For nine months, Wescast Industries Inc. hung on to the threads of a takeover offer from a Chinese company, even when it looked like the deal was falling apart.
Now, at last, the company has a $2-million deposit in hand, but there's still a catch: the buyer needs financing from the Chinese government via the China Development Bank.
Wescast, a Brantford, Ont.-based auto parts maker, said early Friday that it had reached an agreement to sell to Sichuan Bohong Industry Co. The deal is valued at $11 per share, or $160-million on a fully diluted basis. Including debt and other liabilities, the buyer's total cost is $195-million.
"I'm very optimistic about this," said Wescast CEO Edward Frackowiak. "We have the deposit in hand and [Bohong]posted it before deal was signed," he said.
The market doesn't appear to be fully convinced the deal will actually get done, even though the stock closed up $2.04 to $7.64 in Toronto on Friday.
Wescast initially struck a "memorandum of understanding" with Bohong last September for a takeover worth $13.60 per share. But two weeks later, when it came time to secure the deal with a deposit, Bohong turned out empty pockets.
Then, on the last day of December, Wescast said the agreement had lapsed because Bohong had still failed to obtain a commitment for financing from the China Development Bank. Still, Wescast stood by Bohong saying the situation was "complex," but it was worth continuing talks. Some industry watchers and analysts expressed doubt that the deal would ever be completed, and the stock had by this time lost half its value since its September high.
But although Wescast could have walked away at that point, it waived its right to do so; it insisted on continuing negotiations. Mr. Frackowiak said at the time that giving up would be "silly."
That debt financing from the China Development Bank is still awaiting approval, but in this latest development Bohong has provided Wescast with a $2-million deposit that, according to the release, is refundable only "in certain situations." And this time, the two companies have a "signed comprehensive and definitive agreement," not an MOU, Mr. Frackowiak said.
That commitment changes the outlook on the deal. "I would say that the deal has a higher probability of going through now for two reasons," said Peter Sklar, a BMO Nesbitt Burns Inc. analyst. "One, I don't think Bohong would have come back unless there was a higher likelihood of getting financing. And two, the $2-million deposit is a financial commitment that didn't exist before."
In the new deal, Bohong has until Aug. 31 to lock down funding, although Bohong, with Wescast's agreement, can extend this deadline until Nov. 30 by paying a second $2-million deposit. If that second deadline is not met, Wescast will retain the $4-million.
But while there may be more reason for optimism, the question of China Development Bank approval is still a question mark. "I don't think anyone has a crystal ball about what approval process looks like in China right now," said Mr. Frackowiak with a laugh.
He said there are a number of hurdles ahead, including various regulatory approvals and a shareholder vote. "It's hard to know, even in Canada, how long things will take," Mr. Frackowiak said. Wescast's controlling shareholder, the LeVan family, has agreed to support the deal.