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Templeton is a minority shareholder in AsiaPharm and is opposing a S$357.4 million ($259 million) management buyout offer made in early-February for the Chinese pharmaceutical company. It opposes on the grounds that it believes the offer price is undervalued by at least 50% and fails to take into consideration potential earnings over a three- to five-year period.
Templeton manages the Templeton Strategic Emerging Markets Fund II, which holds a 4% share in Asiapharm. Templeton has said that it is not convinced by the cash offer by Lu Ye Pharmaceutical Investment û controlled by private equity firm MBK Partners û to acquire all the issued and paid-up ordinary shares of AsiaPharm.
MBK previously launched a tender offer of S$0.725 ($0.53) per share for AsiaPharm in a deal that would eventually result in the companyÆs delisting from the Singapore stock exchange. MBK Partners was founded by five ex-Carlyle executives led by Michael Kim, who previously headed CarlyleÆs Asia practice.
Mark Mobius, Templeton president and principal portfolio manager, has vowed to vote against the buyout. He has said that US-based Pope Asset Management and UK firm Martin Currie Investment Management also plan to reject the buyout. Combined, the three investors hold more than 10% of AsiaPharm, which is enough to derail the deal, which requires approval from 90% of the shareholders unless the bidders waive the restriction before the offer closes on March 24.
Mobius û considered an emerging market guru for being among the first fund managers who pioneered investing in these markets û is known for fighting for his fundÆs right as a minority shareholder of the companies in his portfolios and pushing for corporate governance reforms in emerging markets worldwide.
In his latest fight, Mobius says Lu YeÆs offer price ôseverely undervaluesö AsiaPharm's shares based on prospective company earnings, which indicate substantially higher values are in order, and is ôhighly disadvantageousö to minority shareholders. Mobius believes the offer price should be around S$1.09 ($0.79) per share or 50% higher, based on an expectation that AsiaPharm's stock could roughly double from its current levels in around three to five years. Templeton bought its AsiaPharm stake in a placement in May 2006 at S$0.80 ($0.62) per share. On March 19, the stock closed at S$0.68 ($0.49).
AsiaPharm is a specialty pharmaceutical group in China which started operations in 1994. It is engaged in the production and sale of drugs and formulations for medicines for orthopaedics, neurology, gastroenterology and hepatology and also provides contract research services. AsiaPharm has a manufacturing facility in Yantai in the northeastern Shandong province in China and a distribution network of 35 sales offices covering 30 provinces.
Templeton is questioning AsiaPharmÆs 2007 financial results because of what it believes is an unexpected report of fourth quarter losses following positive net profit reports in the seven quarters prior. AsiaPharm reported a net loss of Rmb11.6 million ($1.63 million) in the three months ending December 2007 compared with a net profit of Rmb20.4 million ($2.87 million) in the same quarter in 2006. The net loss ôcontrasts dramaticallyö with the fact that AsiaPharmÆs revenue increased by 86.7% and gross profit increased by 95.9% in the fourth quarter of 2007 compared with the same quarter in 2006, Templeton says.
According to AsiaPharm, the sudden reversal of performance into a loss in the fourth quarter of 2007 is partly due to the sudden increase in amortisation of intangible assets, which was treated as a non-cash item. The company incurred amortisation of intangible assets in the range of Rmb1.6 million ($230,000) to Rmb2.5 million ($350,000) every quarter in the first three quarters of 2007 and then charged Rmb18.7 million ($2.63 million) in the fourth quarter of 2007. The increase in intangible assets was attributed to a restatement of its value, which resulted from fair value adjustments. The fair value adjustments, in turn, resulted from a purchase price allocation exercise relating to AsiaPharmÆs acquisition of investment holding company Solid Success Holdings.
Templeton says AsiaPharm should give a ôfull explanationö in order to arrive at a fair assessment of the business of the company, particularly when the fourth quarter results show such dramatic changes in profitability based on non-cash, draft and non-audited items.
ôThose 2007 fourth quarter results are extremely important for minority shareholders, independent directors and brokerage research houses to consider, in their assessment of the current voluntary conditional cash offer,ö Templeton says.
AsiaPharm could not immediately be reached for comment regarding TempletonÆs demands for a detailed explanation of the pharmaceutical companyÆs 2007 financial results. However, earlier this month, the Singapore Exchange already asked AsiaPharm to clarify certain items on its 2007 financial results, and the company has replied to the exchange.
In its reply, AsiaPharm says: the purchase price allocation (PPA) exercise was performed by PricewaterhouseCoopers Singapore; the PPA resulted in an upward fair valuation adjustment of Rmb6.9 million to the inventory on acquisition, which was sold in 2007, thus increasing the cost of goods sold by the corresponding amount; the increase in amortisation of intangibles of Rmb16.2 million ($2.28 million) is a result of an upward fair value adjustment of intangibles of Solid Success Holdings of Rmb177.2 million ($24.96 million) from Rmb15 million ($2.11 million) to Rmb192.2 million ($27.07 million); and the increase in amortisation of Rmb16.2 million ($2.28 million) was computed based on estimated economic useful lives of nine to 12 years for these intangibles.
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