Bloomberg News

Winsway Hit by Short Sellers as Coal Deal Offers 115%: Real M&A

February 21, 2012

Feb. 8 (Bloomberg) -- Traders can double their money betting Winsway Coking Coal Holdings Ltd.’s $1 billion takeover of a Canadian coal miner won’t be derailed by an allegation the Chinese acquirer’s financial statements aren’t accurate.

Calgary-based Grande Cache Coal Corp. yesterday traded 65 cents below Winsway and Marubeni Corp.’s cash offer of C$10 a share after Jonestown Research, an anonymous short seller, said that Winsway’s imports were less than the Hong Kong-listed coal transporter stated. Winsway said the report was “dead wrong,” and arbitragers buying Grande Cache before today’s open of trading could make a 115 percent profit on an annualized basis if the deal closes by the end of February as planned, according to data compiled by Bloomberg.

Chinese companies have faced increased scrutiny in North America after short seller Carson Block’s Muddy Waters LLC alleged Sino-Forest Corp. overstated assets, Longtop Financial Technologies Ltd. was delisted following a probe by U.S. regulators and China MediaExpress Holdings Inc. lost almost all its value as its auditor quit. While Jonestown is betting shares of Winsway and Grande Cache will drop, UOB Kay Hian’s Helen Lau says the analysis is flawed and investors can profit from the takeover by purchasing the target company’s stock.

“We think it will go through,” UOB’s Lau, a Hong Kong- based analyst with a “buy” rating on Winsway, said in a telephone interview. Winsway is “fully confident that the deal will go through. Investors should go ahead and buy” shares of Grande Cache, she said.

Flora Cao, an investor-relations officer for Winsway in Beijing, declined to comment.

‘Entirely Without Merit’

A spokeswoman for Tokyo-based Marubeni reiterated the company’s statement on Jan. 20 that it will proceed with the deal as planned. Ian Bootle, Grande Cache’s chief financial officer, didn’t immediately respond to a telephone call or e- mail seeking comment.

“Grande Cache Coal has no reason to believe that there is any merit to the allegations,” the company said in a statement on Jan. 19. Grande Cache Coal “has been assured by Winsway that the report is entirely without merit,” it said.

No contact information for Jonestown is listed on InvestDOOR’s website, where the report on Winsway was published. There don’t appear to be any results for a research firm named Jonestown Research using Google Inc.’s Internet search engine.

InvestDOOR, which said in an e-mailed response to Bloomberg last month it doesn’t research or analyze companies and that Jonestown doesn’t publicly disclose contact information, didn’t respond to an e-mail yesterday seeking further comment.

Today’s Trading

Grande Cache climbed 3.9 percent to C$9.71 today in Toronto, the sixth-biggest gain among 253 companies in Canada’s benchmark S&P/TSX Composite Index. The stock rallied after the company said in a statement that Canada’s Minister of Industry approved the acquisition by Winsway and Marubeni and determined that the deal satisfies the Investment Canada Act because it’s “likely to be a net benefit” to the country.

Earlier today in Asian trading, Winsway advanced 3.4 percent to HK$2.12 (27 cents) in Hong Kong, while Marubeni rose 0.2 percent to 540 yen ($7.02) in Tokyo.

Winsway and Marubeni, a 153-year-old Japanese trading house founded by linen seller Chubei Itoh, agreed on Oct. 31 to buy Grande Cache in an acquisition that valued the company at C$1.05 billion ($1.06 billion), including about C$54 million in net debt, according to data compiled by Bloomberg.

Shares of Grande Cache, which rose to within 6 cents of the C$10-a-share agreement last month, fell 5.8 percent in its biggest drop in three months after Jonestown Research published a report alleging Winsway made “material misstatements” regarding its inventories and the amount of coal it imported, and that the company is committing securities fraud.

‘Not a Fraud’

Jonestown said in the Jan. 19 report that it is betting against shares of both Winsway and Grande Cache. In a short sale, traders sell borrowed shares in anticipation that the securities will decline and they can buy them back at a profit.

Winsway Chief Financial Officer Jerry Xie said on conference calls with investors that “this report is dead wrong” and the company is “absolutely not a fraud.”

“It’s a misunderstanding in the market,” said David Lam, an analyst at Guosen Securities Co. in Hong Kong, who has a “buy” rating on Winsway. “The deal’s going ahead.”

While Jonestown doesn’t appear to be a credible source, the risks the deal will unravel may now outweigh the potential rewards, according to John Maysles, an event-driven analyst at Elevation LLC.

‘Hairy Deal’

Winsway said on Jan. 19, the same day the Jonestown report was published, that it asked the Hong Kong Stock Exchange for more time to submit a filing it needs to complete the acquisition of Grande Cache. Winsway now expects to submit the so-called circular by Feb. 22.

“It’s a high-risk, hairy deal,” Maysles said in a telephone interview from Los Angeles. “The fact that the delay was announced on the same day that this Jonestown report was put out, that definitely raises an eyebrow.”

Because Winsway is also one of Grande Cache’s customers, any fraud allegations that are substantiated could hurt Grande Cache more than a typical takeover target, he said.

Allegations from Muddy Waters last year that Hong Kong- and Mississauga, Ontario-based Sino-Forest overstated its timber holdings caused the stock to plummet 74 percent, costing investors including John Paulson’s Paulson & Co. C$3.3 billion.

Sino-Forest, which has denied committing fraud, was suspended from trading in Canada by the Ontario Securities Commission in August and is also being investigated by the Royal Canadian Mounted Police.

‘Lost Confidence’

Longtop Financial, the Hong Kong-based maker of financial software that went public in 2007, was delisted from the New York Stock Exchange in August following an inquiry by U.S. securities regulators over its financial reports.

China MediaExpress lost more than 99 percent of its value after the provider of advertising on buses in China said in a March regulatory filing that its auditor, Deloitte Touche Tohmatsu, quit after saying that it “lost confidence in the representations of management.”

The U.S. Securities and Exchange Commission has also been investigating reverse takeovers, in which a closely held firm becomes public by buying a shell company that already trades.

The Bloomberg Chinese Reverse Mergers Index of U.S.-listed companies retreated 51 percent in the past year through yesterday. Shares of more than 35 non-U.S. companies had their trading halted on American exchanges because of inaccurate financial statements and other issues, according to the SEC.

Harbin Electric

Some allegations have created a buying opportunity for traders betting on the Chinese companies that have been targeted by short sellers.

Short interest in Harbin Electric Inc., which was being acquired by its Chief Executive Officer Tianfu Yang in a management-led buyout, almost tripled to a record in June after Citron Research raised questions about its accounting practices and amid rumors that Yang had gone missing.

While the stock fell 51 percent to a low of $6.98 a share in June, Yang closed the deal in November by paying Harbin holders $24 a share. That means purchasing shares of Harbin after the plunge would have generated a return of as much as 244 percent, data compiled by Bloomberg show.

Jonestown’s allegation increased the gap between the deal offer and Grande Cache’s stock, giving traders the chance to reap the largest annualized profit for any all-cash takeover in Canada, according to data compiled by Bloomberg.

If they hold the shares until the end of February, when the acquisition is projected to close, the annualized gain would be 115 percent, the data show. Without taking into account when the transaction will be completed, the difference to the deal offer is currently about 7 percent.

“I’m leaning towards that at the end of the day, Jonestown is nonsense because of their lack of credibility,” Sachin Shah, a Jersey City, New Jersey-based merger strategist at Tullett Prebon Plc, said in a telephone interview. “Ultimately, I believe the deal is going to close.”

--With assistance from Nick Baker, Nikolaj Gammeltoft and Simon Casey in New York, Christopher Donville in Vancouver, Michelle Yun in Hong Kong and Ichiro Suzuki in Tokyo. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Angus Whitley in Sydney at awhitley1@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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