company Tenaris (NYSE:TS) is paying $1.5 Billion for a 650K ton capacity seamless pipe plant in the US. WSP's Houston facility alone has a threading capacity of 120K tons, and a hot threading line of 100k tons.

According to the latest annual report filed in April 2012:

As of December 31, 2011, our key operating assets included eighteen threading lines and two drill pipe production lines with an aggregate annual production capacity of approximately 1,394,000 tonnes of seamless OCTG. In addition, we have five production lines with an aggregate annual production capacity of 1,430,000 tonnes for the manufacturing of green pipes, which are semi-finished pipes that can be further processed into end-products. We have expanded our hot-rolling OCTG pipe production capacity and pipe threading capacity with the construction of production facilities in Houston, Texas and Thailand and additional production facilities in China.

Conclusions:

UMW holds the key to closing negotiations, and in all likelihood are presently bargaining for a slightly higher buyout price due to their high cost basis of over $7.00 a share. This is not an unreasonable proposition, given recent examples of increased offer amounts like (NYSE:GU) and (NASDAQ:PSOF). An update and possible decision from UMW can be expected on August 16th, when the company reports their second quarter financials.

Source: WSP Holdings Limited Bursting At The Seams And Set To Explode