Sale of Rakon's Chinese factory better than liquidation

Rakon, a maker of crystal oscillators used in smart phones and navigation systems, will liquidate its two-year-old Chinese factory if a plan to sell it does not go through.

Shenzhen Stock Exchange-listed ZheJiang East Crystal Electronic Co is buying 80 percent of Rakon Crystal (Chengdu) Co (RCC) for $US18.8 million.

Rakon, which will retain a 5.4 percent holding in a venture with the buyer through several layers of holding companies, is taking a $32 million impairment on the deal but will use the proceeds to reduce debt.

A report by Grant Samuel on the transaction reveals the company is forecasting RCC will make a $5.5 million loss in the year to March 31, 2014, compared to a $5.7 million loss in 2013 even though sales rise to $17.7 million from $12 million in 2013.

Rakon expanded boldly into China in 2009 and has a factory in Chengdu but the venture reported a loss of $2.8 million in 2013 compared to the $6.3 million profit forecast by management as adverse currency rates eroded margins.

Grant Samuel says margins have improved in New Zealand dollar terms compared to 2013 due to favourable currency movements and production efficiencies.

But capital expenditure at the facility has effectively been halted and it is only 20 percent utilised.

If the transaction does not proceed the board has resolved to close or liquidate the Chinese venture, believing the chances of an alternative transaction are slim.

It has not done a detailed analysis of estimated proceeds under a liquidation scenario which would damage the Rakon brand in China.

Rakon decided to sell rather than liquidate, believing the proposed transaction is an opportunity to form a strategic partnership, while preserving the brand.

Grant Samuel concludes that the transaction is in the best interests of Rakon shareholders.

Grant Samuel says the cut in debt resulting from the plan is critical to alleviate the debt burden of the company.

Rakon and ZheJiang will share resources and capabilities, with ZheJiang funding expansion of the factory to enable the venture to achieve greater scale while Rakon provides research and development, technology and marketing to the partnership. Competition is strong and further consolidation in the industry is likely in the next three years, Rakon said.

Rakon's shares were unchanged at 23 cents, and have plunged 38 percent this year.

BusinessDesk.co.nz

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