Heng Ren: Jack Ma’s Yunfeng Must End iKang’s 2-Year Buyout Fiasco

Heng Ren: Jack Ma’s Yunfeng Must End iKang’s 2-Year Buyout Fiasco

Heng Ren Partners, sent a letter to iKang Healthcare Group Inc. (NASDAQ: KANG), its Board of Directors, and proposed acquirer Yunfeng Capital, which is backed by Alibaba’s Jack Ma, to end a two-year buyout fiasco that has destroyed $466 million in market value for shareholders. No small feat considering iKang’s stock market capitalization is $973 million.

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Since June 6, 2016 when Jack Ma's Yunfeng made its "white knight" bid for iKang at $20.00-$25.00, iKang's stock has dropped from $21.12 to a July 2017 low of $11.70, and now is at $14.20. There has been no update from Yunfeng or iKang's Special Committee evaluating the bid while the stock has sunk to these lows.

This round with Yunfeng was preceded by 10 months of battle between iKang's Chairman and a Chinese competitor, Meinian Onehealth. That started with a lowball bid of $17.80 in August 2015 by iKang Chairman Ligang Zhang, followed by a promising counter bid by Meinian of $25.00 that was preceded by a poison pill from iKang's Board. Meinian's bid, at a 40% premium to Chairman Zhang's, was squandered.

Heng Ren demands a Yunfeng decision on the buyout, and, if it is proceeding, a minimum bid of $37.00 and a deal closing by year end.

If Yunfeng withdraws, iKang should remove the poison pill, withdraw official complaints it made against Meinian, and renegotiate with Meinian to acquire iKang for a minimum bid of $37.00.

Leaving U.S. shareholders in the dark after a huge loss in market value with unfulfilled pledges is risky for Mr. Ma, whose Alibaba Group (NYSE: BABA) and affiliates are in the midst of various M&A and regulatory scrutiny in the U.S.


Mr. Ligang Zhang, Chairman and CEO of iKang Healthcare Group

The Board of Directors of iKang Healthcare Group

Mr. Yu Feng, aka David Yu, Chairman and co-Founder of Yunfeng Capital

Mr. Ma Yun, aka Jack Ma, co-Founder of Yunfeng Capital

From: Peter Halesworth, Managing Partner and Portfolio Manager, Heng Ren Partners LLC

We are holders of iKang Healthcare Group, Inc. (NASDAQ: KANG). The proposed “go-private” transaction, which has seen three different bidders ranging from $17.80-$25.00 per share, all substantially undervaluing the company’s current value.

An ordeal that began 24 months ago has endured at least seven major mistakes that have cost iKang shareholders $466 million dollars in market value, a debacle for a company with a stock market capitalization of $973 million. This is unacceptable and has understandably destroyed investor confidence in iKang’s leadership.

Here’s a list of the seven known major mistakes:

Mistake #1 - A paltry 10.8% premium offered in a bid led by iKang Chairman and CEO Ligang Zhang.

Mistake #2 – iKang Board of Directors’ decision to impose a poison pill that curtailed shareholder value in a competitive bidding process by seeking to repel the highest bid, which was at a 76% premium to today’s price. ($14.20*) per American Depositary Share or “ADS” (referred to as “shares”).

Mistake #3 – When the highest bidder, Meinian Onehealth Healthcare Group Co. (SHENZHEN: 002044), offered $25.00 per share 20 months ago, iKang dismissed it and instead responded with two aggressive official complaints against the highest bidder (see Mistakes 4 & 5).

Mistake #4 - iKang filed a report of an alleged violation against the highest bidder, Meinian, with China’s
anti-monopoly bureau.

Mistake #5 - iKang filed a legal complaint against Meinian alleging intellectual property rights infringement.

Mistake #6 – “White Knight” Yunfeng Capital, a private equity fund co-founded by Alibaba Group (NYSE:BABA) Chairman Ma Yun, aka Jack Ma, proposed a bid of $20.00-$25.00 per share for iKang. Both iKang
and Meinian then dropped their bids. A reported last-minute effort by China Life Insurance (HKSE: 2628)
to acquire iKang was unsuccessful.

Mistake #7 - Fourteen months later, after $466 million in iKang market value has been destroyed, neither iKang or Yunfeng have updated shareholders on the status of Yunfeng’s unfulfilled bid of $20.00-$25.00, with a midpoint of its range below Meinian’s bid of $25.00 made 20 months ago.

* Today’s stock price based on closing price of $14.20 on August 24, 2017.

Heng Ren Partners ikang

Perhaps a Mistake #8 can be added, this one made by shareholders like us – mistakenly believing that iKang’s Chairman Zhang and Jack Ma’s Yunfeng would act in the best interest of all shareholders to create value. The attached stock charts and timeline illustrate how this trust was misplaced, and how these mistakes destroyed market value.

Shareholders believed Yunfeng Chairman and co-founder Yu Feng, aka David Yu, when he wrote to shareholders on June 6, 2016, that due diligence of iKang would be “efficient,” and financing to acquire China’s largest private preventive health care services provider was “well prepared.”

To quote from Mr. Yu’s June 6, 2016 letter:

“Our Proposal provides existing shareholders with an opportunity to realize their investments at an attractive offer price with a higher degree of certainty.”

Fourteen months later, Yunfeng’s assurances have proven to be empty, remain unfulfilled, and create doubts and erode confidence about a firm co-founded by Jack Ma.

iKang’s stock closed the day of Yunfeng’s bid at $21.12. Since then it has collapsed by 33% to $14.20, after a mild rebound from its July low of $11.70 and a -44.6% drop.

A so-called “white knight” to end this ordeal has instead inflicted $466 million in market value destruction. The Chairman and Board of iKang have acquiesced. This is delinquent leadership of a public company in the U.S. Perhaps because iKang’s Board owns negligible to zero shares of Jumei.

Yunfeng, David Yu, and Jack Ma have failed iKang shareholders on four pledges made in their 2016 proposal to cause this value destruction:

1) “Efficient” due diligence - The average duration between the announcement and closing of a buyout of a U.S.-listed Chinese company is nine months. Yunfeng already has taken 14 months. The U.S. M&A average is considerably shorter.

2) “Well prepared” financing plans are absent.

3) The “attractive offer price” of $20.00-$25.00 per share is not attractive. iKang is worth more than $37 per share.

4) “A higher degree of certainty” – To the contrary, silence for 14 months from a white knight creates uncertainty.

iKang is a leader in a high-growth sector, providing preventive health care exams and screening to employees of more than 36,400 companies (up 50% since 2014) with 5.6 million customers (up 57%) in 2016. While iKang’s operating performance has dipped during this two-year buyout ordeal, its leadership position in this high-growth sector is promising, and the company’s value is undeniable.

For example, peer group A-share companies in China are valued far higher than the buyout multiple on Yunfeng’s bid for iKang - and iKang has been growing faster than most of these peers. Highlighting iKang’s attractiveness was a reported last-minute effort by China Life Insurance (HKSE: 2628) to acquire iKang after Chairman Zhang and Meinian withdrew their bids.

Meanwhile, as Yunfeng is silent on iKang, Yunfeng’s co-founder Jack Ma has been attracting a lot of attention in the U.S.

  • Boldly proclaiming with President Trump at his side that Alibaba will create 1.0 million jobs in the U.S.
  • Alibaba’s payment arm, Ant Financial, wants to purchase MoneyGram International, Inc. (NASDAQ: MGI) for $1.2 billion.
  • Jack Ma-backed Yunfeng Financial Group’s bid, with Ant Financial and others, to purchase MassMutual Asia for $1.7 billion.
  • As co-Chairman of the recent U.S.–China Business Leaders Summit, leading the pledge for bilateral cooperation on sensitive issues, including intellectual property rights.

Mr. Ma has dived into the river of U.S. public life, a Chinese entrepreneur who has achieved global business-celebrity status for being brash, tenacious, and brave. We are not investors in Alibaba but we admire Mr. Ma for his accomplishments. There probably is no business leader in China better equipped to lead a global expansion for his growing company.

Mr. Ma should by now understand that, unlike in China, public opinion in the U.S. is not one-sided and automatically fawning. Many before him have had their careers sink in our unpredictable river of public opinion. While behavior in the public spotlight in America is more freewheeling than in China, there are limits. The red lines are not always easy to see if the spotlight is too bright. Being brash is tolerated - until it is not. Mr. Ma should be careful to avoid overstepping.

For example, Yunfeng and Mr. Ma’s neglect of U.S. shareholders of iKang may not be overlooked much longer by these entities currently scrutinizing him and Alibaba:

  • The White House (“Does Jack Ma fulfill his many ambitious pledges, like creating 1.0 million jobs in the U.S.?”).
  • The SEC, currently investigating Alibaba’s accounting (“Is Alibaba’s leadership honest?”).
  • The Committee on Foreign Investment in the U.S. (CFIUS), currently reviewing the plan by Alibaba subsidiary Ant Financial to buy MoneyGram (“How do they treat U.S. investors?”).
  • Massachusetts Mutual Life Insurance Company (“Is the Yunfeng and Ant Financial bid real?”)

The Office of the U.S. Trade Representative (USTR), where Alibaba’s Taobao.com, the consumer-to-consumer e-commerce platform, remains on the USTR’s 2016 “notorious markets list” for sales of allegedly counterfeit and pirated items (“Is Alibaba committed to their pledge to fight piracy and protect intellectual property rights?”)

The currents of U.S. public opinion are strong, will swiftly change direction, and can be perilous if one, even with Mr. Ma’s ability, doesn’t pay attention if doubts accumulate.

Just as Mr. Ma famously stated that Alibaba was the crocodile lurking in the Yangtze River to pounce on foreign rivals who challenged him in China, Mr. Ma should not be overconfident that the U.S. is free of its own crocodiles. And if he is going to swim with them in the river of public opinion, it is better to make friends.

To repair the destruction of iKang’s market value for shareholders, and restore confidence in the integrity and credibility of Yunfeng’s public pledges, we urge Yunfeng to take these steps immediately:

  • Announce a decision on the iKang buyout.
  • If executing the buyout, raise the bid to a minimum of $37 per share.
  • Close the transaction by the end of 2017.

If Yunfeng withdraws its bid, we urge the Board of Directors and Chairman Zhang of iKang to:

  • Remove the poison pill.
  • Withdraw the anti-monopoly complaint against Meinian (if not already done).
  • Withdraw the legal complaint against Meinian (if not already done).
  • Renegotiate terms for a strategic investment or sale to Meinian at a minimum of $37 per share.

This effort to repair market value for shareholders, and restore confidence in iKang and Yunfeng, must be undertaken. iKang’s Board should no longer underestimate the damage done to shareholders triggered by Chairman Zhang’s lowball offer and followed by your mistakes and delinquent leadership.

iKang shareholders may fear the prospect of Yunfeng withdrawing its proposed bid. Heng Ren’s research shows when lowball bids of fundamentally sound and growing U.S.-listed Chinese companies are withdrawn, many of the stocks eventually trade at significant premiums to the proposed low bids. This is more evidence the Insider bids are unfair to shareholders and, in fact, are curtailments of market value for shareholders, just as we have endured during this two-year ordeal triggered by Chairman Zhang’s lowball bid.


Peter Halesworth

Managing Partner

Heng Ren Partners LLC

Boston, Massachusetts

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