Newport Firm and Chinese Distributor to Merge
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NEWPORT BEACH — A Chinese energy company is seeking a foothold in the U.S. public stock markets by merging with a small Newport Beach real estate firm.
Under a complex stock deal, an affiliate of Xinmao Petrochemical Industrial Co., a rapidly growing distributor of liquid petroleum gas in southwest China, would gain a 70% stake of Newport Beach-based Largo Vista Group.
The Orange County company has just six employees, no revenue and “a lot of licenses, hopes and connections in China,” said its president, Daniel Mendez. But its stock is currently traded over the counter and Mendez said the transaction could create a company with enough revenue and assets to qualify for listing on the Nasdaq National Market. Xinmao, which has 93 employees, recorded sales of $3 million last year, Mendez said.
No Chinese company has a national listing now, according to Michael Whitehouse, director of Nasdaq’s international programs and partnerships.
Under the terms of the deal, which Largo Vista shareholders approved Wednesday, Xinmao Chairman Deng Shan would become chief executive of the Newport Beach company, at least temporarily. He also serves as an economic development liaison for the Chinese government. Mendez would remain president. The company did not disclose other details.
Some traders and securities officials criticize this practice of buying into a public “shell” company to gain access to stock markets. Under this approach, companies can become public without clearing several regulatory hurdles or fully disclosing financial details or other pertinent information, officials say.
“This type of transaction is looked down upon,” said Fred Roberts, president of Los Angeles-based investment banking firm F.M. Roberts Inc. and a former board member of Nasdaq.
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Mendez said the company will be subjected to such scrutiny--and expects to clear these hurdles--when it applies later this year for a Nasdaq national listing. Among other things, companies must show assets of $4 million and annual net income of at least $400,000 to be eligible, according to Nasdaq rules. The stock also must carry a minimum price of $5 a share.
Largo recently retained Price Waterhouse as its auditor.
The 9-year-old company previously was involved in plans to develop a community of 2,000 manufactured homes near Shenzhen, which is close to Hong Kong. It also had drawn up plans with Newport Beach-based Langdon Wilson Architecture & Planning for an entertainment center in Shenzhen. It still has lease agreements for the land, but both projects are on hold, Mendez said.
Kunming-based Xinmao is the largest distributor of liquid petroleum gas in the Yunnan province, serving about 40,000 households in the province of 40 million people. It also is acquiring gas distribution operations in neighboring provinces.
This market in China has experienced explosive growth--about 20% a year--over the last decade as the government seeks a substitute for coal, which supplies three-quarters of the country’s energy, said Huabin Lu, an associate director of Cambridge Energy Research Associates, an energy consulting firm.
Xinmao purchases gas supplies from a coastal terminal owned by Mobil Oil Hong Kong and uses rail cars and trucks to ship it inland.
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