HOLI - Bidding War For Hollysys Leaves Shareholders Demanding More Input

2023-11-15 06:00:00 ET

Summary

• A consortium led by two investment firms has upped its bid to privatize Hollysys, as minority shareholders agitate for a special meeting to discuss a sale.
• The offer tops a bid two days earlier from a China-focused private equity firm, as well as one from the company’s own management team.
• Minority shareholders don’t appear too optimistic that their interests will be best served by the current management team.

A bidding war is heating up for Hollysys Automation Technologies Ltd. ( HOLI ), but it hardly feels like party time for the company's marginalized minority shareholders.

Last Wednesday, a consortium led by two investment firms - Singapore-based Recco Control Technology and Hong Kong-based Dazheng Group - said it offered to buy all of Hollysys' shares for $26.50 each in cash, valuing the automation and control systems maker at $1.64 billion. That tops a $26-per-share bid two days earlier from China-focused private equity firm Ascendent Capital Partners, which already owns about 14% of Hollysys' stock. Back in August, the Recco Control group made an initial bid of $25 per share.

Things got even more interesting last month as Hollysys' own management team, led by founder and CEO Wang Changli, joined the fray with a bid that matched the Recco consortium's original bid in August. The internal suitors for the 30-year-old company had backing from the municipal government of Beijing, its home city, Reuters reported in September.

Such bidding wars are relatively rare but are becoming more common as private equity investors look for bargains among beaten-down Chinese stocks. Other wars have emerged for names like data center operators VNET (VNET) and Chindata (CD), as well as marketing services provider iClick (ICLK). But they often face challenges because most companies are controlled by a single major shareholder, often the founder, who might resist third-party offers.

The latest bid from the group led by Recco, which specializes in the automation industry, is about 29% higher than the company's closing price on Nov. 3, the last trading day before the Ascendent Capital offer was disclosed. The Recco consortium's first bid in August was already more than a third above Hollysys' stock price before the bidding began.

Investors appear somewhat skeptical about the prospects for a sale. Hollysys stock gained just a little more than 1% last Wednesday to close at $22 per share, far below the latest $26.50 offer from the Recco consortium or any of the other bids. It has climbed a bit further since then, but it continues trading well below the latest takeover offer, which indicates that investors aren't so optimistic that a sale will actually materialize.

It's not so hard to understand why, since talk of a Hollysys sale has circulated for quite some time. Last year, CEO Wang and his lieutenants were reportedly looking to take the company private but didn't take any action until the Recco group made its first move. The company hasn't publicly said anything about the latest Recco-led offer either.

After the first Recco offer, Hollysys took more than a month to respond. That frustrated some of the company's minority investors, leading a group of them, including activist hedge fund Oasis Management, to ask the board to convene a special shareholder meeting. Under the law of the British Virgin Islands, where Hollysys is incorporated, registered shareholders have a statutory right to make such requests. Yet no meeting has happened.

Growing calls for meeting

The initial calls for a meeting came from shareholders holding a combined 32% of Hollysys shares. The group's size has grown since then, and now holders of about 46% of the company's shares want such a meeting, the Recco consortium said in a statement on Monday , urging Hollysys to "move forward with a transparent and genuine sale process." Ascendent is also asking Hollysys to hold a meeting by Dec. 1, while the Recco group is pressing for the creation of an independent board elected by shareholders.

"The right to meet is an unqualified and unfettered absolute right of the shareholders," the Recco group said in its latest statement. "The directors should convene the special meeting immediately to uphold their fiduciary duties."

Hollysys issued a statement on Oct. 30 saying it will decide whether to hold such a meeting after the resolution of a dispute over the ownership and control of company shares held by an entity called Ace Lead Profits Ltd., which will be the subject of a court hearing in Hong Kong on Nov. 21.

The desire to take Hollysys off the Nasdaq is understandable. Valuations of U.S.-listed Chinese companies, in general, have been sagging, in no small part because of tensions between China and the U.S. Beijing has also been increasingly wary about U.S. listings of technology companies that deal with large volumes of data, worried that sensitive data could pose a national security risk in the hands of a foreign government.

Such risks can be high for Hollysys because it sells products for infrastructure like railways and sensitive facilities like nuclear power plants. The company is one of China's oldest New York-listed firms, first floating shares back in 2005. Unlike many of its New York-listed peers, its shares have done relatively well over the years and now trade near their all-time highs, helped by the ongoing bidding race.

Hollysys' focus on infrastructure puts it in a strong position since China often turns to infrastructure building as a form of economic stimulus. The company has more than 20,000 customers, including state-controlled institutions. Its revenue grew more than 50% in total over its past three fiscal years, with its net profit up as well. Despite its relatively strong stock price, its valuation looks modest compared to its peers. The shares now trade at a price-to-earnings (P/E) ratio of 13, which is less than half the 32 for Shanghai-listed Zhejiang Supcon Technology (688777.SS).

All told, a privatization of Hollysys makes sense so its new owners can continue to grow the business without worrying about the complications of being a U.S.-listed company. The new owners could try later to list the company closer to home, be it in Hong Kong or on the Mainland at a higher valuation, netting a profit in the process. The ongoing bidding war also presents an opportunity for minority shareholders to pocket gains at a price that the company's stock hasn't reached in years.

But before any such rosy scenario can play out, the company needs to sort out the current messy situation. And minority shareholders don't appear too optimistic that their interests will be best served by the current management team.

Disclosure: None

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

For further details see: