Privatize – Business China : news for investors in China

End nears for AsiaInfo’s life as a public company

The end of life as a public company is fast approaching for telecoms software maker AsiaInfo-Linkage (Nasdaq: ASIA), marking the end of a long chapter for one of China’s first technology firms to list overseas. A newly announced special meeting will see AsiaInfo shareholders vote on a plan to privatize the company, whose shares have been ignored for years now by western investors. More broadly speaking, AsiaInfo’s looming buyout represents the challenges that smaller China tech firms face as they struggle to be noticed by western investors.

AsiaInfo’s life as a public company began with its listing on the Nasdaq in 2000, and now that chapter of its life looks set to close with a shareholder vote set for December 19 on whether to accept a buyout offer that would privatize the company. (company announcement) In its more than 13 years as a publicly traded company, AsiaInfo’s stock has traveled all over the map. It zoomed out of the gate by climbing to nearly $100 on its trading debut in 2000, quadrupling from its offering price of $24. Its shares moved quickly down after that as the Internet bubble of the late 1990s burst, and they have been below $30 for more than a decade now.

The stock faced a second crisis starting in 2011 when many western investors started to question the accounting practices of many US-listed Chinese companies. AsiaInfo stock mostly languished after that, and the current buyout offer announced in May will give investors $12 for each of their shares. (company announcement) For people too lazy to do the math, that means anyone who bought shares during the IPO and was foolish enough to hold them up until now will get a negative 50 percent return on their investment.

AsiaInfo will become just the latest Chinese tech firm to de-list from New York, joining a steady stream of recent privatizations. Others to de-list or in the process of doing so include former high-flyers like game operator Shanda Interactive, outdoor advertising specialist Focus Media, chip maker Spreadtrum Communications (Nasdaq: SPRD) and and IT services firm Pactera (Nasdaq: PACT), just to name a few. But while those de-listings have been mostly orderly and quiet, AsiaInfo has given investors a bit more drama in its privatization.

The company first announced it had been approached by a potential buyer in early 2012, and later hired an adviser to explore rival bids. The original buyer, a group led by a unit of the powerful Chinese Citic Group conglomerate, ultimately won the contest more than a year after expressing its initial interest. That triggered a flood of shareholder lawsuits, leading me to suspect that rival bidders that were willing to offer more money were unhappy at Citic’s selection as the buyer. (previous post) Presumably those lawsuits have been settled now, as AsiaInfo nears the finish line in this long and colorful process and prepares to go private next month.

The company’s shares last traded at $11.64, and didn’t move much on the announcement of the shareholder vote. Perhaps there’s still some skepticism that the deal will actually close, or maybe unhappy shareholders may mount a rebellion at the December vote. But the more likely case is that western investors ceased to notice or care about AsiaInfo long ago, an increasingly common problem for many smaller US-listed Chinese firms. That’s good in a way, as it means only Chinese companies with high profiles will go overseas to list in the years ahead. But at least for now, it also marks the end of a chapter that saw US investors fall into and then out of love with just about any Chinese tech firm that listed its shares in New York.

Bottom line: AsiaInfo’s looming privatization marks the end of more than a decade of fascination by western investors with Chinese tech firms.

AsiaInfo-Linkage Buyout: A Lawsuit Magnet

Cloudary, Spreadtrum Pull Out Of NY

UTStarcom Privatization Derails

It seems appropriate that 2 more longtime-listed Chinese companies are bowing out of New York as we head into the final days of 2013, with word that shareholders have approved plans to privatize telecoms software maker AsiaInfo-Linkage (Nasdaq: ASIA) and drugmaker Simcere Pharmaceutical (NYSE: SCR). AsiaInfo was the more lively of these 2 de-listing stories, with a narrow majority of shareholders approving a buy-out offer after several months of protest from others who thought the price was too low. Meantime, Simcere’s looming privatization raises the question of what’s next for this neglected company, whose foreign partners include Bristol-Myers Squbb (NYSE: BMY) and Merck (NYSE: MRK).

The 2 imminent de-listings cap a year that has seen many US-traded Chinese companies go private, after investors lost interest in their shares following a 2 year confidence crisis towards the sector. Others to de-list this year include hotel operator 7 Days and outdoor advertising specialist Focus Media. A longer list of others are in the process of privatizing, including telecoms chip maker Spreadtrum (Nasdaq: SPRD), IT services providers Camelot Information Systems (NYSE: CIS) and Pactera (Nasdaq: PACT) and online game operator Giant Interactive (NYSE: GA).

AsiaInfo has been one of the most contentious of the long list of privatizations, as many investors believed that insider politics were an element in the company’s acquisition by a group led by a unit of Chinese conglomerate Citic Group. Believing the offer price was too low, a number of shareholder law firms sued to block the deal after it was announced earlier this year. One major shareholder said earlier this week it would vote against the buy-out offer of $12 per share.

Despite all that resistance, AsiaInfo has announced that shareholders narrowly approved the deal in a vote this week, with 52.75 percent voting in favor. (company announcement) AsiaInfo said it expects the deal to finally close in the first quarter of next year, at which time it will de-list after more than a decade of trading on the Nasdaq. I suspect we may see 1 or 2 more legal challenges, but the company will ultimately close the deal and de-list, providing an entertaining end for its life as one of China’s oldest US-listed firms.

Meantime, Simcere announced shareholders approved its management-led privatization plan by a much wider margin, with 81.6 percent voting in favor of the deal. (company announcement) Simcere said it expects to de-list very soon, meaning we could see the company’s shares disappear from the New York Stock Exchange by year end. Simcere first announced the deal back in March, showing just how long these deals can take to close.

All of these de-listings raise the interesting question of what’s next for these companies. Private equity is providing much of the funds in nearly all of these cases, meaning we can probably expect to see most of these firms either sold to larger companies or make new IPOs in the next 5 years. In the case of AsiaInfo I would expect we could see the latter, with the company possibly making an IPO in either China or Hong Kong within that 5-year timeframe.

Simcere represents a more interesting case, since it’s one of China’s larger private drug firms and already has tie-ups with Bristol-Myers Squibb and Merck. That means it could be an attractive takeover target for either of those companies as they seek to expand in China. Of that pair, Merck could be the strong contender since it already has a joint venture with Simcere, which the pair formed in 2011. Many of these other recently privatized companies could see similar developments in the next few years, and I suspect we’ll see a number of firms list in Hong Kong.

Bottom line: AsiaInfo’s privatization is likely to close by March despite 1 or 2 more legal challenges, while Simcere could be purchased by Merck following its imminent de-listing.

Showdown Looms For AsiaInfo Buy-Out

China Tough Medicine For Simcere

AsiaInfo On Cusp Of Buyout With Regulatory Nod

Fosun Pharma, TPG make offer for Chindex

I’ll start this post with a major disclaimer, since one of my main reasons is simple sentimentality for writing about the newly announced buyout of New York-listed hospital operator Chindex (Nasdaq: CHDX) by a unit of the aggressive Fosun Group. When I first arrived in Beijing in 1987 as recent college graduate, I worked briefly in Chindex’s Beijing offices, which at the time were in the old Xiyuan hotel near the Beijing zoo. Since then, the company has transformed from its early days as an importer of medical and industrial equipment to its current focus on building and operating hospitals and clinics. Along the way it also made an IPO, and has quietly grown into a company with a market value of nearly $300 million.

Under the buyout deal, Chindex stockholders will receive $19.50 in cash for each of their shares from a group led by Fosun Pharmaceutical (Shanghai: 600196). (company announcement; English article) The offer represented a 14 percent premium to Chindex’s closing price on February 14. Other members of the buyout group include US private equity giant TPG, which has helped to finance a number of other recent similar buyouts and privatizations of US-listed Chinese firms. Shares for many of those companies had stagnated in recent years as investors lost interest in the group, leaving the stocks undervalued.

Chindex shares began rising on February 13 as rumors about a deal began to circulate, gaining 6 percent since then. Still, they now trade at just $17.15, or 12 percent below the offer price, indicating investors have some doubts about whether a deal will close. Others also seemed less enthusiastic about the offer, with several law firms saying the deal may not be in the best interest of shareholders. That indicates many may see the offer price as too low, and that perhaps we could see a higher price before a deal closes.

The fact that Chindex’s stock remains so far below the offer price, even with the prospect of a potentially higher bid, underscores just how much smaller Chinese companies have fallen out of favor with US investors. While big firms can still attract attention, especially from the Internet space, smaller names from more traditional sectors have found much more difficulty. Money-losing firms and companies without strongly growing revenues have also fallen out of favor, leading to a steady stream of buyouts and privatizations for companies like Shanda Games (Nasdaq: GAME), Focus Media and Simcere Pharmaceutical, just to name a few.

Shanghai-based Fosun is quickly emerging as one of China’s companies to watch, as reflected by a number of recent major acquisitions by its investment arm Fosun International (HKEx: 656) and now this move by its pharmaceutical unit. In the last year alone, Fosun has made major investments in French resort operator Club Med (Paris: CU) and leading Portuguese insurer Caixa Geral de Depositos, and last month was reportedly a finalist bidding for US publishing giant Forbes Media. (previous post)

It’s been quite a long time since I’ve followed Chindex, but I do have a lot of respect for its co-founders Roberta Lipson and Elyse Silverberg, who were way ahead of the crowd when they opened their company in Beijing around 3 decades ago. Revenue from the company’s core health care services grew at a respectable 16 percent in its latest reporting quarter, though it also slipped into the loss column, which is never a good sign. It was on track to post less than $200 million in health service revenue for the year, reflecting how tough the highly-regulated hospital services market is for foreign-controlled companies. Still, I have to offer my kudos to Chindex for growing and evolving all these years, even as the end of its life as an independent company could be fast approaching.

Bottom line: Fosun Pharmaceutical could be forced to raise its buyout offer price for Chindex, but is likely to ultimately succeed in its plans to privatize the company.

Fosun Eyes Traditional Media In Forbes Bid

Fosun Takes China Holiday With Club Med

Outbound M&A Starts Strong In 2014

Luye jumps in HK debut

The old saying “One man’s trash can be another man’s treasure” certainly seems pertinent for drug firm Luye Pharma (HKEx: 2186), which has found a receptive audience in Hong Kong for its newly listed shares. The company’s high valuation and strong trading debut contrast sharply with its performance during a previous life as a listed company in Singapore, where it was ignored by investors before privatizing in 2012.

Some analysts are saying Luye’s move could mark the start of a wave of similar re-listings for “China orphans” — Chinese firms that listed in New York or Singapore, only to see their shares languish due to lack of investor interest. But I would caution that Hong Kong investors are quite sophisticated and will still be looking for firms with strong growth potential — a quality that was lacking in many of the New York and Singapore-listed firms that privatized over the last 2 years.

Luye certainly seems to have a strong recipe for growth, as its profit grew 86 percent last year to 328 million yuan ($53 million). That story may have helped to attract Hong Kong investors, who gave the company $760 million in new funds as part of an IPO that valued the firm at $3 billion. (English article) That new valuation was nearly 6 times the amount that a group of private equity buyers paid when they privatized Luye and its shares de-listed from the Singapore stock exchange in 2012.

Luye’s shares priced at the top of their range, and also debuted strongly in their first trading day. The stock rose as much as 18 percent for the day before finishing up 13 percent. One media report pointed out that another pharmaceutical firm that made a similar move from Singapore to Hong Kong, Sihuan Pharmaceutical (HKEx: 460), has performed similar well. In that instance, private equity investors de-listed Sihuan from Singapore in 2009, and then re-listed it in Hong Kong a year later.

In that re-listing process, Sihuan saw its market value leap to $3.7 billion, or more than 7 times the $500 million figure it achieved in Singapore. Since that time the shares have risen another 80 percent, giving Sihuan a current market value of $6.7 billion.

Recent private equity buyers of undervalued US- and Singapore-listed Chinese firms must certainly be encouraged by Luye’s strong reception in Hong Kong. Some 53 companies have privatized or are in the process of de-listing from New York and Singapore since 2010, including former high-flyers like Focus Media and Shanda Games (Nasdaq: GAME). About 60 percent of those buy-outs were backed by private equity, and the list covered a wide range of industries from drugs, to hotels, to chip makers and IT consultants.

I partly believe the Hong Kong re-listing story, especially for firms that listed in Singapore and the handful that have gone to European stock exchanges. Singapore always looked interesting in theory, since it’s a major financial center and is located in Asia not too far from China. But the reality has been quite different, and very few major companies have found success with those listings. New York has been a different story, and has developed a dedicated and sophisticated group of Chinese stock followers who can understand their stories and properly value them.

Thus Singapore-listed companies that try this approach could have some success; but I don’t really see too much upside for companies that de-list from New York and retry their luck in Hong Kong. Focus and Shanda were good cases in point, as both had seen their revenue and profits slow sharply due to competition and operational issues before they privatized. New York investors realized this and avoided the companies, and so will Hong Kong investors if and when these “China orphans” try to re-list in Hong Kong over the next few years.

Bottom line: New York-listed Chinese firms that privatized due to lack of investor interest are unlikely to find more success in Hong Kong unless they can show strong growth potential.

Gamers Giant, Ourgame Bet On HK

Bidding War Breaks Out For Chindex

Giant Buy-Out: Paving Way For A Real Gaming Giant?

RDK closes privatization

Two more US-traded Chinese firms are on the cusp of de-listing, with online game operator Giant Interactive (NYSE: GA) and chipmaker RDA Microelectronics (NYSE: RDA) just announcing they have wrapped up buy-out deals that will pave the way for their imminent privatization. These 2 de-listing stories were announced months ago and are completely expected. But the bigger underlying story is the lack of major new privatization announcements in the last half year. In a similar development, major new IPOs by Chinese firms in New York have slowed considerably since a boom of offerings in April and May, indicating the broader deal-making market may be entering a new, more stable phase.

The imminent de-listings of Giant and RDA will mark the end of processes that kicked off more than half a year ago for each company. In both cases, private equity buyers made offers for the firms, believing that their shares were undervalued by Wall Street. Giant and RDA were just the latest firms to receive such offers, in a trend that began 2 years earlier and saw big names like Focus Media and Shanda Interactive all go private for similar reasons.

Giant received its buy-out bid last November, with a management-led group offering to buy the company for about 20 percent more than its valuation at the time. (previous post) Shareholders later approved the deal, and Giant has just announced that the buy-out has been completed. (company announcement) The company said it requested its shares be suspended at the end of last week, and that it expects to de-list in the near future.

RDA is a similar case, announcing its receipt of a buy-out offer from a group led by an investment arm of Tsinghua University back in November. (previous post) RDA’s shareholders also approved that deal, and now the company has completed the merger that will pave the way for its final privatization. (company announcement) Like Giant, RDA said it has also requested a halt in trading of its shares, which should be followed in the near future by their de-listing.

As I’ve said above, what’s perhaps most interesting about these latest 2 deals is that they could represent the end of a wave of similar privatizations for US-listed Chinese firms over the past 2 years. According to my calculations, the last major new similar de-listing announcement came back in February, when clinic operator Chindex (Nasdaq: CHDX) unveiled its own plan to be acquired by a private equity group. (previous post)

That means we’ve now gone a full 6 months without a major new privatization bid, which seems like a safe period for calling an end to the trend. Of course it’s still possible we could see 1 or 2 more such bids as private equity looks for a few more bargains. We could also see some strategic acquisition bids for remaining undervalued companies, with cash-rich companies like Alibaba and Baidu (Nasdaq: BIDU) potentially continuing their recent acquisition sprees.

Meantime, activity for new New York IPOs has also slowed sharply over the last 2 months, following a boom in April and May that saw names like microblogging leader Weibo (Nasdaq: WB) and e-commerce giant JD.com (Nasdaq: JD) make big new offerings. In this case the slowdown could be at least partly seasonal, since many US bankers and investors go on holidays during the summer months.Listing candidates could also be waiting until e-commerce giant Alibaba makes its blockbuster offering, expected to raise up to $20 billion in September or October.

Still, the bigger picture is that a frenzy of deal-making involving privately-owned Chinese firms may finally be winding down as the market settles into a new equilibrium. Now the next step should see all the asset buyers trying to reposition their purchases, which could lead to a new round of sales and listings around 2 years down the road.

Bottom line: A wave of deal-making involving private Chinese firms is nearing an end following a 2-year frenzy of activity, which should be followed by a 2 year quiet period before the next wave of sales begins.

Giant To Privatize, Other Gamers To Follow?

Neglected Luye Finds Tonic In HK Listing

500.com Cuts IPO, Vancl Raises Funds

Bottom line: Perfect World’s de-listing plan is likely to succeed and could be followed by a merger with Shanda or Giant Interactive, while Renren is likely to also get bought out and de-list by the end of the year.

Perfect World (Nasdaq: PWRD) has become the latest US-listed online game operator to decide it’s unappreciated by shareholders, announcing a plan to privatize and de-list its shares from New York. The management-led buyout offer shouldn’t come as a surprise, as it follows a steady stream of similar moves that has seen peers like Giant Interactive and Shanda Games (Nasdaq: GAME) also leave or prepare to leave the market.

At the same time, another headline from struggling social networking site (SNS) Renren (NYSE: RENN) is fueling speculation of a similar imminent de-listing. That news has Renren announcing the resignation of its CFO — news which should normally have a neutral to negative effect on the company’s stock. But in this case the stock has jumped on the news, indicating investors may think a buy-out offer is coming.

The privatization plan from Perfect World is part of a broader clean-up over the last 2 years that removed many underperforming Chinese companies from New York. The clean-up began 4 years ago when a series of companies were forced to de-list due to accounting irregularities and other listing rule violations. After that, a group of companies like Perfect World voluntarily began to privatize after their growth prospects dimmed due to stiff competition, causing investors to lose interest.

The clean-up has largely finished by now, though there are still a few companies like Perfect World and Renren whose shares have languished these last few years, even as many other Chinese Internet stocks boomed. Perfect World’s shares were down 20 percent last year, though they jumped 22 percent after the buy-out offer was announced. Renren’s shares were down by a similar amount, though they also jumped by a smaller 7 percent on news of the CFO resignation.

Let’s look first at Perfect World, which said it has received a buy-out offer at $20 per American Depositary Share (ADS) from a group led by its chairman. (company announcement) The shares jumped to $19.25 after the announcement, indicating investors are fairly confident the deal will succeed.

I’m also fairly confident the deal will be completed, since Perfect World is a fairly well run company and shouldn’t face any opposition to the plan if it has reliable financing. One potential scenario could see Perfect World combine with Shanda once both companies complete their pending buy-outs. Another could see Perfect World combine with Giant Interactive, which may also be looking for a buyer. Either combination could create a player that may finally have the scale to challenge to industry leaders NetEase (Nasdaq: NTES) or Tencent (HKEx: 700).

Next let’s look at Renren, which simply announced that Huang Hui has resigned as its CFO after 4 years at the job. (company announcement) It named an acting CFO, implying that Huang’s departure was unplanned and no long-term replacement has been found. The sudden departure of a CFO with no named replacement would normally be greeted with either no reaction from investors, or possibly a share price decline over concerns about potential financial problems.

But in this case investors are guessing that Renren’s days as an independent company are numbered, and that a buyout offer is coming soon. I’ve previously said Renren can’t survive in its current money-losing form, and it really does need to find a cash-rich partner that can provide money and synergies to help it survive. With a market value of about $1 billion, Renren would certainly be affordable for a big name like Baidu (Nasdaq: BIDU) or Alibaba (NYSE: BABA), and I do expect that Renren will end its existence as an independent company before the New Year is finished.

INTERNET – Shanda Breakup Nears End With Game Unit Sale

Struggles Continue At Shanda, Perfect World

Perfect World’s Shanda Buy: Consolidation Coming?

Bottom line: A booming China stock market and IPO reforms could fuel a new wave of re-listings by Chinese tech and media firms that were formerly traded in New York, led by an upcoming backdoor listing by Focus Media.

A pair of stories in the headlines today are highlighting a nascent movement that could see a growing number of US-listed Chinese firms take down their shingle in New York to return to stock markets closer to home. No companies have made such a move yet, but advertising specialist Focus Media could soon become the first with word that it’s moving closer to making a backdoor listing in China after leaving New York in 2013.

Meantime in a related piece of news Xueda Education (NYSE: XUE) said it has received a buy-out offer from Chinese financial firm Insight Investment (Shenzhen: 000526). Such a move would continue a trend that has seen a growing number of neglected US-listed Chinese firms abandon New York, where their shares have stagnated over the last few years.

The latest reports point out that a number of factors could lead more US- and even Hong Kong-listed Chinese firms privatize and return to their home market. One of the main attractions has always been the awareness factor, since many of these firms are well known to Chinese but are unfamiliar to most westerners. A new element to the equation is a recent rally that has seen China’s stock markets double over the last 6 months. That’s probably creating envy among many US-listed Chinese firms whose shares have moved in the opposite direction over that time.

Last but not least is a major reform being planned for China’s stock markets that would see them move to a registration-based system for IPOs similar to the US. The current system is quite cumbersome and involves extensive vetting by the securities regulator, which tightly controls the number of new listings. The current system also strongly favors state-run firms, meaning many fast-growing venture-funded companies ultimate go overseas due to difficulty they would face in listing on one of China’s 2 main boards.

All of those changes are undoubtedly factors in Focus Media’s decision to pursue a re-listing in China, following its management-led privatization 2 years ago. According to the latest reports, Focus has just made a major move that could pave the way for such a domestic listing by refinancing a $1.275 billion loan. (English article) The reports add that Focus has identified a target company to take over for its planned backdoor listing, helping it to avoid the current cumbersome IPO path.

Focus Media was once an investor darling when it listed in New York a decade ago, but later became mired in bad assets after embarking on a buying binge. This backdoor listing plan was first reported in February, and has Focus aiming for a market value of about 46 billion yuan ($7.4 billion), or about 3 times its $2.7 billion valuation when it de-listed in 2013. (previous post)

Meantime, Xueda shares jumped 6.3 percent to $3.35 after it announced its receipt of the buyout offer from Insight Investment for $3.38 per American Depositary Share (ADS). (company announcement) Xueda certainly fits the description of Chinese firms that have recently abandoned New York due to lack of interest from US investors. Its shares once traded as high as $12 back in 2010, but crashed in 2011 during an investor confidence crisis in Chinese stocks. Since then they’ve mostly traded in the $2-$4 range.

The offer for Xueda follows a recent similar spate of buyouts, with online game firms becoming a particular favorite. Most recently Perfect World (Nasdaq: PWRD) received a management-led buyout offer, and Shanda Games (Nasdaq: GAME) is also in the process of de-listing. (previous post) If the Focus Media deal succeeds, which looks like a good possibility, I do expect we could see some of these other former US-listed companies try to make similar re-listings in China, where perhaps their shares will be more appreciated by local investors who recognize their names.

INTERNET: The End Finally Nears For Shanda Games

INTERNET: Matchmakers Momo, Jiayuan Hit Resistance From Beijing, Investors

IPOs: Clock Ticks Down On 55Tuan, Jiayuan

Bottom line: Chinese Internet blue chips like Baidu and Ctrip should continue to flourish on Wall Street due to their leading status, while shares of smaller names will sputter and even plunge if a recent wave of buyout offers starts to collapse.

The last 2 days have been most notable for what hasn’t happened over that time, namely the announcement of any new buyout offers for US-listed Chinese companies. Barring any new announcements on this final day of the trading week, the second quarter of 2015 is likely to end with a record 20 such privatization bids for Chinese firms looking to de-list from New York in search of better valuations back in China.

At the same time, 2 of China’s premier US-listed Internet companies are on the cusp of issuing a combined total of nearly $2.5 billion in new bonds, reflecting a new reality for Chinese companies on Wall Street. That reality is allowing China’s leading Internet names like search giant Baidu (Nasdaq: BIDU) and top online travel agent Ctrip (Nasdaq: CTRP) to still do quite well in New York, even as the far bigger number of lesser-known companies see their shares sputter.

Let’s begin with the privatization trend, which most recently saw social networking app operator Momo (Nasdaq: MOMO) announce earlier this week that it received a management-led buyout offer. That made it the 20th US-listed Chinese company to receive such an offer since April. (previous post) Since that announcement, which was officially dated on Tuesday, we haven’t seen any more similar privatization bids.

Momo’s announcement capped a frenetic 2 week period that saw at least 6 other Chinese companies receive similar buyout offers, including AirMedia (Nasdaq: AMCN), Vimicro (Nasdaq: VIMC) and China Information Technology (Nasdaq: CNIT) over the long Chinese holiday last weekend. Many market watchers are probably wondering if this sudden silence marks the end of the wave of bids, or is simply a pause.

I would guess we’re probably near the end of the wave, though perhaps we’ll see one or two more bids in the next week. Most of the euphoria fueling the wave is coming from China’s own recent stock market rallies, which have seen the nation’s markets more than double over the last year. But the rallies are showing growing signs of fizzling, which could bring an abrupt end to the privatization wave and even end up killing as many as half of the recent buy-out bids.

At the same time, Baidu and Ctrip are showing why New York is still a friendly place for leading Chinese Internet companies, as each completes a massive bond issue worth more than $1 billion. Ctrip completed its issue of $1.1 billion in convertible notes earlier this week, while Baidu is likely to follow with its recent pricing of $1.25 billion in similar notes. (Ctrip announcement; Baidu announcement)

These 2 bond issues are both massive, and come after Baidu, Ctrip and many of China’s other top Internet companies have made similar sized offerings over the last 2 years. The fact that these are convertible bonds means that shareholders still have quite a lot of confidence in the stocks of these 2 companies, and are hoping to convert their bonds into company shares when they mature.

To put things in perspective, the funds raised from either of these 2 bond offerings would be enough to fund the AirMedia, Vimicro and China Information Technology privatizations combined. A few larger companies have also announced privatization bids, most notably security software specialist Qihoo 360 (NYSE: QIHU), whose market value of $8.7 billion could make it a bit tougher to buy out.

So, what’s the bottom line in all this for investors? The answer is that China Internet blue chips, such as Baidu, Ctrip and Alibaba (NYSE: BABA), should remain attractive investments for at least the next few years, and their stocks should probably grow annually by at least 10-20 percent on average over that period. But New York will be far less welcoming to smaller Chinese companies, many of which could see their shares plunge if some of the recent buyout bids start to collapse.

BUYOUTS: Momo Gets Offer, Focus Media Gets More Headaches

BUYOUTS: Vimicro, CNIT, AirMedia Line Up; Sina Joins E-House Bid

IPOs: Buyouts Roll On With New Bids For Jiayuan, E-House

Bottom line: Earlier announcers of privatization plans like Jiayuan are likely to succeed due to their more reliable funding sources, but many of the deals announced by Chinese firms in the second half of June could ultimately collapse.

De-listing bells keep ringing for Jiayuan

China’s sudden stock market rally isn’t reassuring US investors who believe that many of the most recent buy-out offers for New York-listed Chinese firms may collapse due to questionable funding. That has prompted at least 1 firm, online dating site Jiayuan (Nasdaq: DATE), to come out and openly say it is still committed to the privatization process that could ultimately end with its departure from New York and re-listing of its shares in its home China market.

The rationale for this kind of a move hasn’t changed throughout China’s massive stock market gyrations, which saw the main Shanghai index more than double over the past year at its early June peak, before crashing in a major sell-off. The crash has subsided in the last few days thanks to major intervention by Beijing, though it’s far from clear whether the selling binge is over.

But at the end of the day, the rationale for leaving New York and coming home to China remains the same regardless of the latest market sentiment. That logic says that investors are far more likely to get excited about a stock when they’re familiar with its name and business model, giving it a better valuation than it would get from less familiar buyers in overseas markets.

That logic is certainly sound, and is the main reason that most companies choose to make their primary listings in their home stock markets, though some bigger names also host secondary listings in other places like New York. Jiayuan CEO Wu Linguang outlined that logic in an internal employee memo, which was strategically leaked to the media in an attempt to prop up Jiayuan’s flagging shares.

In the memo, Wu points out that Jiayuan is a Chinese company, and that 99 percent of its users are in China. (Chinese article) Wu adds that the process of privatizing and re-listing in China isn’t a short-term one, and thus shouldn’t be affected by short-term gyrations in China’s stock markets. Wu also acknowledges that China’s young stock markets still have room for better performance, but that improvements are likely over the long term.

Measured Response

Such logic looks reasonable, and I like Wu’s overall measured response to the volatile situation. Jiayan’s stock is typical of the broader group of US-listed Chinese companies that have announced similar privatization bids since the start of the year. The company’s shares mostly languished after its 2011 IPO, but rose after the initial bid in March, and then again after the buyer raised the bid sharply in response to shareholder protests. (previous post)

Then the shares collapsed in tandem with China’s sell-off that saw the main Shanghai index lose more than 30 percent of its value over just 3 weeks in June. But then the markets rallied after major intervention by Beijing, igniting a rally for Jiayuan and other US-listed Chinese companies. At the end of the last week, Jiayuan’s American Depositary Shares (ADSs) were at $6.34, still 12 percent below the latest buy-out offer of $7.20 but about 10 percent higher than their low during the sell-off just days earlier.

At this point, 2 main camps are shaping up in terms of the gap between company stock prices and their buyout offers. In one camp are companies like Jiayuan, which received their offers relatively early and thus probably secured reliable funding commitments. In the other camp are companies that received their offers during a frenzy of new announcements in the second half of June.

Shares of many firms from this latter camp, such as China Information Technology (Nasdaq: CNIT), Vimicro (Nasdaq: VIMC) and Qihoo 360 (NYSE: QIHU), are mostly still trading at 20 percent or lower than their offer prices. That reflects investor belief that bids for many of these companies were assembled hastily with shaky funding sources at the height of the buyout frenzy. Thus many of those funding sources may now evaporate due to the volatility in China’s markets.

I would tend to agree with that sentiment, and thus would argue that Jiayuan’s deal probably has a good chance of success since it was one of the earlier ones announced in this current buyout wave. As to some of the later deals, there’s still a chance that some may succeed, since the rationale for the move is still valid. But others may have to wait if their funding sources disappear, and I would still predict we’ll see at least 4 or 5 deals from the tail end of the buyout wave ultimately collapse.

IPOs: Buyouts Roll On With New Bids For Jiayuan, E-House

INTERNET: Matchmakers Momo, Jiayuan Hit Resistance From Beijing, Investors

IPOs: Clock Ticks Down On 55Tuan, Jiayuan

Today’s top stories

Bottom line: Mindray is likely to finally privatize following its announcement of a new, lowered offer price, kicking off a new round of revised bids for some of the other Chinese companies that received similar offers earlier this year.

In a move that didn’t get investors too excited, medical device maker Mindray (NYSE: MR) announced that a group aiming to privatize the company has lowered its earlier offer price to reflect recent declines in the company stock. Shareholders greeted the news by dumping Mindray stock, which ended the latest session at $23.60, or 13 percent below the revised offer price of $27 per American Depositary Share (ADS).

Frankly speaking, I’m quite impressed that this deal is moving forward at all, since I fully expect most of the 3 dozen similar privatization bids announced earlier this year to ultimately collapse. Mindray is the first of the huge field of buyout candidates to update investors on the status of its bid since shares of US-listed Chinese companies began to tank in sync with a much louder sell-off on China’s domestic stock markets in June.

Accordingly, I see quite a good buying opportunity here for anyone who wants to make some quick money, since this new announcement indicates Mindray still has access to the necessary financing to complete its privatization. The same may not be true for many of the other US-listed Chinese companies that announced similar bids, many of which could soon collapse.

That’s because much of the funding behind many of the deals may have been tied to highly speculative investors, who were banking on continuation of a rally that saw China’s stock markets more than double in the 12 months through June. Of course anyone who isn’t living in a cave knows that rally ended in spectacular fashion 3 months ago, and the main Shanghai index is now nearly 40 percent below its peak at that time.

New Reality

All that said, let’s look more closely at Mindray’s latest announcement that includes the revised offer at $27 per ADS. (company announcement) The new price represents a 10 percent reduction from the earlier offer of $30 per ADS that Mindray announced in early June when China’s stock markets were near their peaks. (previous post) Since receiving the offer, Mindray’s shares have fallen about 20 percent, which is actually relatively mild compared to some other Chinese firms that received similar offers.

The logic behind the flood of buyout offers was simple. Most of these companies had seen their shares languish on Wall Street due to lack of investor interest. At the same time, they watched with envy as shares of their China-listed peers soared in the recent rally to valuations that were quite attractive, even if they were unsustainable. So the US-listed companies were hoping to privatize, then quickly re-list in China at much higher valuations.

Of course that logic has lost a lot of its validity with the recent plunge in China’s stock markets. What’s more, many of the buyout offers came at the height of the China rally, and appeared to be backed by murky funding sources that may have changed their mind following the recent sell-off.

The drop in Mindray’s shares after its latest announcement reflects a large degree of skepticism among US investors that this deal, or any of the others, will actually close. Shares of most other buyout candidates still trade well below their original offer prices, with shares of the biggest deal for software security specialist Qihoo (NYSE: QIHU) now a whopping 43 percent below their earlier buyout price.

In closing, I would suggest that anyone looking to make money off this phenomenon do some research on the funding sources for many of these buyout bids. I expect we’ll see more revised bids coming in soon for some of the stronger candidates with better funding sources, with premiums likely to average around 10 percent above the latest share prices. But I do expect about two-thirds of the previously announced deals will ultimately collapse, which could create further downward pressure on their shares.

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Bottom line: Giant Interactive is likely to achieve a backdoor listing in China over the next 12 months, while Qihoo could receive a new, lowered privatization offer by the end of this year.

Early signs of stabilizing on China’s stock markets are breathing new life into the nascent migration by Chinese tech firms that are abandoning overseas listings to re-list back at home. The latest signals of new movement are coming from formerly New York-listed Giant Interactive, which is eyeing a backdoor listing in Shenzhen, and from Qihoo 360 (NYSE: QIHU), which is indicating its faltering plan to de-list from New York is still alive.

Both of these deals have a bit of history, and are part of a broader wave that saw 3 dozen US-listed Chinese firms announce plans to privatize in the first half of this year. Most of those plans came when China’s domestic stock markets were rallying sharply. Backers of the bids were betting that companies whose shares had languished in New York could get much higher valuations from investors in their home China market.

A few of the buyouts have been completed, with names like online game operators Perfect World and China Mobile Games at or near completion of their de-listings. But the big majority of the deals remain in limbo, following the massive sell-off that saw China’s stock markets plummet more than 40 percent at one point from their June peaks.

Qihoo was the largest company to announce a privatization plan during the earlier wave, but almost immediately ran into trouble because of the deal’s huge size. The uncertainty grew when one of the company’s major joint venture partners started creating mischief, prompting Qihoo to say it might need to focus its financial resources on sorting out that clash.

Backers of Qihoo’s original bid had offered to buy the company’s American Depositary Shares (ADSs) at $77 apiece, and were also reportedly balking at a widening gap between that price and Qihoo’s actual price as Chinese stocks tumbled. (previous post) At the latest price of $53.42, Qihoo’s shares now trade 30 percent below the earlier offer price.

But Qihoo has recently settled the dispute with its joint venture partner, and now its CEO Zhou Hongyi has said at a recent event that he is determined to complete the privatization process and bring his company home to re-list. (Chinese article) That’s the clearest signal we’ve seen that Qihoo is still aiming to complete the process, and I expect we’ll see the buyout group submit a new, lower bid before the end of this year.

Backdoor Listing for Giant

Next there’s Giant Interactive, which was actually one of the first Chinese companies to leave New York when it de-listed at the end of 2013. Now media are reporting the company has identified Shenzhen-listed Century Cruises (Shenzhen: 002258) as a backdoor listing vehicle, and indeed Century Cruises has made its own initial filing about such a reorganization. (company announcement; Chinese article)

Giant has talked about such a plan for a while now, after its stock languished for years in New York. It would be following a similar trail blazed by Focus Media, which also de-listed from New York around the same time and is now making its second attempt at a backdoor listing using another Shenzhen-listed company called Hedy Holdings (Shenzhen: 002027). (previous post) Focus had earlier tried a backdoor listing with another company, but aborted that plan after the listing vehicle came under investigation for securities violations.

At the end of the day, this wave of companies returning to China seems inevitable due Beijing’s desire to bring home some of its most promising tech names for local investors. But such a process will be slow due to many complex issues involved and ongoing volatility in China’s economy. Accordingly, I stand by my earlier assertion that half or more of the earlier privatization bids will ultimately fall apart. But more determined companies like Focus Media and Giant Interactive should ultimately be able to achieve their goals and list on domestic markets in the next year or two.

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Bottom line: Weak share reaction to Ming Yang’s new buyout offer and a low valuation for Giant Interactive’s China backdoor listing reflect weakening investor sentiment towards poorly performing Chinese Internet companies.

Chilly reaction for Ming Yang buyout plan

After a brief period of relative quiet, movement is picking up again in the tide of Chinese companies privatizing from New York to re-list back in China. This time former new-energy high flyer Ming Yang (NYSE: MY) announced it has received a management-led buyout offer, becoming the latest firm to receive such an offer. Meantime in China, one of the earlier firms to privatize, gaming company Giant Interactive, has taken the latest step for a backdoor listing in Shenzhen using a shell company called New Century Cruises. (Shenzhen: 002258).

But in an interesting twist to the homeward migration story, a chilly reception from investors seems to reflecting shriveling interest in these poorly performing Chinese companies. In the Giant story, the proposed new valuation for the company looks quite low — far less than what Giant was worth when it de-listed from New York in 2013. That’s quite a switch from what Giant’s talkative chief was saying just 4 months ago, when he boasted his company might be able to get valued as much as 5 times the $3 billion it was worth when it was still listed in New York.

The rapidly changing market sentiment was also reflected in investor reaction to the Ming Yang buyout announcement, which saw the company say a management-led group has offered to buy its New York-listed American Depositary Shares (ADSs) for $2.51 apiece. (company announcement) Rather than greeting the news with gusto, investors actually thumbed their noses at Ming Yang by bidding down its shares by 4 percent after the announcement came out. That means that at their latest price of $2.13, the shares now trade 15 percent below the buy-out price.

That would seem to indicate investors have become highly skeptical of this and many of the other 3 dozen buyout bids that have come for US-listed Chinese companies since the beginning of the year. Funding sources for many of those offers were never really very clear, and Ming Yang’s own announcement is equally vague. But that said, it does seem like the timing of Ming Yang’s announcement indicates it believes it has the funding commitments to complete its deal. Accordingly, I would expect this particular deal could have a better chance of closing than many of the earlier ones that are still pending.

Shrinking Valuation

Next there’s Giant, whose talkative chief Shi Yuzhu said in July that Chinese investors might value his firm at as much as 100 billion yuan ($16 billion), or 5 times what it was worth at the time of its New York de-listing 2 years ago. (previous post) That number contrasts sharply with the latest public filing from New Century Cruises, Giant’s backdoor listing vehicle, which says it will issue 13.1 billion yuan worth of new shares and exchange them for all Giant’s assets. (English article; Chinese article)

Some quick math will show that amount translates to a purchase price of about $2 billion, which is actually a third less than what Giant was worth when it de-listed from New York. That’s certainly a far cry from Shi’s earlier boast, and probably indicates that market sentiment is rapidly cooling towards Chinese companies that are losing money or performing poorly like Giant. Such changing sentiment was probably a factor that drove together 2 recent shotgun marriages on the Chinese Internet, one bringing together online travel rivals Ctrip (Nasdaq: CTRP) and Qunar (Nasdaq: CTRP), and the other group buying enemies Dianping and Meituan. (previous post)

Giant’s low valuation certainly doesn’t bode well for many of the other US-listed Chinese companies that were hoping to leave New York and get much higher values by re-listing back in China. It also doesn’t look good for high-flying startups like smartphone maker Xiaomi that achieved meteoric valuations last year when sentiment was strong, but could see their values stagnate or even start to shrivel when they return to market for more funds. We’ll have to wait and see how the next big investment goes before making any assessment. But the trends certainly seem to be pointing downward for Chinese high-tech start-ups looking for cash and lofty valuations.

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Bottom line: A new round of buyouts for US-listed Chinese firms is being greeted with skepticism due to China’s volatile economy, and could offer a good buying opportunity for investors with strong appetite for risk.

Investors dump E-House shares after new buyout offer

In what looks like an emerging new trend, investors are dumping shares of online real estate services firm E-House (NYSE: EJ) after it announced a new lower offer price for its shares under a privatization bid first announced in June. This lowering of the price doesn’t come as a huge surprise, since US-listed Chinese shares have tumbled since many first announced privatization bids in the first half of the year with an eye to re-listing back in China.

But what does come as a surprise is US investor reaction to the new offer. In the case of E-House, the company’s shares fell more than 5 percent after it announced the new buyout price, which still represented a nearly 7 percent premium to the stock’s last close. Normally one would expect the shares to rise after such an announcement to approach the new bid price. But in this case the sell-off seems to reflect investor skepticism that the new deal will ever get completed, even at the lower price.

This particular share reaction looks almost identical to one that occurred just a day earlier when wind energy equipment maker Ming Yang (NYSE: MY) announced its own new buyout offer. (previous post) In that instance Ming Yang’s bid also represented a modest premium over its last closing price, but that didn’t stop investors from dumping the shares. Ming Yang shares have now fallen 6.2 percent in the 2 trading sessions since its original buyout announcement, and now trade 16 percent below the offer price.

We’ll try to understand why investors are greeting these deals with such a cold shoulder shortly, but first let’s review E-House’s latest offer and the history of this particular buyout. A management-led group first offered to privatize E-House back in June, bidding $7.38 for each of its American Depositary Shares (ADSs). (previous post) That represented a hefty premium of more than 20 percent to the stock price at the time, and was just one of about 3 dozen similar privatization bids in the first half of the year for undervalued US-listed Chinese companies.

Of course everyone knows what happened next, namely that China’s surging stock markets went into a tailspin that saw them plunge during the summer, sparking a concurrent sell-off for US-listed Chinese companies. That sell-off saw most of the buyout candidates’ shares plunge well below their offer prices, prompting me to predict that many of the deals would collapse or perhaps that buyers would submit new lower bids once the markets stabilized.

Downward Revision

Now we’re seeing the first revised bid arrive with E-House, whose management has submitted a new offer of $6.64 per ADS to privatize the company. (company announcement; Chinese article) That’s about 10 percent lower than the June bid of $7.38. But as I’ve already noted, investors greeted this new bid by selling the shares, even though the new bid represented a modest premium to the last closing price. That reaction is a bit unexpected, since the fact that E-House announced the new offer shows it believes it has the necessary funding to complete the deal.

So now we come to the questions of: Why are we seeing this particular reaction, and are we likely to see similar things from the other buyout candidates whose bids are still pending? The short answer to the first question seems to be that investor skepticism is high that any of these deals will be completed, most likely due to the volatile situation in China’s economy that is scaring away both big and small investors.

I can certainly understand that skepticism, and also the fact that investors are probably feeling a bit duped after being offered a higher price for their shares earlier. But at the same I do think that many of the most recent bids like the one from Ming Yang and now this one from E-House probably have relatively secure funding sources and will get completed at their offer price. The same may not be true for many of the other pending bids, and I still do predict that half or more of those will ultimately collapse.

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Bottom line: Momo may be reconsidering its de-listing plan as it approaches profitability and becomes comfortable in New York, while Shanda’s final de-listing testifies to the resourcefulness and tenacity of founder Chen Tianqiao.

Two companies aiming to de-list from New York are in the headlines as the weekend approaches, led by word that Shanda Games (Nasdaq: GAME) is finally packing its bags and heading home after a long and difficult privatization process lasting nearly 2 years. At the other end of the spectrum is social networking app maker Momo (Nasdaq: MOMO), which was aiming to capture the record for shortest life as a US-listed company when it announced a privatization bid in June just 7 months after its Nasdaq IPO.

I’ve written quite a few times about Shanda Games’ imminent de-listing, only to see the buyout derail for different reasons. But this time it really does look final after shareholders approved a buyout deal that has now formally closed. (company announcement) Meantime, Momo has just announced quarterly results that show it is almost profitable. But what’s perhaps equally interesting is the lack of any mention of its own previously announced buyout offer in the report, which could perhaps imply a change of direction.

Let’s start with Momo, sometimes called the Chinese equivalent of US app Tinder, which has reported that its net loss shrank to just $800,000 in the third quarter, down from $14.6 million a year earlier. (company announcement) In my view that’s the equivalent of break-even, meaning it’s quite possible Momo could post its first-ever profits in the fourth quarter if current trends continue.

The company also posted strong revenue growth, with the figure tripling to $37.5 million in the third quarter from a year earlier. While that revenue growth does look impressive, it’s worth noting the figure is still quite small, which is one of the reasons investors have ignored Momo and other similarly small Chinese Internet companies listed in New York.

Momo made its IPO late last year and saw its shares lose about a quarter of their value, before regaining some momentum in the spring and summer. Its shares dipped 3.3 percent in after-hours trade after its latest results came out, and now trade about 5 percent below their IPO price.

Reading Between the Lines

As I’ve said above, an interesting element in this latest report is what’s not included, namely any mention of the status of Momo’s buyout offer announced in June at a bid price of $18.90. (previous post) That figure is now more than 30 percent higher than Momo’s latest price, and is almost certain to come down if Momo moves ahead with the plan.

But Momo’s failure to even mention the plan in its report could hint that it’s having a change of heart, and perhaps is growing more comfortable with its New York listing. If that’s the case it might ultimately scrap its privatization plan. Such a move makes sense for a number of reasons, many of which I’ve noted before (previous post), though I would still put Momo’s chances of pursuing its privatization bid at around 50-50.

Meantime, we’ll close with a quick look at what may be the final announcement from Shanda Games, which has just notified investors of the closing of a deal to sell itself to a Chinese buyer. Shanda Games said it will now request that its shares be de-listed, and that it will no longer make any disclosures usually required of a publicly traded company.

I’ve written about this deal quite a bit, and anyone who wants to see my latest thoughts can read a posting from last month on the same topic. (previous post) This particular deal has certainly taken a long time, and its completion testifies to the tenacity and resourcefulness of Shanda founder Chen Tianqiao, who was determined to dismantle his empire to pursue a career in private equity finance. Other companies aiming to privatize may not have the same resources and determination, and I still do think many of the nearly 3 dozen deals announced earlier this year may ultimately collapse.

(NOT FOR REPUBLICATION)

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Bottom line: iKang’s poison pill plan will kill a hostile offer for the company but could force a management-led group to raise its earlier bid, while CMGE’s China backdoor listing shows a quickening of the process for US-listed Chinese companies to return home.

The first bidding war for a Chinese company looking to privatize from New York has taken an interesting twist, with word that medical clinic operator iKang (Nasdaq: KANG) has launched a shareholder rights program often called a “poison pill”, aimed at preventing hostile takeovers. Usually I’m relatively neutral on this kind of defensive move, as it’s often aimed at getting shareholders better value for their money. But in this case the move seems like a somewhat abusive use of power by iKang’s founder and chief executive to protect his own earlier and significantly lower buyout offer for the company.

Meantime another headline from the recent wave of US-listed Chinese companies to privatize has gaming company China Mobile Games (CMGE) already preparing to re-list in China. If successful, CMGE’s homecoming would be remarkably quick, since it only completed its privatization from New York 3 months ago.

We’ll begin with iKang, which first announced a management-led buyout offer in August at a price of $17.80 for each of its American Depositary Shares (ADSs). But that deal was trumped earlier this week when a high-profile rival group offered $22 per ADS. (previous post) That prompted iKang’s CEO Zhang Ligang to reportedly say on his microblog that he would never sell his shares to any third party.

Now Zhang appears to be backing up his earlier threat by launching the shareholder rights program or poison pill, designed to flood the market with new shares in the event of this kind of hostile takeover bid. (company announcement; Chinese aritcle) iKang says it took the move to ensure that “all shareholders” receive “fair and equal treatment” in the event of such a hostile takeover attempt.

I find this wording quite ironic, because the move is clearly designed to protect Zhang’s own interests, and doesn’t seem particularly favorable to minority shareholders. After all, most independent shareholders would almost certainly prefer to get $22 for each of their ADSs, rather than the $17.80 that Zhang and his group previously offered.

But this is China, and unfortunately CEOs often treat their companies like personal fiefdoms and do what’s best for themselves but not necessarily their other shareholders. iKang ADSs fell 2.7 percent in the latest session to $18.37, which is above the management group offer but well below the rival bid. That probably reflects a reality that will see the management group forced to raise its bid slightly after this new offer, but also signals that the rival bid will fail.

Lighting-Speed Homecoming

Next let’s look at CMGE, which announced its privatization bid in May at the height of a wave that saw around 3 dozen Chinese companies announce such bids to de-list from New York this year. Unlike many of the other deals that have yet to be completed, CMGE finished its buyout at the end of August and de-listed, and now media are saying it is already set to re-list back in China.

In this case it appears that CMGE’s privatization was part of a larger plan by its private equity buyer, which is now moving to inject CMGE along with assets from 5 other peers into a Shenzhen-listed company called Zhejiang Century Huatong Group (Shenzhen: 002602). (English article; company announcement) Huatong will purchase the assets using a private placement worth 11 billion yuan ($1.7 billion).

Previous similar homecomings have taken much longer, which makes this latest deal look quite unusual. The only 2 companies to nearly complete the process so far have been outdoor advertising specialist Focus Media and gaming company Giant Interactive, and both of those required more than 2 years. (previous post) The CMGE deal looks like it was probably part of a bigger plan that was crafted before the actual privatization offer in May, but also does seem to indicate that re-listings in China could become easier and faster as companies gain more experience at the process.

(NOT FOR REPUBLICATION)

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Bottom line: Domestic private equity is fueling a sudden resurgence in privatizations of US-listed Chinese firms, with a flurry of new deals likely to come after the signings of new buyout offers for Homeinns and Jiayuan.

Homeinns, Jiayuan move closer to US de-listings

Two companies looking to de-list their shares from New York and re-list back in China have taken major steps forward, with hotel operator Homeinns (Nasdaq: HMIN) and online dating site Jiayuan (Nasdaq: DATE) both announcing they have signed formal buyout offers to privatize. In an interesting twist to the privatization story that has seen dozens of US-listed Chinese firms announce similar plans, Homeinns and Jiayuan are both being purchased by China-listed firms as part of their buyout deals.

That means that once the buyouts are consummated, both Homeinns and Jiayuan will immediately become publicly listed in China. Such a development would mark a rapid shortening of the time these companies would need to return to Chinese stock markets from the US. In the past, the small number of similar migrations was typically taking 2 years or more to complete.

We’ll begin with Homeinns, operator of one of China’s largest budget hotel chains, whose market value of $1.7 billion would make it one of the biggest companies to complete a privatization so far this year. But it could quickly be eclipsed soon by security software specialist Qihoo 360 (NYSE: QIHU), which is valued at $8.8 billion and is reportedly close to finalizing a deal that would lead to its own privatization.

Homeinns said it has signed a deal to be purchased by Shanghai-listed hotel operator BTG Hotels Group (Shanghai: 600258). (company announcement; Chinese article) The buyer will pay $35.80 in cash for each of Homeinns’ American Depositary Shares (ADSs), or nearly 10 percent higher than the original buyout price of $32.81 that Homeinns announced when it received an initial buyout offer in June. (previous post)

The move marks one of the first times so far we’ve seen a buyer raise its offer price, and reverses an earlier trend that saw many buyout groups actually lowering their prices after shares of many privatization candidates fell sharply during the summer. One of my sources tells me that China-based private equity investors are now scrambling to get involved in these buyouts, which may explain why we’re seeing this sudden flurry of new deals.

New Dating Giant

Next there’s Jiayuan, whose buyout group is being led by rival dating site Baihe. (company announcement; Chinese article) Under their newly signed deal, the buyer group will pay $7.56 for each Jiayuan ADS, which is also higher than the offer of $7.20 that the company received back in June. (previous post) The June bid itself was already raised from an original offer of $5.37, which investors complained undervalued the company.

Following the deal, Jiayuan will be combined with Baihe to create a clear leader in China’s online dating space. The new company will also be listed on China’s year-old over-the-counter (OTC) board, also known as the New Third Board, following Baihe’s own listing on that board late last month. (Chinese article)

This sudden announcement of 2 concrete buyout offers comes just a week after a bidding war erupted for clinic operator iKang (Nasdaq: KANG) (previous post), and as the reports swirl that Qihoo will soon announce its own signing of a firm buyout offer. Before that, only a handful of the 3 dozen US-listed Chinese companies to disclose privatization bids earlier this year had actually gone on to secure financing and sign firm offers.

This sudden pick-up in activity is being driven by domestic private equity, which believes that China’s stock markets have stabilized after a steep summer sell-off that previously put many of the privatization bids in doubt. That means we could see many of the previously announced bids that had yet to secure financing come back to life, and we could easily see a flurry of new deal signings over the next 2 months.

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Bottom line: The large premium being offered in Trina Solar’s new buyout reflects a recent flood of private equity chasing privatization deals for US-listed Chinese firms, and could breathe new life into many previously announced bids that have become dormant.

The homeward migration by US-listed Chinese firms has taken a turn into the new energy sector, with solar panel maker Trina (NYSE: TSL) becoming the first major player in the space to announce a management-led buyout offer. Throughout the current round of buyouts that has seen some 3 dozen US-listed Chinese companies announce privatization bids this year, few have come in the new energy sector that includes about a half dozen of China’s top solar panel makers listed in New York.

That’s not to say that New York has been a comfortable place for these companies. Most of the big names saw their shares soar in their first few years in New York, only to watch them tumble between 2011 and 2013 as panel prices plunged due to massive oversupply. That downturn saw the departure of 2 of the sector’s biggest names from Wall Street, though the exit of Suntech and LDK was prompted by bankruptcy rather than privatization.

We did get a hint last month that the privatization wave might be spreading to the new energy sector, when wind energy giant Ming Yang (NYSE: MY) announced a buyout bid. (previous post) Trina’s entry to the buyout queue now raises the question of whether we might see a few more panel makers join the migration back to China, a point I’ll revisit towards the end of this post.

First let’s look at the latest buyout offer, which comes from a group led by Trina’s Chairman and CEO Gao Jifan. (company announcement; Chinese article) Under terms of the deal, the group would purchase Trina’s American Depositary Shares (ADSs) for $11.60 apiece, representing a sizable premium of more than 20 percent to their last close before the announcement.

The buyer group also looks relatively solid, with a unit of Industrial Bank Co as one of the main backers. The large premium and presence of Industrial Bank as a backer both reflect the sudden surge of interest in funding these buyouts by domestic private equity. That interest is seeing a flood of money rush into the market looking to back similar deals, which in turn is pushing up the size of premiums being offered.

Rising Offers

Among the latest developments in the buyout wave, 3 out of 4 have seen groups raise their offer prices above previously-announced levels, with Homeinns (Nasdaq: HMIN), Jiayuan (Nasdaq: DATE) and Taomee (NYSE: TAOM) all announcing higher offers. I suspect that many of the offers that have lain dormant since their original announcement in the first half of the year could soon come back to life, most at higher prices, which could provide some good quick profit opportunities for savvy investors.

This latest move of the buyout wave into the new energy space isn’t completely unexpected, though it’s still a slight surprise. That’s because most of these solar companies are standing on shaky financial ground due to lingering oversupply, and it’s quite possible that a few could go bankrupt or get sold for bargain prices in the next year. Such companies wouldn’t make particularly attractive buyout candidates, since their values are hard to determine and they could quite possibly become worthless.

All that said, let’s close with a quick look at who some other buyout candidates might be in the sector. Weaker companies like Yingli (NYSE: YGE) and ReneSola (NYSE: SOL) look unlikely, and so does the far stronger Canadian Solar (Nasdaq: CSIQ) as it prepares a separate New York listing for its solar power plant-building unit. That would leave mid-sized players like Jinko Solar (NYSE: JKS) and JA Solar (Nasdaq: JASO) as the most likely candidates, and I expect we could see 1 or 2 such offers in the last 2 weeks of the year.

(NOT FOR REPUBLICATION)

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Bottom line: Qihoo is likely to complete its $9 billion privatization in the next few months at its original bid price, while Jiayuan’s buyer may have to raise its price again to placate unhappy shareholders.

Qihoo buyout advances, Jiayuan hits resistance

The year of the buyout for US-listed Chinese firms is ending on a loud note, with announcement of a formal privatization offer for security software specialist Qihoo 360 (NYSE: QIHU), the largest of the deals among the 3 dozen announced in 2015. But while Qihoo’s plan moves ahead, another older deal to buy out online dating site Jiayuan (Nasdaq: DATE) is running into trouble due to complaints about its low valuation. In the latest development on that front, a major third-party advisory service has recommended that shareholders reject the offer because it’s too low.

Last but not least, I’ll end this buy-out round-up with some whimsical speculation that Phoenix New Media (NYSE: FENG) may be next to receive a privatization offer. My speculation isn’t based on any insider information, but rather the simple fact that the company’s stock jumped 14 percent on Friday for no apparent reason. The company also looks similar to many of the others that have already received similar offers.

2015 will go down as the year of the reverse IPO for US-listed Chinese companies, which have suffered for the last 2 years due to lack of investor interest in their stories. It’s somewhat ironic that the wave of privatization offers came this year, since 2014 saw a huge wave of new US listings by Chinese firms that raised nearly $30 billion. That wave was capped by Alibaba’s (NYSE: BABA) record $25 billion IPO in September 2014, which now seems like a very distant memory.

We’ll begin with Qihoo, which is by far the most valuable Chinese company to de-list so far with a current market value of $9 billion. While that may seem high, it was as much as 65 percent higher early last year when sentiment was much stronger towards Chinese companies. The fall in its value was probably deserved, since Qihoo’s stock became overinflated on unrealistic hopes for its 2-year-old Haosou search service, which was challenging incumbent Baidu (Nasdaq: BIDU) but has failed to earn much money so far.

According to its final buyout announcement, the management-led buyer group will pay $77 for each of Qihoo’s American Depositary Shares (ADSs). The amount is unchanged from the original proposal Qihoo received back in June, unlike some recent offers for other companies that have risen from original proposed bids. Still, Qihoo’s offer reportedly ran into trouble during the summer due to its huge size, and its ability to complete the process in such a relatively short time should be considered quite an accomplishment.

Investors Resistance

Next there’s Jiayuan, whose privatization process has been even bumpier than Qihoo’s. The company received an original buyout offer earlier this year of $5.37 per ADS, only to see investors complain the figure was too low. The buyout group, now led by rival dating site Baihe, has raised the price twice since then to its current level of $7.56. (previous post) But apparently that’s still not high enough for owners of Jiayuan stock.

The independent Institutional Shareholder Services has just issued its own assessment of the latest bid, and concluded the $7.56 price is too low. (English article) ISS has formally recommended that shareholders reject the current offer, and is citing a figure of $11.74 calculated by Heng Ren Investments, one of the company’s current shareholders, as a more accurate valuation. It’s unclear if ISS’ recommendation could kill the deal, but perhaps we’ll see the buyout group raise its offer one more time to quiet the dissent.

Finally there’s Phoenix New Media, whose stock has been a chronic underperformer despite its relatively good position as a well-known web portal operator. There hasn’t been any news on the company these last few days, which makes the 14 percent jump in its stock on Friday look like it could presage a buyout offer. If such an offer is indeed in the works, its arrival would be a nice Christmas present for shareholders who have been disappointed by the stock over the years.

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Bottom line: iDreamSky’s finalized buyout offer marks the start of a new wave that will see more than a half dozen US-listed Chinese firms sign similar offers by the Lunar New Year, mostly at the same prices from original privatization deals announced last year.

iDreamSky finalizes buyout bid

The New Year is kicking off with a shot of deja vu, as a wave of companies that announced privatization bids in the first half of 2015 are now returning to investors with concrete offers. In the latest chapter of this two-part wave, mobile game operator iDreamSky (Nasdaq: DSKY) has just announced its signing of a formal deal to take the company private.

iDreamSky announced its original intent to privatize last June, at the height of a wave that saw about 3 dozen such de-listing bids proposed last year, mostly in the first half. The wave of announcements skidded to a halt in mid June when China’s stock markets underwent a massive correction after an even larger rally. But with China’s markets showing signs of stability, the de-listing movement has resumed.

According to its new announcement, iDreamSky has signed a formal agreement with a management-led group that has agreed to pay $14 for each of the company’s American Depositary Shares (ADS). (company announcement) That price remains unchanged from the original buyout offer that iDreamSky received in June, and values the company at roughly $600 million.

The decision to keep its buyout price unchanged is somewhat significant, because it reverses an earlier trend that was seeing some companies announce higher prices in their final buyout deals from the original proposals. Two weeks ago software security specialist Qihoo 360 (NYSE: QIHU) also announced a final buyout deal that left the final price unchanged from the original offer. (previous post)

Before that, a few companies like Homeinns (Nasdaq: HMIN) had announced final bids that were raised from original offers, hinting that more such final bids might be raised as Chinese private equity firms jostled to take part in the buyouts. Thus iDreamSky’s decision to maintain its original price could indicate many final offers we’re likely to see in January will also maintain prices from original privatization plans announced last year.

Short Life in New York

iDreamSky has the distinction of being one of Chinese companies with the shortest time as a US-listed company. It made its IPO in August 2014 at the height of a wave of Chinese firms listing in the US, culminating with the record-breaking $25 billion IPO for Alibaba (NYSE: BABA) in September that year. The company ultimately sold its ADSs for $15 in the offering, meaning this final buyout is about 5 percent below the IPO price.

Other recently-listed companies that have also received buyout offers include social networking app operator Momo (Nasdaq: MOMO), and mobile game developer Sungy Mobile (Nasdaq: GOMO). While a few companies have signed final buyout offers and even completed the privatization process, the big majority have remained silent since China’s summer stock market sell-off that seemed to put many of the plans in jeopardy.

We’re entering what’s usually a relatively quiet period of the year for corporate fund-raising by Chinese firms, usually lasting about 2 months between the Christmas and the Chinese New Year holidays. But I expect that this year will be different, and we could see quite a few more final privatization bids signed before China goes on holiday in the second week of February.

In this instance the unusual activity is being driven by a large pool of China-based private equity that is clamoring to help finance these privatization deals. One case last week saw the head of an overeager buyout group get sued and face criminal prosecution, after overselling shares in the ongoing privatization of Shanda Games (Nasdaq: GAME). (previous post) It’s quite possible we could see more buyouts run into similar problems due to big demand for deals, though I would still expect that up to two-thirds of the 3 dozen companies that have announced plans will ultimately de-list from New York.

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Bottom line: A flurry of lawsuits alleging undervaluation in the latest buyout offer for US-listed Chinese firm Synutra could signal growing new resistance to low valuations for many other existing offers.

The law firms that make their money by suing publicly traded companies have found a new reason to sue, taking aim at the dozens of Chinese firms now trying to privatize from New York. This new wrinkle in the wave of privatization bids for US-listed Chinese companies comes after infant formula maker Synutra (Nasdaq: SYUT) became the latest to get an offer from a management-led group to take the company private.

This marks the first time I’ve seen so many lawsuits threatened after a company announced the receipt of a buyout offer, with at least 3 firms saying the offer undervalues the company. Up until now, we’ve only seen minor shareholder resistance to most buyout offers, even though many of the buyers are taking advantage of depressed valuations for the companies being privatized.

This entry by the law firms into the equation means we can probably expect to see a big increase in similar lawsuits when other companies announce new or finalized buyout offers. That’s because these law firms are far more disciplined and systematic than most investors, and will probably automatically now threaten lawsuits whenever anyone receives a new offer.

US-listed Chinese stocks have tumbled since the start of the year, in tandem with a sell-off that has seen the main Shanghai index plunge 18 percent since January 1. Synutra shares got sucked up in the trend, tumbling nearly 20 percent since the start of the year before the company received its buyout offer at the start of this week.

According to the offer, the management-led group will pay $5.91 for each of Synutra’s American Depositary Shares (ADSs), representing a 63 percent premium to the stock’s last closing price before the announcement. (company announcement; Chinese article) That’s one of the larger premiums we’ve seen in the nearly year-old buyout wave. But it’s also worth noting the premium would have been much smaller if the offer had come in December before the ongoing sell-off.

No sooner did Synutra announce its bid, then at least 3 class-action lawsuit specialists announced their own intent to sue for a higher price. (announcements) These kinds of lawsuits are quite common, and these specialist law firms usually take action when a company’s stock price drops suddenly due to release of unexpected bad news.

New Resistance?

Among the 3 dozen companies to launch privatization bids in the current wave, few have encountered this kind of resistance so far. One notable exception was dating site Jiayuan (Nasdaq: DATE), which was one of the earlier companies to get an offer in the privatization wave that began last year.

Several investors complained that the offer was far too low, and the buyout group ultimately raised its offer quite a bit. But even after that, US investors complained the offer was still too low, and in December a major independent advisory company recommended that shareholders reject the deal because it undervalued Jiayuan. (previous post)

It’s not yet clear if the class-action lawsuit specialists will start to take similar actions against other US-listed Chinese companies when they announce new buyout offers, since this is one of the first major cases I’ve seen. But the signal certainly looks ominous for the companies looking to go private, and could force some to sharply raise their bids or simply abandon their de-listing plans altogether.

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AsiaInfo Nears The End With Buyout Vote

AsiaInfo, Simcere Bow Out From New York

Chindex Joins Privatization Queue With Fosun Buyout

Neglected Luye Finds Tonic In HK Listing

Giant, RDA De-List As Deal-Making Slows

INTERNET: Perfect World Privatizes, Renren Next?

FUND RAISING: Focus Media Eyes China Listing, Xueda Gets Buyout Offer

FUND RAISING: Bond Issues Boom at Baidu, Ctrip as Buyouts Pause

BUYOUTS: Jiayuan Committed to Buyout, As Investor Doubts Persist

Measured Response

BUYOUTS: Mindray Buyout Moves Ahead at Lower Price

New Reality

BUYOUTS: Giant Eyes China Backdoor, Qihoo Still Trying

Backdoor Listing for Giant

BUYOUTS: Giant, Ming Yang Get Chilly Reception in China Migration

Shrinking Valuation

BUYOUTS: E-House Lowers Buyout Price, Investors Flee

Downward Revision

BUYOUTS: Momo Goes Mum, Shanda Waves Bye-Bye

Reading Between the Lines

BUYOUTS: iKang’s Poison Pill, CMGE’s China Homecoming

Lighting-Speed Homecoming

BUYOUTS: Homeinns, Jiayuan Quicken Homecoming Pace

New Dating Giant

BUYOUTS: Solar Joins Homeward Trek with Trina Bid

Rising Offers

BUYOUTS: Qihoo Advances, Jiayuan Hits Headwinds, Phoenix Next?

Investors Resistance

BUYOUTS: iDreamSky Buyout Advances, Price Unchanged

Short Life in New York

BUYOUTS: Law Firms Cast Chill On Synutra Buyout Bid

New Resistance?