Pacific Insight bid is not all it seems

When i t comes to C hinese i nves t - ment, t his may be a first. Two days after Pacific Insight Electron

ics Corp. filed material for a special shareholders meeting to approve a takeover offer from an American buyer, a new potential buyer, in this case one from China, made noises about a “binding superior proposal” to acquire the company.

Since that announcement, however, there has been no contact from the potential Chinese buyer, Shenzhen Kaizhong Precision Tech

nology Co. Ltd., to make its offer of $24.35 a share official. Time is ticking away as Pacific Insight shareholders are slated to meet on Sept. 26 to opine on the original offer which both parties have already agreed to.

“It’s a very unusual situation. They have put something forward that can’t be considered,” noted one interested observer, given that no official offer from the late-tothe-party potential buyer has been tabled. In the absence of such detail, it’s impossible to determine whether a socalled superior proposal is at work — all of which means the target can’t respond. To do that it needs full and proper information.

That’s the dilemma facing shareholders at TSX- listed Pacific Insight, which on Aug. 1, agreed to be acquired by NYSE- l i sted Methode Electronics Inc. for $ 18.50 a share payable in cash. Insiders owning about 30 per cent of Pacific Insight have agreed to tender. To get over the line, support from two thirds of those who vote is required.

Pacific Insight, which started life as a stereo store in Prince George, B.C., now manufactures lighting and electronic components for a wide range of industries. It has grown substantially and employs 1,000 people from operations and offices in Canada, U.S. and Mexico.

The company, which seems set to be sold for $144 million, is understood to be the second largest employer in Nelson, B.C. It accepted the Methode offer after eight months of discussions with another potential buyer that ended this year.

Methode defines itself as “a global developer of custom engineered and application-specific products and solutions.” It has manufacturing, design and testing operations in 14 countries. We were unable to reach Chicago- based Methode, which is understood to have agreed to keep operations at Pacific Insight running as they currently are.

Meanwhile, nothing has been heard from the Shenzhen Kaizhong. When it made its binding superior proposal, it said it was “committed to working diligently to completing our proposed transaction as expeditiously as possible.” But it added some conditions, including financing: the purchase price would be paid with cash on hand and proceeds of a loan facility which it said had been committed by GF Securities Co., Ltd. ( In Canada deals can only proceed with committed financing.) Slowing down the process even further was the fact that shareholders of Shenzhen Kaizhong would have to approve the plan.

Friday, the situation may have been made a little clearer: ISS, a proxy advisory firm, recommended shareholders support the Methode transaction because of the substantial premium, the certainty of value, immediate liquidity to shareholders and the favourable market reaction.

ISS also noted Shenzhen Kaizhong’s proposal does not represent a superior proposal as defined in the arrangement agreement “and is not a proposal that the Company is able to accept without breaching the arrangement agreement.”

There are also other issues: the Kaizhong proposal is subject to Chinese government approvals and it needs bank financing given that the Chinese lender would provide more than 90 per cent of the purchase price.

So what’s the next step? Clearly, if its interested, it’s up to Shenzhen Kaizhong to get organized and make, in effect, a non- conditional superior offer.