Pa­cific In­sight bid is not all it seems

National Post (Latest Edition) - - FINANCIAL POST - Ba r ry Cr itCh­ley Fi­nan­cial Post

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.

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