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Huanxu Electronics gambles on e-cigarettes abroad without performance commitment

According to Kingfisher Capital News, a cross-border acquisition of more than 3 billion is being staged, and the protagonist is A-share listed company Huanxu Electronics (601231.SH).

On December 13, 2019, Huanxu Electronics (aka Universal Scientific Industrial France) disclosed that it intends to issue shares to pay cash for the purchase of equity in a European company Financière AFG S.A.S.

From the acquisition of the target company FAFG, there is a key point worth noting, this key point is “electronic cigarettes.”

Huanxu Electronics gamble on e-cigarettes abroad without performance commitment

According to the disclosure, one of FAFG’s important customers is a well-known US e-cigarette company. In the last two reporting periods, this e-cigarette company contributed approximately 35% of the operating income of the target company.

However, Huanxu Electronics did not specify who the “a well-known US e-cigarette company” was, but only referred to as “Customer A”. Kingfisher Capital found through multiple sources and material comparisons that the “Customer A” mentioned in the plan was the American electronic cigarette brand JUUL.

Painstaking acquisition

Huanxu Electronics took great pains for this acquisition.

At present, the acquisition is divided into two steps, namely cash purchase and issue of shares; cash purchases are the main ones.

The cash purchase announcement disclosed that Huanxu Electronics will purchase 89.6% of FAFG for $ 403 million in cash. The preliminary plan disclosed that Huanxu Electronics intends to purchase 10.4% equity of FAFG held by ASDI by issuing shares with a transaction price of US $ 45-49 million. The corresponding transaction prices for a total of 100% equity of the two are from US $ 430 million to US $ 470 million, and RMB 3.16 billion to 3.45 billion.

It can be seen that Huanxu Electronics is very determined to acquire FAFG. According to the preliminary plan, under the premise of the implementation of the cash purchase transaction of 89.6% equity interests, if the issue of shares has not been approved or filed, the company or the designated offeror will purchase 10.4% equity of FAFG in cash.

However, according to the financial report, as of the end of the third quarter of 2019, Huanxu’s monetary fund balance was 4.536 billion yuan. The cash acquisition part is 403 million US dollars, nearly 3 billion yuan, which will inevitably cause significant pressure on the company’s cash flow.

In response, the Shanghai Stock Exchange issued an inquiry letter to Huanxu Electronics, asking the company to explain the impact of this cash payment on the company’s working capital, current ratio, asset-liability ratio, and financial costs in combination with the currency in hand, and the possible negative impact on subsequent operations.

At the same time, the Shanghai Stock Exchange also asked Huanxu Electronics to explain whether the cash purchase of shares and the issue of shares to purchase shares were a package transaction, and the reasons and main considerations for the two transactions were disclosed separately, and asked it to respond within five trading days.

Huanxu Electronics stock price
Huanxu Electronics stock price

Clear Ping An, Alibaba stock to raise money?

It is worth noting that Huanxu Electronics has continuously announced “selling shares” in recent days. Its recent operations show that Huanxu Electronics has cleared its holdings of Ping An of China and Alibaba.

It can be seen from the 2019 half-year report of Huanxu Electronics that the company held shares of nearly 20 listed companies including Ping An of China, Conch Cement, Alibaba, China Merchants Bank, Tencent Holdings and Construction Bank.

Among them, Huanxu Electronics holds 920,000 shares of Ping An of China. Huanxu Electronics announced on the evening of December 22 that Huanhong Electronics Co., Ltd., a wholly-owned subsidiary of the company, sold 920,000 shares of Ping An of China on December 20, 2019, with a turnover of about 75.83 million yuan and a net profit of about 5.67 million yuan.

This also means that after the sale, Huanxu Electronics has also completed the clearance of Ping An’s shares in China.

At the same time, the semi-annual report revealed that Huanxu Electronics holds 52,000 shares of Alibaba. According to the announcement of the sale of financial assets on December 24, Huanxu Electronics sold all of Alibaba’s stock and no longer holds it.

 

No performance commitment on acquisition

JUUL is the pioneer of cartridge-based pod vape starter kit, and its growth into the largest electronic cigarette brand in the United States is also fast. But this year’s continuous regulatory pressure in the United States has overwhelmed JUUL. In September 2019, Kevin Burns, the former CEO of JUUL, was suddenly replaced.

In November 2019, JUUL started layoffs of nearly 20% and stopped all advertising; the valuation was also cut. At the same time, it has been extremely difficult to enter China. Currently JUUL has begun to withdraw from China.

For the current dilemma that JUUL faces, Huanxu Electronics should be clear.

The content of the plan stated that “Although the main business of the target company is not limited to the manufacture of electronic cigarette devices, and its main production equipment is not a highly customized electronic cigarette production equipment, if the related orders for electronic cigarette devices decrease in the future, the target company will take some time to introduce customers from other industries and make appropriate transformation of the production line still. Therefore, if the regualtion of electronic cigarettes in the United States and globally continues to increase, the short-term performance of the target company in the future may be adversely affected to some extent. ”

Huanxu Electronics paid such a high price for the acquisition, knowing these risks, it is strange that there is no performance commitment in this acquisition.

Huanxu Electronics stated in its preplan that in order to improve the efficiency of integration of the target company after the listed company acquired 100% of the equity of the target company, reduce the risk of integration, and avoid the management of the target company to delay or even refuse to implement the integration plan in order to achieve performance commitments. The company’s 100% equity has no performance commitment.

When the global e-cigarette industry was in dire straits and JUUL e-cigarettes were facing challenges, Huanxu Electronics took the initiative at this time, spending huge sums of money to acquire a company that mainly serves e-cigarette customers, and was clearing popular stocks such as Ping An and Alibaba to raise money. Are they optimistic about the development prospects of the electronic cigarette industry and bargain-hunting the low stock?

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The author who has 5 years of experience writing on vapes, stays in Shenzhen and follows the origin of vapes closely. He distributes the earliest vape news & reviews from most authoritative vape insiders. DISCLAIMER

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