KANG - iKang Healthcare

[writser]

Probably nobody is interested but I'm just throwing this out there. iKang (KANG) is a Chinese healthcare company providing preventive healthcare solutions (dental services, medical examinations, etc). They IPO'd on the NASDAQ in April 2014 (no reverse merger). Just a few months later, in August 2015, the company received a non-binding proposal from the CEO to go private at $17.80. A few months later a competing group offered $22 / ADS. Both proposals went nowhere. In 2016 the company received another proposal, this time from Yunfeng Capital, to take the company private in a $20 - $25 deal. Some time passed - as is common with these Chinese deals - but in March this year the company entered into a a definitive agreement with Yunfeng together with Alibaba to go private at $20.60 / ADS. They entered in a definitive agreement, shareholders voted in favour of this deal, everything was good and shares traded as high as ~$20.50 for months.

However, in August the company said that up to ~32% of shareholders were requesting appraisal rights. The buyers had the right to cancel the deal if more than 15% of all shareholders requested an appraisal. And a few days ago the company announced that they are 're-evaluating the commercial viability of the merger' and requested a four week extension of the termination date. iKang announced that they have to explore financing alternatives because ~$125m in convertible loans are coming due. Understandably the stock cratered, trading as low as $15.50 before rebounding to ~$17 as of now.

First of all, this is an interesting dynamic, in some of these lowball Chinese mergers a lot of shareholders are asking for appraisal rights. JA Solar was another deal that was delayed (but eventually completed) because there were too many dissenting shareholders. Something to think about in the future.

My gut tells me there's a decent chance that the deal will still go through. Alibaba should have deep pockets, they were already willing to go to court with 15% of the shareholders, is the extra 15% really a deal-breaker? On top of that, by playing hardball and threatening to cancel the deal the buyers can maybe coerce some dissenting shareholders into accepting a settlement or dropping the lawsuit. On the other hand, if 30% of the shareholders go to court and the court decides fair value is $40 / ADS then the transaction will end up significantly more expensive for the buying group (however you could argue that in that case they still pay ~$26 / share for something that the court says is worth $40).

Does anybody have experience with appraisals? Can I follow the court proceedings somewhere? Is it possible for the dissenting shareholders to drop their lawsuit and / or accept a settlement? I don't have a position in iKang - just trying to think about how to approach this situation. For now it is in the 'too hard' basket but if it trades at $15 the market is quite pessimistic. Seems to me a quick close of the deal (and a small sweetener for the dissenting shareholders) is probably a good outcome for a lot of parties. Bit of game theory at work here.

Any thoughts would be appreciated.

[mjohn707]

Probably nobody is interested but I'm just throwing this out there. iKang (KANG) is a Chinese healthcare company providing preventive healthcare solutions (dental services, medical examinations, etc). They IPO'd on the NASDAQ in April 2014 (no reverse merger). Just a few months later, in August 2015, the company received a non-binding proposal from the CEO to go private at $17.80. A few months later a competing group offered $22 / ADS. Both proposals went nowhere. In 2016 the company received another proposal, this time from Yunfeng Capital, to take the company private in a $20 - $25 deal. Some time passed - as is common with these Chinese deals - but in March this year the company entered into a a definitive agreement with Yunfeng together with Alibaba to go private at $20.60 / ADS. They entered in a definitive agreement, shareholders voted in favour of this deal, everything was good and shares traded as high as ~$20.50 for months.

However, in August the company said that up to ~32% of shareholders were requesting appraisal rights. The buyers had the right to cancel the deal if more than 15% of all shareholders requested an appraisal. And a few days ago the company announced that they are 're-evaluating the commercial viability of the merger' and requested a four week extension of the termination date. iKang announced that they have to explore financing alternatives because ~$125m in convertible loans are coming due. Understandably the stock cratered, trading as low as $15.50 before rebounding to ~$17 as of now.

First of all, this is an interesting dynamic, in some of these lowball Chinese mergers a lot of shareholders are asking for appraisal rights. JA Solar was another deal that was delayed (but eventually completed) because there were too many dissenting shareholders. Something to think about in the future.

My gut tells me there's a decent chance that the deal will still go through. Alibaba should have deep pockets, they were already willing to go to court with 15% of the shareholders, is the extra 15% really a deal-breaker? On top of that, by playing hardball and threatening to cancel the deal the buyers can maybe coerce some dissenting shareholders into accepting a settlement or dropping the lawsuit. On the other hand, if 30% of the shareholders go to court and the court decides fair value is $40 / ADS then the transaction will end up significantly more expensive for the buying group (however you could argue that in that case they still pay ~$26 / share for something that the court says is worth $40).

Does anybody have experience with appraisals? Can I follow the court proceedings somewhere? Is it possible for the dissenting shareholders to drop their lawsuit and / or accept a settlement? I don't have a position in iKang - just trying to think about how to approach this situation. For now it is in the 'too hard' basket but if it trades at $15 the market is quite pessimistic. Seems to me a quick close of the deal (and a small sweetener for the dissenting shareholders) is probably a good outcome for a lot of parties. Bit of game theory at work here.

Any thoughts would be appreciated.

No thoughts to add here about the situation, but I think you're right that if it involves Alibaba it must be a decent offer, even considering the recent issues they've had and all.  Seems interesting though

[Hielko]

Does anybody have experience with appraisals? Can I follow the court proceedings somewhere? Is it possible for the dissenting shareholders to drop their lawsuit and / or accept a settlement?

I don't think there is anything yet that you can follow. A court case will only start after the merger has been completed, and I doubt that the company can legally already offer some people more/share than other shareholders while the merger hasn't closed.

[Spekulatius]

I would only play arbitrage, when I didn’t mind owning and iKang isn’t a stock that I would want to own after a quick review. The balance sheet and the deteriorating income statement are not encouraging.

[writser]

Another four week extension: https://www.sec.gov/Archives/edgar/data/1524190/000110465918058479/a18-14230_8ex99d2.htm . Playing hardball.

The Company has formally requested that Parent and Merger Sub waive this closing condition. However, Parent and Merger Sub have indicated that they do not presently intend to waive the closing condition based on current circumstances. As such, the Company cautions its shareholders and others considering trading its securities that there is no indication or assurance that Parent and Merger Sub will waive such closing condition and proceed to consummate the Merger.

[bianji108]

Kang is really best acquired by BABA who has deep pockets to support its huge capex. if the dissents are rational, they should take $20.6...I have a hard time valuing KANG on its own

[writser]

https://www.sec.gov/Archives/edgar/data/1524190/000110465918065273/a18-39383_1ex99d1.htm

As previously disclosed, under the Merger Agreement, either the Company or Parent have the right to terminate the Merger Agreement if the Merger has not been completed by October 31, 2018 (the “Termination Date”). Accordingly, as the Termination Date has passed and the Merger has not been completed, either the Company or Parent may terminate the Merger Agreement at any time going forward.

[..]

The Company has continued to request that Parent and Merger Sub waive the closing condition under Section 7.02(e). However, Parent and Merger Sub have not agreed to waive the closing condition. The Special Committee of the Board of Directors is continuing to engage in discussions with Parent and Merger Sub, and the Board of Directors of the Company is evaluating the Company’s alternatives. The Company cautions its shareholders and others considering trading its securities that there is no indication or assurance that Parent and Merger Sub will waive the closing condition and proceed to consummate the Merger.

[writser]

Is it possible for the dissenting shareholders to drop their lawsuit and / or accept a settlement? I don't have a position in iKang - just trying to think about how to approach this situation. For now it is in the 'too hard' basket but if it trades at $15 the market is quite pessimistic. Seems to me a quick close of the deal (and a small sweetener for the dissenting shareholders) is probably a good outcome for a lot of parties. Bit of game theory at work here.

Any thoughts would be appreciated.

Here we are (link).

The Company has been informed by Parent and Merger Sub that a substantial majority of the dissenting shareholders have agreed to withdraw as dissenters and, accordingly, it is expected that the closing condition set forth in Section 7.02(e) of the Amended Merger Agreement will be satisfied.

In addition, Amendment No. 3 amends the Merger Agreement to (i) include an additional closing condition for the benefit of Parent and Merger Sub that there has been no change in applicable laws which imposes certain restrictions or prohibitions with respect to the Company’s business and operations and (ii) provide that shares held by shareholders who have validly exercised and effectively withdrawn their rights to dissent from the Merger pursuant to agreements entered into between such shareholders and Merger Sub, will be cancelled for no consideration under the Amended Merger Agreement upon the effective time of the Merger.

The parties currently expect to close the Merger in January 2019, subject to the satisfaction of the closing conditions set forth in the Amended Merger Agreement.

What happened exactly with the withdrawn shares of the dissenters? My legalese isn't very good. The way I read it those shares are now worthless. I guess a monetary settlement was agreed upon? Or all dissenting shareholders agreed to withdraw 50% of their shares and get a lot of money for the remainder in court? Or they continue to hold their shares? Or something else? Not sure.

Anyway, my gut feeling was correct and a relatively quick solution was found. I didn't have the balls to act on it though. Too hard to handicap the dissenter game and too hard (for me) to value the company on a standalone basis.

FWIW in cases like this there is basically a tiered shareholder structure. Retail / small holders buy and get fucked when there are many dissenters. They have no information, shares trade at a huge discount to deal value. Meanwhile big players can buy a large stake, hold out, reach a deal with the buyer and are kept in the loop. Seems like a bad thing for the market in general. But the accompanying mispricings in the market could very well be opportunities. A repeating pattern so far:

1. Chinese buyer has secured financing, shareholder vote, deal is expected to close in a few days. Shares trade very close to the deal price.
2. Buyer announces that there are too many dissenters and that the deal might collapse. Shares crater. Can't trust the Chinese!
3. A few months of silence.
4. One way or another the deal is completed anyway.

Risky though.