Business Context and Reporting Period
This Form 6-K filing, dated March 3, 2010, serves as a Management Information Circular for KHD Humboldt Wedag International Ltd. (KHD). The filing solicits shareholder approval for a special meeting scheduled for March 29, 2010, to vote on a proposed "Arrangement." The Arrangement involves a corporate restructuring to split KHD into two independent, publicly traded companies: one focused on the industrial plant technology, equipment, and service business (to be held by KHD Humboldt Wedag International (Deutschland) AG, or "KID") and the other focused on the mineral royalty business (retained by KHD).
Key Financial Metrics
The filing provides historical and pro forma financial data for KHD and its industrial business segment (KID) based on Canadian GAAP.
| Metric (in thousands USD) | KHD Historical (9 Months Ended Sept 30, 2009) | KHD Pro Forma (Post-Arrangement) | KID Combined (9 Months Ended Sept 30, 2009) |
|---|---|---|---|
| Revenues | $366,208 | $0 (Deconsolidated) | $366,208 |
| Operating Income | $12,583 | $(1,826) | $13,580 |
| Net Income (Loss) | $1,226 | $(12,370) | $15,519 |
| Total Assets | $764,163 | $277,689 | $706,913 |
| Long-term Debt | $11,891 | $11,891 | $11,891 |
| Shareholders' Equity | $279,776 | $246,999 | $228,655 |
Note: Pro forma figures reflect the deconsolidation of KID and the distribution of 26% of KID shares to shareholders. KHD will retain approximately 72% of KID shares post-arrangement.
Material Changes and Transaction Details
- Share Distribution: Shareholders will receive one new KHD share and one KID share (or two if a split occurs) for every seven existing KHD shares held. Approximately 4,322,844 KID shares (26% of issued shares) will be distributed in this first tranche.
- Deconsolidation Strategy: KHD intends to enter a Shareholders Agreement with an independent "Custodian" to direct the voting of the remaining 72% of KID shares it retains. This is intended to allow KHD to deconsolidate KID's financial results immediately, rather than waiting for a future tax-efficient distribution of the remaining shares.
- Business Focus: Post-arrangement, KHD will focus on its mineral royalty business (specifically the Wabush iron ore mine) and acquiring additional royalties. KID will focus on the industrial plant technology business, primarily serving the cement industry.
- Listing: New KHD shares will continue to trade on the NYSE. KID shares are expected to commence trading on the Frankfurt Stock Exchange (FSE) around March 31, 2010.
Guidance, Outlook, and Risks
Management Commentary: The Board unanimously recommends the Arrangement, citing a fairness opinion by Stephen W. Semeniuk, CFA, which concluded the terms are fair from a financial point of view. Management believes the separation will enhance long-term value by allowing each entity to pursue strategies best suited to its specific assets and attract different investor groups.
Key Risks and Contingencies:
- Deconsolidation Failure: There is a risk that KHD may not be able to deconsolidate KID if the Custodian is not identified or if accounting standards require consolidation due to common directors, cross-guarantees, or the Shareholders Agreement structure.
- Bonding Facility: KID's operations depend on a €195 million bonding facility with Raiffeisen Zentralbank (RZB). Consent from RZB is required for the distribution and transfer of the facility. While RZB has indicated it will approve the distribution subject to terms (including KHD remaining a guarantor until November 2010), formal consent had not been obtained as of the filing date.
- Market Conditions: Both entities face risks from the global economic downturn, which has reduced demand for cement plants (KID) and iron ore (KHD). KID specifically faces risks regarding project cancellations and customer payment delays.
- Regulatory Compliance: Shareholders receiving KID shares must comply with German disclosure laws (reporting ownership if exceeding 3% thresholds) or face fines and suspension of voting rights.
Investor Verification Checklist
- RZB Consent Status: Verify if Raiffeisen Zentralbank has formally consented to the distribution of KID shares and the transfer of the bonding facility, as this is critical for KID's operations.
- Custodian Identification: Confirm if an independent Custodian has been identified to direct the voting of the retained KID shares, which is a prerequisite for the intended deconsolidation.
- Shareholder Voting Thresholds: Ensure the Arrangement Resolution receives the required two-thirds majority vote at the special meeting on March 29, 2010.
- German Disclosure Obligations: Review the specific requirements for notifying BaFin and KID regarding share ownership thresholds (3%, 5%, 10%, etc.) to avoid penalties.
- Pro Forma Financials: Review the pro forma financial statements (Schedule E) to understand the projected financial position of the standalone royalty company (KHD) versus the industrial company (KID).