Bain Capital to Buy China Fire - Analyst Blog

China Fire & Security Group Inc. (CFSG) has agreed to be acquired by Amber Parent Limited, an affiliate of funds managed by Bain Capital Asia Fund, L.P. for $265.5 million.

Bain Capital is a global private investment firm that manages several pools of capital, including private equity, venture capital, public equity, credit products and absolute return, with approximately $65 billion in assets under management. Since its inception in 1984, the firm has made private equity investments and add-on acquisitions in more than 300 companies worldwide. Bain Capital Asia, the firm's Asian private equity affiliate, has been investing on the same lines since 2007.

As per the offer, each shareholder of China Fire's common stock will receive $9 in cash. The offer represents a 44% premium over the company's closing price on March 4, 2011, the undisturbed share price prior to the company's announcement of a receipt of a going-private proposal. The price is also at a 38% premium over the company's 90-trading day volume weighted average price calculated as of May 19, 2011.

China Fire's board of directors has approved of the merger agreement and would recommend the same to its shareholders. The merger is expected to close before November 15, 2011. However, it is subject to the adoption of the merger agreement by an affirmative vote of holders of at least 75% of the company's outstanding shares of common stock and an affirmative vote of holders of more than 50% of the company's outstanding shares of common stock held by the disinterested shareholders, as well as certain other customary closing conditions. Mr. Weigang Li and other members of management, who collectively own a total of 16,789,100 shares of common stock and 127,500 shares of restricted common stock, representing 59.14% of the total voting power of the company, have agreed to vote on the adoption of the merger agreement. 

China Fire remained in 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 buyout target and thus await future developments on this front. The stock currently retains a Zacks #3 Rank (short-term Hold recommendation).

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.