China Buyout Offer Under Scrutiny - Analyst Blog

The buyout offer received earlier this month by China Fire & Security Group Inc. (CFSG) from a global private equity firm is being investigated by Goldfarb Branham LLP. The firm is investigating whether the board of China Fire violated shareholder protection laws in connection with the proposed acquisition.

According to Goldfarb Branham, the company offered no extensive details regarding the special committee's scope of authority, the price offered, the identity of the private equity group or whether management would be partnering with the private equity firm. The investigation seeks to ensure that the directors properly valued the company, maximized value to its shareholders and disclosed full and fair information about the transaction.

China Fire, during the announcement of the receipt of the offer, had not disclosed the offer price but said that it came at a premium over the then-current stock price. On the day of receipt of the offer, the closing stock price was $6.26. As of September 30, 2010, China Fire had about 27.6 million shares outstanding. Based on the aforementioned price, the purchase price can be assumed to be above $172.8 million.

According to the offer, the private equity firm is willing to structure the proposed acquisition to allow the existing members of China Fire's management to exchange all or part of their equity interests in the company into equity securities in the post-acquisition company.

China Fire remained in the loss territory in its fourth quarter results. The company reported a loss per share of 8 cents in its fourth quarter, way short of the Zacks Consensus Estimate of a positive 23 cents and EPS of 10 cents in the year-ago quarter. Reported quarter EPS was hurt by lower-than-expected revenues and gross margins. China Fire reported an EPS of 52 cents in fiscal 2010, below 86 cents in the prior year and the Zacks Consensus Estimate of 84 cents.

Total revenue plunged 32.5% year over year to $11.4 million in the fourth quarter, failing to meet the Zacks Consensus Estimate of $26 million. Revenue from China Fire's product sales exhibited growth but was offset by a decline in revenue from system contracting projects due to slow construction progress in the large-scale Wuhan Iron and Steel retrofitting project.

Revenues dipped 1.5% to $80 million in fiscal 2010, missing the Zacks Consensus Estimate of $94 million, pulled down by lower revenues from system contracting projects, which was somewhat offset by increased sales in its product sales and maintenance services segments.

China Fire primarily serves the iron and steel, power and petrochemical industries, and relies heavily on the iron and steel industries for its revenues. Though the company is now exploring other industrial sectors, we believe its inability to successfully expand the market for its products and services in these industries will limit its long-term growth potential.

However, we look upon China Fire as a good acquisition target and thus await future developments on this front. The stock currently retains a Zacks #4 Rank (short-term Sell recommendation). We maintain our long-term Underperform recommendation on China Fire.

China Fire & Security Group, through its wholly owned subsidiary, Sureland Industrial Fire Safety Limited, is engaged primarily in the design, manufacturing, sales and maintenance services of a broad product portfolio including detectors, controllers and fire extinguishers.

China Fire's clientele comprises major companies in the iron and steel, power, petrochemical and transportation industries. It competes with privately held COSCO Fire Protection Inc., UTC Fire & Security and Western States Fire Protection Company.