August 27, 2018 / 4:28 AM / 8 months ago

Breakingviews - China Biologic suffers contaminated infusion

A worker is seen at the manufacturing workshop of vaccine maker Wuhan Institute of Biological Products in Wuhan, Hubei province, China May 26, 2010. Picture taken May 26, 2010. REUTERS/Stringer

HONG KONG (Reuters Breakingviews) - China Biologic Products makes a good case for why it should go private. Instead of accepting one of two takeover bids offering hefty premiums, the U.S.-listed manufacturer of plasma products opted for a dilutive share sale at a discount to both. Fuzzy math and poor corporate governance create nothing but bad blood.

About two months ago, CITIC Capital offered to buy China Biologic for about $110 a share, 34 percent above the market price. The company acknowledged the bid but said precious little else about it, then or since. A rival offer surfaced a week ago at $118 a share, or $3.9 billion in all, from an investor group led by recently deposed China Biologic Chief Executive David Gao, with Goldman Sachs “highly confident” it could raise the necessary funding.

On Friday, China Biologic abruptly announced it would issue new stock to a small group of existing owners, including CITIC and an investment firm linked to its chairman, at around $101 a share. These investors will control 37 percent of the enlarged share capital.

China Biologic’s stock price tumbled 16 percent, settling near where it traded in early June. It’s hardly surprising shareholders are worried. At the least, they should have been given a chance to buy the new equity, too. What’s more, if neither $110 or $118 a share “reflects the intrinsic value” of the company, as China Biologic put it, neither can a stake sale at just over $100 or a decision that pushes the price down to $85. A better way for the investing group to express long-term confidence would be to buy shares at the highest price an outside suitor is willing to pay.

The company’s directors have questions to answer, too. In February, Gao was considered “instrumental”. In July, China Biologic said he had stepped down as CEO, but would stay on the board. Only a few weeks ago investors were told Gao had been terminated for cause, without further explanation.

Being based in the Cayman Islands allows China Biologic to dispense with best governance practices, and Nasdaq’s market overseers don’t seem to mind. Shareholders who stick around may one day see the company sold. Based on the latest infusion, though, they may become scarred in the process.


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