China Fire & Security Group Inc. (CFSG), a leading industrial fire protection product and solution provider in China, announced that it has received a buyout offer from a global private equity firm. The company did not disclose the offer price but said that it comes at a premium over the current stock price.
China Fire shares closed at $6.26 on Friday, March 4, 2011. As of September 30, 2010, China Fire had about 27.6 million shares outstanding. Based on Friday’s price, the purchase price can be assumed to be above $172.8 million. China Fire’s shares jumped 12% to $7.02 on the news on Monday.
According to the offer, the private equity firm is willing to structure the proposed acquisition to allow the existing members of China Fire’s management to exchange all or part of their equity interests in the company into equity securities in the post-acquisition company.
The proposal is however subject to certain conditions, including the successful completion of due diligence to the satisfaction of the firm. The company stated that no decision as such has been made on the offer as yet.
China Fire reported earnings per share of 20 cents in its third quarter ended September 30, 2010, falling short of the EPS of 27 cents in the year-ago quarter as well as the Zacks Consensus Estimate of 36 cents. Results were hurt by lower-than-expected revenues, depressed gross margins and higher operating expenses.
Total revenue in the relevant quarter remained flat at $24.8 million lagging way behind the Zacks Consensus Estimate of $34 million. Revenues from system contracting projects increased by 6.2% to $19.9 million compared with $18.7 million in the year-ago quarter.
Revenues from product sales were $4.1 million compared with $5.4 million in the third quarter of 2009. Revenues from maintenance services increased 12.7% year over year to $0.9 million in the quarter.
A major amendment of the Fire Prevention Law issued on May 1, 2009, requires all fire protection products to comply with the national standards. Nearly 80% of steel plants are not fully compliant with new mandatory fire safety requirements.
Given the strong support from the government, China’s massive iron and steel industry will likely accelerate the process of upgrading the outdated fire safety systems. Given China Fire’s dominant brand position, it is strategically positioned to capitalize on the emerging growth opportunities in this market.
China Fire primarily serves the iron and steel, power and petrochemical industries, and relies heavily on the iron and steel industries for its revenues. China Fire’s results have been suffering due to the slowdown in the execution of projects from the iron and steel industry, a derivative of lower steel selling prices and rising costs of iron ore.
Though the company is now exploring other industrial sectors, we believe its inability to successfully expand the market for its products and services in these industries will limit its long-term growth potential. We however look upon China Fire as a good acquisition target and thus await future developments on this front. The stock currently retains a Zacks #3 Rank (short-term Hold recommendation).
China Fire & Security Group, through its wholly owned subsidiary, Sureland Industrial Fire Safety Limited, is engaged primarily in the design, manufacturing, sales and maintenance services of a broad product portfolio including detectors, controllers and fire extinguishers.
China Fire’s clientele comprise major companies in iron and steel, power, petrochemical and transportation industries throughout China. China Fire competes with privately held COSCO Fire Protection Inc., UTC Fire & Security and Western States Fire Protection Company.
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