Chinese ADR Buyouts in Progress (Update)

Prices of many pending buyouts of US listed Chinese companies fell sharply in May after Chinese regulators expressed concern over relisting these businesses in China through reverse mergers.  Reverse mergers provided a path by which a company could be trading in the domestic market in less than one year instead of potentially waiting 3-4 years to complete the restructuring required for regulatory approval of a traditional IPO.  Some of the problems raised by reverse mergers are:

• Unhealthy speculation.  Mainland Chinese investment funds promised subscribers unrealistic short term gains (even 5X) from money pooled to fund buyouts like Qihoo
• Drain on liquidity.  Local investors feared that supply from a wave of relistings of large companies like Qihoo and Wanda Properties (privatization offer in Hong Kong) would depress the Shanghai/Shenzhen markets
• Profiteering.  A conservative shift in government policy making sees the role of the stock market as providing financing to real businesses.  High profits from the financial arbitrage of offshore vs onshore valuations are an undesirable drain on economic resources.  This mindset has roots in Confucian categorization of society into four classes with merchants and traders being the lowest because they produced nothing of value.

Over the summer it was reported that closing of some buyouts like Qihoo was delayed by new foreign exchange controls and the potential returns from relisting may be limited by caps on the P/E ratios for IPOs and offerings related to reverse mergers.  However many of the economic benefits from privatization are still available:

• Better investor support and higher valuations in domestic market
• Simpler and more efficient corporate structures
• Improved corporate visibility and reputation

Since the April review of buyouts 14 deals closed although the tougher domestic environment led to some lengthy delays between shareholder approval and closing.

Companies withdrew 3 offers

• 21Vianet withdrew its $23/share offer.  The company placed new shares at $16.27 with blue chip investor Tsingua Unigroup.  The company announced a $200mm share repurchase program.  With the stock price having fallen to $8.18 the execution of this program would send a strong signal about how management feels about future prospects for the business and shareholder returns.
• Momo withdrew its $18.90/hare buyout offer, but subsequently announced hugely improved operating results due to a surge in live video streaming.  With the stock price now at $24.03 public investors are sharing in the company’s success.
• YY withdrew its $68.50/share buyout offer and announced a $200mm share repurchase program.  The stock fell sharply in the spring due to investor concerns about a crackdown on salacious content in the company’s live video streaming service, but then rallied over the summer due to surging usage of its live video streaming.  It’s not yet clear whether the company has been using the buyback authorization.

Progress was made on three previously pending offers:

• Dangdang shareholders approved its buyout on 09/12 and the share price suggests that closing is imminent.
• Kongzhong management submitted a revised buyout offer at $7.18/share, a reduction from the $8.56 offer initially made in June 2015.
• Trina Solar signed a definitive buyout agreement at $11.60/share, an unchanged price from the initial proposal in December.

Despite the uncertain outlook for potential relistings and conversion of RMB-based financing, several new buyout offers have come in recent months:

• Qunar received an offer of $30.39/share backed by Ocean Imagination, the private equity firm that recently completed the E-Long buyout.
• Concord Medical received an offer of $5.19/share.  The company distributed 3 special dividends totaling $2.61 in 2014/2015, but never found favor with investors in the US market.
• Actions Semiconductor received a preliminary buyout offer at $2.00/share and then signed a definitive agreement at $2.20/share
• Autohome received a preliminary buyout offer at $31.50/share, but a 47% stake in the company was sold on June 22 to Ping An Insurance.  Ping An was not a party to the offer and expects to realize synergies between promotion of Autohome services alongside its own products.  It seems very unlikely that Ping An supports the offer (that has yet to be withdrawn) and Ping An has given no indication of seeking to privatize the company on its own.

Offers for 16 companies remain outstanding.

Important factors to keep in mind in judging the likelihood that individual deals will be completed:

• Hiring of advisors demonstrates a commitment of management time and money towards completing a transaction
• Backing from strong financial and strategic partners provides validation of the rationale for a buyout and funding for completion
• Low absolute valuation or relative to HK/China listings provides an incentive for completing a transaction