Pamria 2012 Capital Strategy 3-21-2012

Pacific Asset Management, Capital Strategies

肖恩 Shawn A. Mesaros 董事总经理 Pacific Asset Management 金茂大厦31楼 Jin Mao Tower, Suite #31/F 浦东世纪大道88号中国上海, 200120 电话: +86 021-6155-8388 传真: +86 021-2890-9999 手机: +86 182-2156-3221 [email protected]

Shawn A. Mesaros Managing Director 太平洋 Pacific Asset Management Two Union Square 601 Union Street, Suite #4200 Seattle, WA 98101 (206) 933-1600 Seattle Office (206) 600-3175 Fax (206) 923-9200 Re-Direct Shanghai http://www.pamria.com

Pamria Services Associates 投资银行部总监 Pacific Asset Management 5F, Standard Chartered Tower 201 Shi Ji Avenue 中国上海, 200120 电话: +86 021-6155-8388 传真: +86 021-6182-6777 手机: +86 137-0182-1171 [email protected]

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More companies have failed than exist today. “Most Companies Fail”

Businesses have very limited market choices 1. Raise Capital to Grow Organically

2. Acquire Competition to Grow

3. Be Acquired by Competition

4. If deeply undervalued, Go private and relist in high growth markets at a premium price; In this case, Asia

Additional capital is required for all 4 Choices

Our Approach to Investing

Capital Strategies: Companies must Grow, or be acquired by Competition

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Capital Strategies Management Our Approach to Investing

Capital Strategies and Solutions: A Chinese Lesson on Wall Street

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Reasons for Chinese Stock Price Low Valuations

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Result

Chinese stock prices become significantly undervalued

Sabotage

Fabricated reports combined with short selling of Chinese Stocks

Fraudulent Activity Improper accounting and financial reporting created lack of trust in Chinese companies

Global Financial Crisis

Shifted investors to focus more towards U.S. companies

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Undervalued Stock Price Effects on Chinese Companies

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• Undervalued Chinese companies have a difficult time raising new capital

Capital Impediments

• Very costly to be listed in U.S. as Chinese companies must create new infrastructure to comply with U.S. regulations

Costs of U.S. Listing

• Chinese stocks would see a higher valuation if they were listed in Hong Kong or in China

Better Valuations in Asia

• Decreased management morale as the undervalued stock price fails to reflect the growth and successes of the company

Company Morale

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Capital Strategies and Solutions: Public to Private to Public

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USA based shares taken off of the market through strategic repurchase, or through agreed

sale to management controlled entity.

Company #4

Company #3

Company #2 Pacific Asset

Management

Engagement

•Capital Partners

•Mainland PE Funds

•LBO Funds

•Bank Credit Facilities in Place

Investment Banks Bid for Premium Opportunity

•Pacific Asset Manages this Process

•Transparent to Business Operations

Pacific Asset plus IB's Roadshow Company after thorough Audit

•KPMG

•Price Waterhouse

•Deloitt Touche

Company #1

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Capital Strategies and Solutions: Public to Private to Public

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30-90

90-180

• Commercial Banks and Auditors brought together: Credit Provided

• Pacific Asset and Partners assist Company to Reacquire Shares from USA

180-270+

• Investment Banks competitively bid on freshly created IPO opportunity

• Clean and thoroughly vetted "blessed" company re-emerges as public again in high-growth markets and at a premium price.

• Management team further enriched through PPP process of re-acquiring company equity for far less than assets are worth, then re-selling a portion of that equity for a dramatically improved price.

• Management Agrees to Highly Refined due diligence Process • Auditors Brought in to Validate Financials

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Capital Strategies Management

• Increase in public awareness of the company – Strong investor aversion to undervalued equity – Investment policy of many large asset managers may impair investment.

• Boost current stock price of the company – Low equity price is a risk to owners of the company, send the wrong message to the

market, hostile takeover possible. – Growth becomes impossible through capital or equity issuance with low equity

valuation. Accounting and ownership concentration abroad make sending cash to USA or Europe a very high cost activity to fund growth.

• Add value to the company – Most of the shares are owned in Asia already. – Assets and management are in Asia. Owners of public equity should also be in Asia,

enhancing trust and thus enhancing shareholder value. – Re-acquiring shares below asset cost serves to dramatically enrich management.

• Add new capital into the company – We bring fresh capital to the company in equity and debt, at a higher price (ie: lower

cost) adding significant liquidity and resources to management. – Expert network throughout Asia Pacific and the USA enhances relationship and

partnership opportunities driving trust and by extension, company value higher.


Advantages to the Public to Private to Public Model

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Overview of Going Private Transaction


Going Private

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Definition of “Going Private”

• Transaction by founder/significant shareholder/management or other “affiliates” of Listco

• Effect of the transaction is to (i) either reduce the number of record stockholders to less than 300 or (ii) cause Listco stock to be de-listed from a national stock exchange (e.g., NYSE, NASDAQ)

Typical Going Private Transactions

• Leveraged buyout by PE Sponsor working with Management and/or Founder/Significant Shareholder

• Acquisition by Founder/Significant Shareholder of remaining public shares


Definition of “Going Private”

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Challenges of Going Private Transactions

What makes a Going Private transaction more challenging than a typical arm’s length transaction?

• Increased Litigation Risk

– generally unavoidable for US deals

– Usually settle for cash

• Heightened Judicial Scrutiny (“Fair Price” + “Fair Process”)

• Enhanced Disclosure Obligations

– 13e-3 (extensive disclosure requirements)

– Full Disclosure by Management/Controlling Shareholder

– Inadvertent First Step Disclosure

– All emails, notes and records are disclosable

• Put company in play


Challenges of Going Private

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How to control the risks of a Going Private transaction?

• Procedural Safeguards

– Use of a Special Committee

– Obtain Fairness Opinion or Independent Valuation

– Obtain “Majority of the Minority” Shareholder Vote


How to control the risk?

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Special Committees can suffer from numerous defects:

• Lack of Independence

– “perceived” conflicts of interest

– even minor relationships with buyer may be challenged

– full disclosure is essential

– beholden to founder/management

• No power to say “no” to buyer

• No power to select and compensate legal or financial advisors

• Lack of diligence


Issues of Using a Special Committee

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• Merger – most commonly used – Buyer forms Merger Sub, which is merged with Listco, resulting in

Listco continuing as the surviving company in the merger and a wholly-owned subsidiary of Buyer.


Common Transaction Structures - Merger

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Buyer $

Merger Listco

S

Sub

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Common Transaction Structures - Merger (con’t)

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Vote/Approvals Required

• 50+% of outstanding shares of Company (e.g. Nevada)

• Minority shareholders forced to participate if required shareholder vote achieved - but have appraisal rights

Timing

• 4 - 6 months

Advantages

• Straightforward process well known to market • Relatively low approval threshold • Relatively quick • No court process/review

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Common Transaction Structures – Tender Offer

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• Tender Offer (followed by Squeeze-out)

– Buyer makes direct offer to purchase shares from shareholders of Listco. Once statutory threshold reached, Buyer can compulsorily squeeze-out minority shareholders.

Buyer $

T Stock

≥ 90%

S

Listco

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Common Transaction Structures – Tender Offer (con’t)

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Timing • 3 - 6 months (depending on SEC review)

Additional Considerations • U.S. tender offer rules (procedural and disclosure requirements),

including All Holders/Best Price rules Advantages

• Straightforward process well known to market • Buyer group is in control of the process – requires relatively little

cooperation from Listco other than Board recommendation • No Revlon duties • Relatively quick • No court approval/review process

Disadvantages • High approval threshold to effect second step squeeze-out • Financing

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Other Considerations

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• Costs and Expenses

– Wide range depending on many factors, such as financing

– Can be expensive

– But if deal closes, the target company will reimburse the buyer group

• U.S. Tax

– Leaving the US may trigger US tax liabilities

– If stay in the US, may have filing obligations and US tax liabilities even if the company has no US operations

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Debt Financing

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Debt Financing

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• Debt financing is a typical source of funds in “going private” transactions. Examples: • Tongjitang (Cayman)

– Deal Size: US$20.2 million – Debt Financing: up to $25 million term loan (CITIC Bank)

• Chemspec (Cayman) – Deal Size: US$125.4 million – Debt Financing: up to $70 million term loan (Standard Chartered Bank)

• China Security & Surveillance (Delaware) – Deal Size: US$442.1 million – Debt Financing: up to $500 million term loan (China Development

Bank) • Harbin Electric (Nevada)

– Deal Size: US$463.8 million – Debt Financing: up to $400 million term loan (China Development

Bank)

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Debt Financing (con’t)

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Typical Debt Financing Arrangement

• Borrower – Buyer Group Vehicle

• Signing of Loan Agreement -- same time as the Merger Agreement

• Closing of Loan -- same time as the closing of the merger

• Interest Rate -- LIBOR plus Margin

• Term -- term loan (1-2 years; bridge loan in nature)

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Debt Financing (con’t)

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Security: offshore assets only • Onshore assets and equity interests CANNOT be pledged under an

offshore debt financing arrangement due to foreign exchange control • Usually only offshore assets and equity interests of the Founder, Buyer

group vehicle, Merger Sub, or PE sponsors can be pledged as the security of the loan

• Possible solution – PRC bank issues a LOC to its offshore affiliate • Personal Guarantee:

– From Founder, Buyer group vehicle, Merger Sub, PE sponsors

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Conclusion: Can be challenging, but doable with good advice and careful planning

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Tips for a Successful Process

• Ensure the independence of and fully empower the Special Committee.

• Ensure arm’s-length negotiations between the Special Committee and the Buyer.

• Retain experienced legal, financial, and accounting advisors.

• Keep detailed and accurate records of all proceedings.

• Prepare and file thorough and accurate disclosure documents – anticipate plaintiffs’ and SEC hot buttons and proactively address them.


Tips for a Successful Process

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Flow of Financial Services Process

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Capital Strategies Management Our Approach to Investing

High Level Access in the Private Equity and Buyout Space

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Equity Financing Process Cont’d

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Strategic Growth Capital

P/E Bidder #3 P/E Bidder

#2

P/E Bidder #1

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Youngor Group Shenzhen International

Holdings

China Bluechemichal Heinz

Citic Pacific Harbin Pharmaceutical

Group


Leading Underwriting Partners

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World Class Law Firms

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Certified Public Accountant Partners

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• Founder: Pacific Asset Management

Portfolio Management, Customized

Private Wealth Management Solutions

• 20 Years PWM and IB Experience

• VP at Morgan Stanley, Citibank CGM

– 1997-2010

• Equity Sales, Prudential Bache

– 1994-1997

• Business Banker at US Bank WA N/A

– 1990-1994

• Graduated from Seattle University

– Albers School of Business

– Military Science

– 1990, MSF Capstone, Finance 1997


Shawn Mesaros

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• Manages Pamria’s Shanghai office and originates transactions, supports our associated professionals and finders in China and identifies new relationships.

• Initial due diligence process for each transaction and works with our affiliate NY-based Chinese speaking staff as we complete business plans and other documentation.

• Mr. Hemmann received his BA from Pomona College in Claremont CA, and his MA and MBA from the George Washington University in Washington, DC.

• Director of Capital Markets for nearly six years at WestLB in New York. Since 2008, Mark has been working in private equity, focusing primarily on US-China transactions.


J. Mark Hemmann

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• Managing Member of RPL Capital since 2008

• Senior Analyst at Boston Avenue Capital from 2006-2008

• Second Vice President at New York Life Investment Management from 2005-2006

• Senior Analyst at RISC Consulting, 2002-2004

• Business Analyst for McKinsey & Company, 2000-2002

• Graduated from MIT with a Bachelor of Science in Economics and from Columbia University with a Masters in Financial Engineering.


Lanny Chiu

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Important Disclosures

The information and opinions contained herein were prepared by Pacific Asset Management & Co. Incorporated which is registered with the State of Washington and (pend) SEC registration. (“Pacific Asset Management”). Pacific Asset Management has no obligation to tell you when opinions or information in these materials change. Pacific Asset Management and its affiliates are involved in many businesses that may relate to companies mentioned herein and may lead to conflicts of interest. These businesses may include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, prime brokerage activities, investment services and investment banking.

This report is based on public information. Pacific Asset Management makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We are not offering to buy or sell the securities mentioned or soliciting an offer to buy or sell them.

Pacific Asset Management & Co. Incorporated and/or its affiliate companies, and/or their employees may have an investment in securities and derivatives of securities mentioned herein. The securities/investment strategies discussed herein may not be suitable for all investors. Investors must make their own investment decisions based on their own investment objectives and financial position. Pacific Asset Management recommends that investors independently evaluate each issuer, security, instrument, or strategy discussed, and use any independent advisers they believe necessary. The value of and income from your investment may vary because of changes in interest rates or foreign exchange rates, changes in the price of securities or other indexes in the securities markets, changes in operational or financial conditions of companies and other factors. Past performance is not necessarily a guide to future performance. This may refer to a research analyst/research report. For additional information, research reports and important disclosures, contact me or see https://www.pamria.com. Unless indicated, these views are the author’s and may differ from those of Pacific Asset Management research or others in the Firm. Pacific Asset Management does not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws.

© Pamria, Pacific Asset Management

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Pamria 2012 Capital Strategy 3-21-2012