Chinese internet holding company SINA released the preliminary proxy statement for its $43.30/share privatization. The price is well below the company’s 6/30 asset value of approximately $68/share, but the buyout will certainly be approved because SINA’s Chairman Chao controls 61% of the voting rights. The deal process and transaction terms illustrate some risks that investors should keep in mind in evaluating other Chinese issuers.
VALUATION
SINA has traded for years at a discount to the value of its 44% stake in Weibo:
At the 10/14 closing price of $38.79, the Weibo stake was worth $3,948mm ($66.07/SINA). Every analyst and shareholder has valued SINA as Weibo + Other. The fairiness opinion for the buyout agreement considered this sum-of-the parts calculation, but “Morgan Stanley [advisor to the Special Committee] applied a holding discount of 30 – 45% to the value of the Company’s businesses and long-term investments” “based on among other factors, the historical trading discount of the Company relative to the net asset value of certain of its identifiable assets“. So they assumed that the holding company discount has always been “fair”, shareholders are not entitled to that value gap, and it’s “fair” for the Chairman to confiscate it for himself.
TIMING
SINA’s share price passed $120 in early 2018, but dropped due to weakness in advertising revenues amid a cyclical slowdown in consumer spending in 2018-2019 followed by COVID disruption in 2020.
The proxy statement includes financial projections showing management expects revenues and profits to rebound in coming years.
From a long-term perspective this does not seem like a smart time or price to sell SINA, but shareholders have no choice because a deal was agreed between the Chairman and the “disinterested” Directors.
DEAL HISTORY
Chairman Chao made a preliminary buyout offer on July 6 which stated: “We believe that our proposal of US$41 in cash per Ordinary Share will provide a very attractive opportunity to the Company’s shareholders“. The Board of Directors immediately established a Special Committee comprised of “disinterested” Directors including Yan Wang, a SINA employee from 1996-2012. The Special Committee selected Morgan Stanley as its financial advisor. Key points in negotiation of the definitive sale agreements:
- Alternative transactions such as a sale or spin-off of Weibo were not considered because Chairman Chao indicated that he would not support them.
- A “majority of the minority” vote condition was requested, but Chairman Chao said no. This condition would have required a deal to be approved by a majority of the independent shareholders. Without this requirement the shareholder vote has been rendered meaningless.
- A price increase was requested and Chairman Chao responded by raising his offer to $43. The Special Committee then requested $45 and Chairman Chao responded that $43.30 would be his final offer.
SINA has no investors with board representation or stakes large enough to influence the transaction.
WHAT”S NEXT
Shareholders may be powerless to stop the transaction from being completed due to Chairman Chao’s 61% voting interest, however they have “Dissent Rights” under Cayman Islands law as described on pages 91-92 of the preliminary proxy. Dissenting shareholders will be paid the “fair value” of their shares as determined by the Grand Court of the Cayman Islands.
The buyout is highly leveraged with $127mm of equity contribution from Chairman Chao and $2,080mm of debt commitments from China Minsheng Banking. Such a large commitment from Minsheng to an equity transaction probably means they expect it to be a bridge loan with a limited term. The SINA parent company had $301mm of cash on hand at 6/30 which would only modestly reduce the debt. Deleveraging is likely to require getting funds or value from Weibo. Some possibilities:
- Intercompany loan. Weibo had $2.3Bn of cash and short-term investments at 6/30/20 and had already loaned $268mm to SINA.
- Privatization. SINA and Alibaba together own 75% of Weibo’s shares and 87% of the voting power. If they cooperate then privatization at $50/share would require only $2.8BN, only slightly more than Weibo’s cash on hand. The consolidated private SINA+Weibo would then have lower leverage. Weibo could relist after 1-2 years at a higher valuation in Hong Kong or Shanghai.
- Hong Kong Listing. Weibo has large market capitalization, profits, and high visibility so it is an excellent candidate for a secondary listing on the HKEX. It would also be prudent for the company to have a dual listing in case its New York listing becomes affected by adverse US regulatory actions. It’s possible that Weibo deferred plans for an HKEX listing in order to keep its price from rising and raising the cost of SINA’s privatization. If Weibo performs comparably to Alibaba, JD, and Netease around their HKEX Listings then the ratio of privatization debt to SINA’s asset value would drop to a more comfortable level.
Privatization or HKEX listing of Weibo would not occur until SINA’s buyout is completed. I do not expect SINA to relist in any market because holding companies are out of favor.
Disclosures
At the time of publication the author held no position in SINA or Weibo. Investors are encouraged to check all of the key facts cited here from SEC filings and other sources prior to making any investment decisions.
Koneko Research 