CHINA MINZHONG: Big upside if $1.20 general offer materialises

China Minzhong stock closed at 72 cents yesterday. Chart: FT.com
A RECENT ANNOUNCEMENT by Singapore-listed China Minzhong Food Corporation has sharpened the likelihood of a general offer for its shares at $1.20 apiece.

However, the market didn't react strongly to it yesterday. With only 156,700 shares traded, the share price closed at 72 cents, unchanged from the day before when the announcement was released.

Yesterday's trading range of 71.5 - 77 cents suggests a belief among some buyers that there is considerable upside to come.

China Minzhong's announcement said a binding MOU was signed on Oct 14 between CMZ BVI and Indonesian instant noodle maker PT Indofood Sukses Makmur.

CMZ BVI will buy 347,000,000 shares of China Minzhong (representing a 52.94% stake in the China Minzhong) from PT Indofood.

CMZLinGuoRong

China Minzhong Chairman & CEO Lin Guo Rong.CMZ BVI is solely owned by the China Minzhong’s Executive Director and CFO, Siek Wei Ting, who (odd as it sounds) holds the shares of CMZ BVI on trust for China Minzhong's Executive Chairman and CEO, Lin Guo Rong.

Under the MOU, both parties will endeavour to execute a definitive sale and purchase agreement within 12 months from the date of the MOU (or such longer period as may be agreed by them.

Clearly, the key task to be achieved in that time frame is the securing of financing by CMZ BVI.

A key milestone to look out for is CMZ BVI paying PT Indofood "certain earnest sums amounting to S$40,000,000" no later than 30 December 2015.

This amount shall be treated as part of the S$416.4 million consideration payable to PT Indofood for the proposed acquisition.

PT Indofood had become the controlling shareholder of China Minzhong in 2013 after it made a general offer at $1.12 a share for the company shortly after Minzhong's stock price fell on accusations of fradulent accounting by short-seller Glaucus Research Group.

Assuming the 52.94% deal gets consummated, and CMZ BVI makes a mandatory general offer, the upside from the current share price of 72 cents is 48 cents, or a massive 66.7%.

To be sure, this return is juicy if the general offer materialises within 12 months, or even 24 months.

Patience is obviously required in large quantities here, as well as a risk appetite that can stomach any sharp turn of events -- mainly the failure of CMZ BVI to secure the necessary financing -- leading to the extinguishing of any likelihood of a general offer.

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China Aviation Oil (S)