SINGAPORE - Nutryfarm International, through its indirectly wholly owned subsidiary, LottVision Internet Management, is acquiring a 45 per cent stake in First Linkage for 90 million yuan (S$18.7 million).
The company halted trading in its stock on Thursday afternoon (March 15) after its share price jumped by nearly 35 per cent to 31 Singapore cents, prompting a query from the Singapore Exchange (SGX).
In response to SGX's query, Nutryfarm said in a filing on Thursday night that the share price rally came as it was finalising the terms of the deal.
In a separate filing on Thursday night, Nutryfarm said that the acquisition was part of efforts to seek potential business opportunities linked to the group's existing areas of business, one of which is an Internet management business, so as to help diversify income streams. Its core business is in nutrition and health food products.
Its subsidiary LottVision has entered into the sale and purchase (S&P) agreement with Xiaoxin Wang, who will still own 55 per cent of First Linkage. Mr Wang also owns 99 per cent of the Shengyuantong Group.
First Linkage owns First Linkage HK, which in turns owns Beijing Zhonglian Shengtong Internet Technology Co. Zhonglian Shengtong provides exclusive technical and other services to the Shengyuantong Group, including education management consulting services, intellectual property licences, technical support and consulting services.
The group has entered into the proposed acquisition as it is set to occur in connection Zhonglian Shengtong's entry into certain agreements. Among the agreements is an exclusive call option that entitles Zhonglian Shengtong to fully acquire Shengyuantong if at any point permitted by the laws in China, and a business agreement where Zhonglian Shengtong will be appointed the sole technical and service provider of certain services to Shengyuantong and its subsidiaries.
Mr Wang and the other owner of Shengyuantong, Bo Wang, have also irrevocably authorised Zhonglian Shengtong to exercise each of their rights on all matters relating to Shengyuantong.
In particular, Zhonglian Shengtong intends to undertake the business of Chinese Tier 3 Internet service provider (ISP), Beijing Shengyuantong Science and Technology Development Co. The ISP aims to offer the Web content providers a faster track to send Web content in the most efficient way, and to ensure that upstream connections work reliably through the use of technologies; its customers include Tier 2 ISPs and other Tier 3 ISPs in China.
The purchase consideration of 90 million yuan was reached based on the book value of 8.1 million yuan, net tangible asset value of 8.1 million yuan, and the latest available open market value of the equity of Shengyuantong, which is 200.8 million yuan, as at Oct 31, 2017. A valuation as at Dec 31, 2017 commissioned by independent valuer, RSM Corporate Advisory, estimated the indicative fair market value range of the sale shares to be in the range of 83.4 million to 97.3 million yuan.
First Linkage Group broke even for the financial year ended 31 Dec 2017, and the net profit attributable to the equity of the Shengyuantong group for the financial year ended Dec 31, 2017 was 8.1 million yuan. The purchase consideration represents a 10.1 times premium of the net profits of the Shengyuantong group, therefore, Nutryfarm's board views the consideration as "reasonable", it said.
Under the agreement, Mr Xiaoxin Wang has guaranteed that the audited net profit after tax of Zhonglian Shengtong for the financial years from April 1, 2018 to March 31, 2019, and from April 1, 2019 to March 31, 2020 will be 20 million yuan and 30 million yuan, respectively. In the meanwhile, LottVision will retain 22.5 million yuan from the purchase consideration as security for those profit targets.
Explaining its rationale for the acquisition, the group said: "Together with the increase in the numbers of Internet users, online businesses and e-commerce activities in the PRC (People's Republic of China), there has been an increase in the requirements for Internet support networks. The group believes that there will be a growth in the demand for Internet access services, network services and internet solutions."
While it plans to keep its core business in nutrition and health food products, it has "excess working capital" that it is able to deploy as it seeks to increase its profitability and attract more investors.
Nutryfarm requested a lifting of its trading halt, and trading of its shares will commence on Friday morning.