The chief executive officer of Ontario-based auto parts maker Wescast Industries Inc. said Tuesday it would be "silly" to abandon talks to sell the company to a Chinese buyer, despite the fact the would-be acquirer has been unable to produce even the $2-million deposit.
"The situation in China is more complicated than meets the eye," Wescast CEO Edward Frackowiak said in an interview. "That's why we continue to talk and why it would be silly to close the door" on a deal.
Wescast, a maker of exhaust manifolds with 2,000 employees and facilities in six countries, announced on Sept. 6, 2011, that Sichuan Bohong Industry Co., Ltd. of China had agreed in a memorandum of understanding to pay $13.60 a share in a transaction valued at just more than $200-million. The agreement was the culmination of a six-month strategic review by the board of directors of the company, which is controlled by Southern Ontario's LeVan family.
But two weeks later, Wescast revealed that Bohong had not come up with the $2-million deposit required by the Sept. 19 deadline, breaching the terms of the arrangement and giving Wescast the right to terminate the MOU. Wescast repeatedly waived that right, keeping its options open.
Then, on Dec. 31, Wescast said the MOU between the two parties had "automatically" terminated because Bohong had still not secured a financing commitment letter from its would-be financier, the government-controlled China Development Bank. Nevertheless, Wescast pledged to continue to work to reach "a mutually acceptable transaction" with Bohong.
In an interview, Mr. Frackowiak said Bohong was actively engaged in "work and effort … to further this acquisition," but still had not secured any of the committed financing required to purchase Wescast, including the deposit, from the China Development Bank. "We're at the mercy of a third party," he said. "There are different competing interests for China Development Bank money. That impacts our timing and that's where it gets complicated. We don't know the government's agenda."
Wescast stock has fallen by nearly half since the deal was announced, reflecting growing skepticism about the buyer's ability to come through with the needed funds. "Given the inability of Bohong to secure appropriate financing to date, we continue to believe that the completion of the acquisition is unlikely," BMO Nesbitt Burns Inc. analyst Peter Sklar wrote in a research note published Tuesday.
Mr. Frackowiak acknowledged "there will come a time when everybody's patience will run out … but it behooves us to remain patient. The market may not like it and [investors]may come to their own conclusions, but they're not in the middle of this like we are."
He added that other potential buyers remain on the sidelines, and that Wescast's financial adviser, Canaccord Genuity, "is doing a good job of keeping the interested parties interested."