Summary: CNIT has a "going private" offer at $4.43. Market is selling it at $1.14. Isn't it worth looking? If the market is wrong, you'll make a profit of 289%.
A Seemingly Doubtful "Going Private" Offer
In the boom of China stock market, a slew of US-listed Chinese companies announced reception of a "going private" proposal. China Information Technology, Inc. (CNIT) was one of them. Strangely enough, the company didn't promptly announce the engagement of financial advisor and legal counsel like all the others did. Why? From the 20-F, it seems that the company's debt was a bit high at the end of 2014. It could be that the financing was uncertain.
In the proposal letter, the buyer group stated:
We intend to finance the Acquisition with a combination of debt and equity capital.
a. Debt Financing. We have held preliminary discussions with a Chinese bank which is experienced in financing going-private transactions and expect to receive a letter of intent from them in due course. We expect commitments for the debt financing, subject to the terms and conditions set forth therein, to be in place when the Definitive Agreements (as defined below) are executed.
b. Equity Financing. Equity financing would be provided from our existing holdings of ordinary shares. We have also held preliminary discussions with certain potential sources of equity financing, and may make agreements with them relating to possible investments in the Acquisition.
Delayed Announcement Conveys Important Information
It was in fact a reaffirmation of the "going private". While most of the companies haven't said anything yet since the collapse of the China stock market, CNIT showed up and made a positive move the day after Shanghai composite index tumbled 6.15% on a day and 27.6% since the top of the boom. This "going private" is now more credible than most of the others.
On the other hand, the uncertainty of the financing might have been solved. It might be that for reasons of cautiousness, either the buyer group, the bank or other equity financiers wished to make sure before going further. They might first have gone into the due diligence. The financiers might have okayed the financing. The buyer group, led by the Chairman and CEO, then signaled the special committee to go ahead. Then came the engagement of the advisors.
Positive Events for the "Going Private"
The company has recently sold an asset for approximately US$60.48 million, which significantly reduced the debt, radically improved the balance sheet and makes the financing more probable.
On May 27, 2015, the company announced closing of $13.54 million registered direct offering of ordinary shares and warrants at the price of $6.44 per share, which shows the bid price of $4.43 a share is really a bargain for the buyer group and lends credibility to the "going private" offer.
Looking Deeper into the Financing Ability
On November 13, 2014, the company announced "it has obtained a three-year revolving credit facility of RMB 1 Billion ($159 million) from China CITIC Bank (CITIC)", which illustrates the company's ability of borrowing.
Now how much might the buyer group need to buy out the remaining public shares? According to the 20-F, the management group holds 48.6% of 32,263,875 total shares outstanding. It's then 32,263,875×51.4%×$4.43=$73.5 million they will need. It looks to me that they can obtain that amount.
"Going Private" Might Have Started Long Before the China Stock Market Boom
On August 4, 2014, the company announced a strategic partnership with CITIC Securities Co., Ltd.
Pursuant to the partnership agreement, CITIC will provide a variety of corporate financial services including mergers and acquisitions, …. During CNIT's strategic transition from traditional IT system integration to the cloud-based internet platform technology, CITIC will assist the Company in exploring various alternatives in China to enhance long-term shareholder value.…
Mr. Jiang Huai Lin, Chairman and Chief Executive Officer of the Company, commented, "… I believe CNIT shall benefit greatly from CITIC's expertise in the Chinese capital market."
CITIC is China's largest securities broker. It seems to me that CNIT has been looking for a reverse merger opportunity in China for quite some time. This means they might have started preparing leaving the US long before the China market boom and this makes the "going private" more credible.
A Premium You've Never Seen
Now why is the market selling it at $1.14? I believe it's mostly because of manipulation which has become overly excessive and reckless. Someone has been shorting and covering on this stock and exploiting the weakness of the herd to extremes. They've been enjoying manipulating a tiny stock that is forgotten by the market. It seems to me that the bear manipulation has come near to its end. Thanks to the manipulator, market has got a super bargain even without the "going private". A party on the long side might soon be on the way. This company is not going under. Investors should not hesitate to snap up any amount of shares the manipulator may short. If the going private goes through, it'll be a gain of 289%.
If the market fails to correct itself swiftly and the price remains this low, the buyer group may take the opportunity to lower the bid. If that happens, investors should vote "NO" to the "going private" and force the buyer group to pay the original price of $4.43 a share. I believe they really want to and have to take the company private because remaining in the US seems to be a suicide. They have the means to pay that price and that is a fair price.
Disclosure: I am/we are long CNIT, DSKY.
Additional disclosure: seekingalpha.com declined to publish this article for the reason that the company's market capitalization is below $100 million.
Please do your own diligence. I will not share your profits. Nor will I share your losses.