SHENZHEN, China, Dec. 29, 2010 /PRNewswire-FirstCall/ -- Cogo Group, Inc. (Nasdaq: COGO), a leading embedded solutions provider for the technology and industrial sectors in China, today announced its intent to acquire certain businesses of MDC Tech, Inc. ("MDC"), a technology solutions and engineering services company with most of its operations in China. The businesses will be merged into Cogo's existing Industrials business, which currently comprises about 18% of the company's total revenue and represents its fastest growing business segment. MDC focuses on two of the fastest growing industrial markets in China: the Smart Grid roll-out and Medical Equipment.
The deal is expected to close in the first quarter of 2011 and will likely be an all-cash transaction of $22 million that will be paid over several quarters. It is anticipated that MDC will contribute revenue of approximately $15 to $20 million and $2 to $2.5 million in operating income in the first four quarters after closing. Because MDC has large existing contracts in place and the integration will require limited upfront investment, the deal is expected to be instantly accretive to Cogo's earnings. Given MDC's contract pipeline and the expected ability to leverage these assets across Cogo's base of 1,500 customers, Cogo expects to grow MDC's sales at an anticipated 20% compounded annual growth rate ("CAGR") over the next five years. Initially, MDC's end market focus will be energy turbines and high-end Medical Equipment used in new hospitals and those being modernized.
"The acquisition of MDC enhances our already strong position in the Smart Grid roll-out and puts us in the sweet spot of China's healthcare reform," commented Jeffrey Kang, CEO of Cogo Group. "Total spending on the Smart Grid is expected to reach $300 million over the next five years and $125 billion for Healthcare in the next three years. We anticipate this deal will allow us to move 'upstream' in some cases and focus more on broad solutions and sub assembly design and servicing."
Following the close of this transaction, Cogo will have a stronger and growing presence in the following key Industrial segments in China: Automotive, Smart Grid/Smart Meters, High Speed Railways and Healthcare. This acquisition will bring into the fold of Cogo's customer list a handful of large national and international energy and healthcare manufacturing companies. Additionally, Cogo expects to leverage new global supplier relationships from this transaction across its broad customer base. The contracts through MDC will generally be larger and longer in duration than most of Cogo's existing end markets and will likely help to increase medium to longer-term visibility.
In 2009, China committed 850 Billion RMB ($125 billion) over a three-year period to the modernization of its health-care system. China is seeking both to update and expand the number of existing hospitals and create universal health-care for all 1.3 billion of its citizens by 2020. Currently, MDC counts as customers over 10 hospitals in southern China, and Cogo expects this number to grow over time. Additionally, several of Cogo's leading global semiconductor partners are aggressively pursuing this increasingly lucrative market.
Cogo also expects to benefit from two key trends in China's energy strategy: the anticipated increase in renewable energy as a percentage of total China energy consumption, growing from 10% in 2010 to 15% in 2020 and the implementation of a nationwide Smart Grid system, which the government also hopes to complete by 2020. The Smart Grid will incorporate thermal power, wind, nuclear, hydroelectric and other renewable resources. Total Smart Grid investment in China will reach over $40 billion in 2010, and over time, spending on China's energy production, transmission and distribution should be significantly larger than that of telecom equipment.
As a part of China's overall Smart Grid strategy, China is deploying 300 million Smart Meters over the next five years. The Smart Meter roll-out began in 2009 and the recently announced fourth National Smart Meter bid of 2010 equaled over 17 million units. The units from this latest round of bidding will be deployed over the next few months. The Smart Meter roll-out has been a key driver in Cogo's Industrial segment and is expected to remain so for the next few years.
"After the close of this deal, we will be increasingly well-positioned to take advantage of the massive spending anticipated in China, including the 10-year plan to complete a unified, national Smart Grid system, a nationwide infrastructure for high-speed Railways, and an upgrade of the country's Healthcare system to universal coverage," commented Jeffrey Kang. "We are now sitting in the sweet spot of all of these end markets, and we expect to expand our share in these segments and add new Industrial verticals as we move through 2011."
About Cogo Group, Inc.:
Cogo Group, Inc. (NASDAQ: COGO) is a leading provider of customized module and subsystem design solutions in China. The Company believes it acts as a proxy to China's technology industry as it works with virtually all the major ODMs and OEMs in China. Cogo leverages these relationships and combines their IP to create designs that Cogo then sells to electronic manufacturers. These designs allow manufacturers to reduce their time to market for new products and ultimately increase sales. Cogo focuses on the telecommunications equipment, digital media and industrial applications end-markets for their customized design modules while also offering business and engineering services to their large telecommunications equipment vendor customers. Over the last fifteen years, Cogo has grown its customer list to include over 1,500 manufacturers across the telecommunications equipment, digital media and industrial applications markets, covering both multinational Chinese subsidiaries and Chinese domestic companies.
Safe Harbor Statement:
This press release includes certain statements that are not descriptions of historical facts, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include statements about our proposed discussions related to our acquisition strategy or business growth such as growth in industrial applications end-markets, Smart Grids and Medical Equipment businesses, which are subject to change. Such information is based upon expectations of our management that were reasonable when made, but may prove to be incorrect. All such assumptions are inherently subject to uncertainties and contingencies beyond our control and upon assumptions with respect to future business decisions, which are subject to change. For further descriptions of other risks and uncertainties, see our most recent Annual Report filed with the Securities and Exchange Commission (SEC) on Form 10-K, and our subsequent SEC filings. Copies of filings made with the SEC are available through the SEC's electronic data gathering analysis retrieval system (EDGAR) at www.sec.gov.
SOURCE Cogo Group, Inc.