The stars continue to line up for UTStarcom Holdings Corp (NMS:UTSI). Guoping Gu and his affiliates, Shanghai Phicomm Communication Co., Ltd., Phicomm Technology (Hong Kong) Co., Limited, The Smart Soho International Limited, and Chongqing Liangjian New Area Strategic Emerging Industries Equity Investment Fund Partnership (Limited Liability Partnership), jointly filed a Form 13D yesterday after the market closed.
Upon the remaining payment to Shah Capital and Lu Families (Sellers), Mr. Gu and his affiliates will jointly own 31.7% of the total outstanding shares of UTSI, at a purchase price of $6.00 per share, which is about a 160% premium compared to yesterday’s closing price. We think the “Purpose of Transaction” section of the form deserves thorough scrutiny, as it contains this new activist investor’s potential plans regarding UTSI’s future business operation and strategies. This language about corporation restructuring is similar to the language that sent stocks like KaloBios Pharmaceuticals Inc. (NASDAQ:KBIO) and eFuture Information Technology (NASDAQ:EFUT) significantly higher.
Phicomm Group’s Strategy
To summarize the content in that section, The Phicomm Group:
- Acquired UTSI’s shares with intentions to obtain control of the company.
- Will appoint a new CEO and add 4 more designees to the Board and, in the meantime, Mr. Wong will resign from the Board and as the CEO of UTSI and Mr. Shah and Mr. Lu will also resign from the Board.
- Will explore potential ways to increase UTSI’s business, which may involve possible synergies between UTSI and Phicomm Group’s business.
- Will engage in a discussion with the Board of Directors and other significant shareholders regarding any matters that are relevant to preserving and increasing the value of its investment in UTSI’s shares – and efforts to increase overall shareholder value.
- May have plans that include business combinations, acquisitions, dispositions of non-performing or non-core business, and expansions of UTSI’s sales and marketing efforts in attractive markets where it does not currently have extensive operations or sales.
It is still unclear to us why the activist investor was willing to pay such a high premium to acquire these shares, and it is also unclear what exact plans he has for the company after obtaining control (i.e. daily operations and the Board of Directors). Since the investor already spent a significant sum of money at such a high premium to acquire 31.7% (and possible further purchase through open market/private transaction) of the total shares, it is not unreasonable to think that he would try to increase the value of the company in general by utilizing his own company resources to be able to profit from this high-cost investment in the future.
One example is that Mr. Gu is involved in a China A share company (SHA: 600556), as we mentioned in our previous article. The initial purchase price for his shares (through a private transaction) was RMB 9.5 per share in November 2014, and currently the stock is trading at RMB 26.91 per share as of yesterday. During this course of time, Mr. Gu and his affiliates have been purchasing stock on the open market.
If Mr. Gu is looking to gain control of the company, he’s going to need to acquire another ~19% of the company’s outstanding shares. Due to the UTSI’s limited number of large holders, if Mr. Gu has to take to the open market in order to do so, we believe significant price appreciation could take place, all the way to up to where the initial 31.7% of shares were purchased. This is the first time any of the parties involved have illustrated or disclosed what the purpose of this transaction is.