Bottom line: Sinovac may be forced to raise its buyout offer following a chorus of complaints from investors, while Ku6’s new buyout offer is unlikely to meet with any resistance due to its small size and big premium.

The final days of the Year of the Ram are seeing 2 more US-listed Chinese companies head for the exit door, with new privatization announcements from vaccine maker Sinovac (Nasdaq: SVA) and Internet video company Ku6 (Nasdaq: KUTV). Sinovac’s announcement instantly drew criticism from one US fund manager for being too low, and it’s quite possible we could see some law firms that specialize in securities litigation voice similar criticism.

Meantime, no one is criticizing the Ku6 offer, mostly because this is a company that ceased to be relevant long ago. I’ve followed Ku6 since it first went public as Hurray Holdings in 2005. Back then it raised $70 million in its IPO, and it was acquired 4 years later by online gaming giant Shanda. But all that seems like a distant memory now, and the new privatization bid values the company at just $51.5 million.

These latest 2 deals represent what’s likely to be the tail end of a wave of privatization bids that were the big story for US-listed Chinese companies last year. Most of the 3 dozen bids came from management-led groups. Many were funded by Chinese private equity that was hoping to privatize the companies and quickly re-list them in China at higher valuations to earn some fast profits.

But US-based shareholders are starting to object that many of the bids grossly undervalue the companies, and are calling for shareholders to reject the offers as too low. Earlier this month at least 3 law firms also threatened to file class action lawsuits if infant formula maker Syntra (Nasdaq: SYUT) accepted a management-led buyout offer that they said was far too low. (previous post)

According to the latest new buyout offer, a group led by the Sinovac’s chairman has offered to pay $6.18 for each of the company’s American Depositary Shares (ADSs), representing a 23 percent premium to their previous close. (company announcement) No sooner did the company announce the proposal, then minority shareholder Hengren Investments objected the price was too low. (English article)

Hengren has become a leader in objecting to the low prices of many of these offers, and successfully got an earlier bidder to sharply raise its price for online dating site Jiayuan (Nasdaq: DATE). I expect we’ll probably see a few securities law firms add their voice of objection in this latest offer for Sinovac, as US investors try to squeeze more money out of the groups privatizing many of these Chinese companies.

Big Premium

Meantime, I doubt anyone will object to the $1.08 per ADS being offered for Ku6, which represents a whopping 55 percent premium to the company’s last closing price before the announcement. (company announcement; Chinese article) That’s because there’s not much of a business left these days at Ku6, which posted a meager $11 million in revenue and a $2 million loss for all of last year.

The company began life as a provider of services related to SMS text messaging, which was a hot area a decade ago and helped lift other companies like Sina (Nasdaq: SINA) and Sohu (Nasdaq: SOHU) to some of their first-ever profits. But when that business began to fade, Ku6 tried to transform itself into an online video company without much success.

It found a white knight when it sold a majority stake in itself to Shanda, another former online entertainment high-flyer that later fizzled and was recently sold off by its founder Chen Tianqiao. Shanda dumped its Ku6 stake in 2014 (previous post), and the company has continued its fall into irrelevance since then. Accordingly, this privatization will probably be welcome by everyone, allowing the buyer to quietly sell Ku6’s few remaining assets to a rival for a small profit.

Related posts:

• BUYOUTS: Law Firms Cast Chill On Synutra Buyout Bid
• Shanda Overhaul Continues With Ku6 Media Sale
• BUYOUTS: Perfect World Re-Lists in China As Outlook Darkens
• Today’s top stories

The post BUYOUTS: Sinovac, Ku6 Join Privatization Queue appeared first on Business China : news for investors in China.

Bottom line: Canadian Solar’s Recurrent Energy unit is likely to make its first public filing for a New York IPO in the next 2 weeks and should get a positive reception, while Jumei is likely to quietly de-list from the US in the next 3-4 months.

One of the few Chinese IPOs likely to happen in New York this year is moving closer to the launch gate, with word of major new financing for the power plant-building unit of solar panel maker Canadian Solar (Nasdaq: CSIQ). But while that IPO for Recurrent Energy moves closer to the IPO gate, announcement of a new privatization bid for online cosmetics seller Jumei International (NYSE: JMEI) is far more typical for the market these days.

This pair of stories reflect a growing new reality for US-listed Chinese companies. That reality is seeing some of China’s leading private companies choose New York for their listings, banking on interest from global investors seeking to buy into the China growth story. At the same time, many smaller lesser-known Chinese companies listed in New York have discovered US investors are far less interested in their stories, and are privatizing with plans to re-list and hopefully get higher valuations back in China.

Canadian Solar and Jumei quite nicely summarize this divergence. Canadian Solar is emerging as China’s best-run and most innovative solar panel maker, and has attracted strong investor interest as a result. It continued its industry-leading posture last year with its purchase of Recurrent Energy, reflecting a growing trend that is seeing solar panel makers move into power plant construction to boost demand for their products.

Late last year Canadian Solar disclosed it had submitted its first confidential filing for a New York IPO by Recurrent Energy, in an effort to separate that part of its business from its core panel-making. (previous post) Following that disclosure, the company has  announced a steady stream of new plant-building loans to show that Recurrent can secure the funding it needs to build new plants that typically cost $50 million or more.

Previous loans have been for relatively small amounts in the $30-$100 million range from big global names like RBS and Deutsche Bank, and now the company has just announced a $300 million loan from China’s own Ping An Bank. (company announcement) This particular announcement is significant for its size, and also for its source. Ping An is one of China’s more entrepreneurial major banks, and this announcement reflects a relatively big vote of confidence in Recurrent and also hints at a new plant building campaign in China.

Public Filing Coming

We have yet to see any public filings by Recurrent Energy since Canadian Solar disclosed the IPO plan in early December. But I suspect this new financing is aimed at creating more buzz around Recurrent, which is mentioned by name in the announcement. That indicates we could see the unit make its first public filing for a New York IPO to raise $100-$200 million in the next week or two.

Next there’s the Jumei story, which nicely summarizes the disappointment that many Chinese companies have felt on Wall Street after holding out big hopes for US listings. The company made its IPO nearly 2 years ago during a frenzy of new offerings, pricing its American Depositary Shares (ADSs) at $22. But after seeing an initial surge, the stock has moved steadily downward as investors lost interest, and now it trades at just $6.21.

The shares were trading even lower at $5.11 just last week, but rallied after Jumei announced a management led buyout plan to take the company private at $7 per ADS. (company announcement; Chinese article) There’s not much more to say about this deal, except that Jumei management is getting a good deal by buying its shares for one-third of their original IPO price. I expect this deal will probably close with little or no opposition, and the company will quietly bow from the US and attempt to quickly re-list on one of China’s growing number of boards for private high-growth companies.

Related posts:

• IPOs: Postal Bank Heats Up in HK, Canadian Solar Hypes Spinco in NY
• BUYOUTS: eLong, Ming Yang Near NY Exit Door
• NEW ENERGY: Canadian Solar Eyes IPO for Plant-Building Unit
• Today’s top stories

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Bottom line: A new rival bid for Dangdang and the long closing period for Jiayuan’s privatization reflect growing shareholder resistance to low prices being offered for Chinese companies trying to de-list from New York.

A couple of new headlines reflect the growing chorus of complaints about low bid prices being made for Chinese companies privatizing from New York, led by a surprise new rival offer for former e-commerce leader Dangdang (NYSE: DANG). In the other headline, online dating site Jiayuan (Nasdaq: DATE) is finally moving closer to the New York exit door, after a year-long process that saw the company’s original buyout offer meet with stiff resistance from shareholders unhappy about the price.

The volume of protest noise against some of the most recent offers has certainly been growing, as company shareholders try to get more money for their stock in the wave of buyout offers. The most recent twist saw shareholders cry foul over a management-led buyout bid for online cosmetics seller Jumei (NYSE: JMEI) last month. (previous post) A slightly different but related development saw the founder of medical clinic operator iKang (Nasdaq: KANG) cry foul after his own bid for his company got trumped by a higher offer from an independent bidder. (previous post)

Now the iKang case is getting repeated with Dangdang, which has just received a new rival offer from iMeigu Capital Management. (company announcement; Chinese article) It’s revealing that the announcement is coming from iMeigu and not Dangdang, which should really be announcing this development. That probably reflects the surprise being felt by Dangdang’s outspoken co-founder Li Guoqing, who isn’t happy at the prospect of his own bid for the company getting trumped by an outsider like iMeigu.

According to the latest announcement, iMeigu is offering to buy all of Dangdang’s American Depositary Shares (ADSs) for $8.80 apiece, which is about 13 percent above the earlier management group’s offer of $7.81 per ADS announced last July. iMeigu adds that it is “open minded and flexible” about Dangdang’s future operation and ownership, hinting at the resistance it knows it will receive from Li Guoqing and his wife, Peggy Yu, who now run the company.

iMeiguo’s bid will definitely face an uphill climb, since Dangdang’s latest annual report says Li and Yu collectively own about 35 percent of the company’s shares, representing 83 percent of the voting power of its outstanding common stock. Against that backdrop it’s difficult to imagine iMeigu’s bid succeeding. But the threat of shareholder lawsuits is also quite real if Dangdang accepts Li’s original lower offer, meaning the management team will probably have to raise its bid if it wants to succeed.

Jiayuan Signs Agreement

Next there’s Jiayuan, whose original buyout offer was announced about a year ago at the start of a wave of similar bids for undervalued New York-listed Chinese firms in the first half of 2015. That original bid met with resistance from shareholders who said it grossly undervalued the company, and the buyout group eventually raised its bid significantly in response. Even then, a major independent advisory group recommended against rejecting the deal, though shareholders ultimately approved the buyout in December.

Now Jiayuan is saying that it has signed a formal buyout agreement that will pave the way for its privatization and de-listing. (company announcement; Chinese article) The only other noteworthy thing in the announcement is a target completion date of April 30. If it meets that date, Jiayuan will have needed just over a year to complete its privatization, a relatively long period, mostly due to the pricing controversy.

I’ve previously dismissed shareholder complaints about low offer prices as somewhat unreasonable, saying the market should dictate what happens in this kind of situation. But that said, I’m also happy to see this growing trend for rival bids, which is also a market-driven factor, and reflects the fact that many of the management-led groups really are trying to acquire their companies for extremely low prices.

Related posts:

• BUYOUTS: Qihoo Advances, Jiayuan Hits Headwinds, Phoenix Next?
• BUYOUTS: iKang’s Poison Pill, CMGE’s China Homecoming
• IPOs: Wine Seller Jiuxian, Dangdang Write Off New York
• Today’s top stories

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Bottom line: Beijing should launch an aggressive campaign to privatize state-owned enterprises, which could cause some short-term pain but will ultimately put the economy on a more stable long-term footing.

The latest profit reports for big state-owned enterprises (SOEs) are coming in for the first 2 months of the year, and the picture isn’t pretty and even looks quite worrisome for China’s thousands of state-owned enterprises (SOEs). New data published late last week showed profits for SOEs tumbled 14.2 percent in January and February combined, as they continued to be plagued by problems like overcapacity and weak demand due to China’s slowing economy.

But one of the biggest problems facing these companies, and one that threatens their long-term survival, is their failure to act commercially, a legacy of China’s planned economy that saw big SOEs historically function as tools for executing government policy. Such a tendency is what, for example, drives steel makers to continue producing at full throttle even when every ton of product they sell adds to losses due to the sector’s huge overcapacity.
This kind of behavior is driven partly by the implicit understanding that such losses are acceptable, and that the local or central government will step in to rescue these SOEs if they become insolvent. Such a pattern could lead to a financial nightmare if allowed to continue, since the government would be ill-equipped to handle mass insolvencies that could soon occur if profits continue to erode as China’s economy enters a “new normal” of slower growth.

To prevent that from happening and set the economy on a more stable long-term footing, the government should consider the bold step of launching a major privatization campaign that would ultimately affect all SOEs, from the biggest giants like PetroChina down to the smallest local manufacturers.

According to the new data released by the Ministry of Finance, SOEs posted profits of 222.6 billion yuan ($34.2 billion) in the first 2 months of the year. (English article) That figure was down 14.2 percent, or more than double the 6.7 percent decline a year earlier. The picture was even grimmer for SOEs administered by local governments, which saw their profits tumble 41 percent in January and February.

At the same time, SOEs saw their total revenue fall at a much smaller rate of 5.8 percent to 6.2 trillion yuan in the first 2 months of the year. That indicates that companies continued to maintain production at close to year-ago levels despite weak demand, resulting in the much larger rate of profit erosion. As a result, total debt of SOEs swelled by 18 percent in the first 2 months of the year.

Individual Laggards

The worrisome situation is reflected on an individual basis in the many recently released annual earnings reports from most major SOEs over the last few weeks. Leading oil company PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) was typical, reporting its net income fell 82 percent in last year’s fourth quarter to a record low for the company. Similarly, Baoshan Iron and Steel (Shanghai: 600019), China’s second largest steel maker, warned in January that its 2015 net income plunged 84 percent as rapidly slowing demand and overcapacity caused prices to tumble.

While many of the largest SOEs are publicly listed, government entities remain their largest shareholders in nearly all cases. That means that while these companies may try to boost profits to satisfy investors who buy their publicly traded shares, the government is still their ultimate boss that they need to please. Such a reality leads to situations where, for example, a company like Baosteel may maintain output even if that means selling at a loss, since trimming production might cause its hometown of Shanghai to miss its economic growth targets.

Privatization of these companies would rectify that situation, since the companies would no longer feel compelled to give top priority to satisfying local government officials, freeing them to focus on maximizing profits. Such a shift would also remove the implicit promise of government rescues if SOEs ran into financial difficulties, further boosting companies’ incentives to behave commercially.

Resistance to such a move could be large, especially from government stakeholders who would be reluctant to surrender their direct control over these companies. But experience in more mature western markets shows that Beijing and local governments can still continue to exert influence, albeit more indirectly, though policies like tax incentives and regulation.

Such a privatization campaign would by no means be easy, and might cause some short-term pain in the form of layoffs, slowing investment and even some closures. But that would be far better than the prolonged downturn and huge long-term risk that maintaining the old SOE system would pose.

(NOT FOR REPUBLICATION)

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Bottom line: Qihoo’s privatization is likely to succeed after shareholder approval of its buyout offer, though many similar pending deals could collapse and might consider strategic stake sales like the new one by LightInTheBox.

The volume of noise coming from Chinese companies privatizing from New York has dropped sharply in the last month, reflecting volatility in their home market where many hope to one day re-list. But 2 major new stories from that wave are back in the headlines, led by shareholder approval for what would be the biggest privatization so far for security software specialist Qihoo 360 (NYSE: QIHU).

At the same time, the much smaller e-commerce firm LightInTheBox (NYSE: LITB) has just closed another deal that looks less radical than an outright privatization and could provide an alternative template for companies seeking to attract more investor attention. That deal has the company selling 30 percent of itself to Hong Kong-listed Zall Development (HKEx: 2098), which paid a large premium for the stake.

The privatization wave of US-listed Chinese companies has moved in fits and starts over the last year, cruising ahead when China’s stock markets rally and then suddenly losing momentum when those same markets correct. Right now Chinese stock markets seem to be in a holding pattern, which perhaps is why the privatization wave is also on hold while private equity backing most of the buyout bids waits to see how the markets will move.

But one company that seems unconcerned about the volatility is Qihoo, whose strong-willed founder Zhou Hongyi made up his mind a while ago that New York investors didn’t understand his company. Or perhaps it would be more accurate to say that New York understood his company too well, and was growing impatient with Qihoo’s inability to monetize its fast-growing online search business. By comparison, Chinese investors are far less concerned with such fundamental issues as profits, and are more easily swayed by the kind of hype that Zhou is so good at dispensing.

Qihoo announced its management-led buyout last year, and its shareholders have just approved the offer by an overwhelming majority of 99.8 percent of people who voted on the $9 billion deal. (company announcement; Chinese article) Under the deal Qihoo shareholders will get $77 for each of their American Depositary Shares (ADSs). The company’s ADSs rose slightly to $75.70 after the vote, indicating investors are fairly certain the deal will close. I would agree with that assessment, and would add that anyone looking to make some quick cash could do so by purchasing shares at their current price.

Shareholders Unimpressed

Next there’s LightInTheBox, which differs from other Chinese e-commerce companies in targeting foreign online shoppers for Chinese goods. Like many of its Chinese peers, LightInTheBox has failed to find much of an audience among US stock buyers.

The company announced its deal to sell 30 percent of itself to Zall Development earlier this month for $3.60 per ADS, and has just announced that the deal has formally closed. (company announcement; Chinese article) Zall’s price represented a premium of about 50 percent to LightInTheBox’s share price when the deal was first announced, quite a bit higher than the premiums offered for many of the  outright buyouts offers.

But shareholders weren’t too impressed by the premium, and LightInTheBox’s ADSs rallied slightly after the announcement but have largely returned to previous levels since then. From a strategic standpoint, this particular deal looks promising for LightInTheBox, as it gives the company new cash and also an important partner with strong experience in the traditional and online retail sectors.

LightInTheBox was briefly popular after its New York IPO in 2013, but has struggled since then and has been losing money in recent quarters. This particular investment looks like a potential alternative to the privatization that many Chinese companies are trying, as it involves the sale of a major stake to a strategic partner rather than an outright buyout that is far more costly and complex. Other companies now looking to de-list might consider a similar alternative if China’s stock markets fail to stabilize, though it’s unclear if similar longer-term strategic buyers would be interested in many of those firms.

The post BUYOUTS: Qihoo Nears Exit Door, LightInTheBox Gets New Partner appeared first on Business China : news for investors in China.

Bottom line: A flurry of new de-listing activity shows that well-funded privatizations will continue despite market volatility in China, and could also spread to undervalued private companies listed in Hong Kong.

The headlines are brimming with new moves in the buyout wave that has swept over off-shore listed Chinese stocks, which are privatizing in droves due to disappointing valuations. Leading the news are 2 former high-flyers, online video site Youku Tudou (NYSE: YOKU), which has formally completed its buyout by e-commerce giant Alibaba (NYSE: BABA); and property giant Wanda Commercial Properties (HKEx: 3699), which has announced it is exploring a potential buyout less than 2 years after its Hong Kong IPO.

That pair are joined by 2 smaller stories involving ongoing privatizations by budget hotel operator Homeinns (Nasdaq: HMIN) and the shriveling Ku6 Media (Nasdaq: KUTV). Media are saying that Homeinns has already lined up a Chinese listing vehicle to resume its life as a publicly traded company after it de-lists from New York. And Ku6 has announced it has formally signed a buyout agreement that will result in its own de-listing.

Among these 4 stories, the most interesting is Wanda Commercial’s, as it’s one of the first buyout offers I’ve seen outside New York, coming for a Hong Kong-listed company. It also falls squarely outside the high-tech realm that is home to many privatizing companies, and hints that the de-listing wave could soon spread to more traditional sector private Chinese companies that are mostly listed in Hong Kong.

Wanda Properties listed in Hong Kong just 15 months ago, selling shares for HK$48 apiece. The stock posted huge gains in its first few months in tandem with China’s soaring stock markets, but later tanked and was trading about 25 percent below its IPO price when it announced a plan to potentially privatize.

Under that plan, Wanda says its controlling shareholder would pay at least HK$48 for each of the company’s publicly listed shares in Hong Kong. (company announcement; Chinese article) The company’s shares have rallied since the announcement to just over HK$45, meaning investors are fairly confident that Wanda Group’s billionaire founder Wang Jianlin has the resources and determination to privatize his company.

Youku Shares Suspended

Next there’s Youku Tudou, whose de-listing hasn’t ever really been in doubt since the cash-rich Alibaba announced a plan to buy the company last year. Youku Tudou shareholders approved the deal last month, and now the company has announced the buyout has been formally completed. (company announcement) As a result, Youku Tudou has requested a suspension of its New York-listed shares, and a de-listing should probably be complete in the next few weeks.

Then there’s Homeinns, which announced its privatization plan last year and now looks set to post a record for the shortest interval between its New York de-listing and a re-listing in its home China market. Media are reporting the budget hotel operator has selected an existing China-listed hotel company, BTG Hotels (Shanghai: 600258) as its new listing vehicle. (Chinese article)

This deal actually looks more like a merger than an actual backdoor listing, since BTG will still hold 65 percent of Homeinns after the latter injects its assets. The report in China Business Network says Homeinns’ current management will remain at the new company, though it does look like there will be some big adjustments as the 2 companies are merged. In this instance Homeinns looks like the larger company with a market value of about $1.7 billion, while BTG is about half that size at about 5 billion yuan ($800 million).

Last there’s Ku6 Media, whose story really only deserves a quick mention due to its small size. The company said it has entered a final deal that will see its shares purchased for $1.08 apiece, in a deal that seems almost certain to close due to its small size valued at around $50 million. (company announcement; Chinese article) That will bring an end to a public listing that dates back more than a decade, in a move that is somewhat sad but also should have come much earlier for this directionless company.

(NOT FOR REPUBLICATION)

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Bottom line: Autohome and E-House are both likely to complete their privatizations from New York, continuing the migration of US-listed Chinese firms returning home to seek higher valuations on China’s stock markets.

The drive back home for New York-listed Chinese companies continues as we head into the new week, with online car site Autohome (NYSE: ATHM) becoming the latest to announce a privatization plan. In a slightly unusual twist to that story, Autohome shares actually rose above the offer price before the buyout deal was announced, suggesting investors were hoping for a bigger premium than the one offered. But they quickly fell back to the offer price in after-hours trading.

At the same time, online real estate company E-House (NYSE: EJ) announced it has signed a definitive deal to privatize, nearly a year after it first announced its plan to de-list from New York. E-House’s plan has gone down a windy road since it was first announced last June at the height of a rally that saw China’s stock markets more than double in a year. Since then Chinese markets have tanked twice, and are now about 40 percent lower than where they were when E-House first announced its offer.

Let’s begin with Autohome, which was a superstar after it listed its shares in late 2013 at $17 apiece, right at the start of a flood of New York IPOs for Chinese firms. The shares tripled from their IPO price at the height of China’s stock market boom last year, but then fell to as low as $24 when Chinese stock markets crashed at the start of this year.

Authome apparently felt its shares were unappreciated by New York investors, and has announced it will pay $31.50 per American Depositary Share (ADS) in its bid to privatize. (company announcement; English article; Chinese article) The buyout consortium includes some big-name private equity companies, such as Sequoia Capital and Boyu, meaning its quite likely that this particular deal should succeed.

In a slight twist to this story, one of Autohome’s largest previous shareholders, Australian telephone company Telstra (Sydney: TLS), has also just agreed to sell its 48 percent stake in the company to Chinese insurer Ping An (HKEx: 2318; Shanghai: 601318) for $29.55 per ADS, or about $1.4 billion. Thus Telstra is selling its stake for about 6 percent less than the buyout price.

Telstra’s sale to Ping An is probably an important part of the broader buyout package, since it means the buyout group will now only have find financing to pay for the 52 percent of Autohome’s remaining shares not held by Ping An. As I’ve said above, I do expect this deal could close relatively quickly due to its solid financing, and perhaps we’ll see Autohome look to re-list in China sometime next year.

Compromise Offer From E-House

Next there’s E-House, which announced it has signed a formal deal to take the company private valued at $6.85 per ADS. (company announcement) The buyout group had originally offered $7.38 per ADS when it first announced its bid last June, and then lowered that to $6.64 in November after China’s stock markets crashed the first time. In between that period, it also signed on leading web portal Sina (Nasdaq: SINA) as a member of the buyout group.

So it looks like this final buyout offer represents a compromise between the original offer last June and the later lowered one in November. E-House may have raised its bid to the final level to satisfy some minority US-based shareholders, who have increasingly complained that buyout groups are offering prices that significantly undervalue the Chinese companies.

E-House ADSs jumped 4.3 percent to $6.55 after the final deal was announced, meaning they’re still about 4 percent below the buyout price. E-House said members of its buyout group collectively hold about 45 percent of the company, and thus shareholders are almost certain to pass the deal in an upcoming vote. The main risk could be more volatility in Chinese markets that could affect the financing, though in this case the chances look quite strong the deal will close.

Related posts:

• BUYOUTS: E-House Lowers Buyout Price, Investors Flee
• BUYOUTS: Vimicro, CNIT, AirMedia Line Up; Sina Joins E-House Bid
• IPOs: Buyouts Roll On With New Bids For Jiayuan, E-House
• Today’s top stories

The post BUYOUTS: Autohome, E-House Drive Back to China appeared first on Business China : news for investors in China.

Bottom line: 21Vianet’s new convertible bond indicates it may be abandoning its previous plan to privatize from New York, and could help to boost its shares by bringing in more investors from China.

Nearly a year after announcing a plan to privatize from New York, data center operator 21Vianet (Nasdaq: VNET) has just issued an unusual plan that could see it sell a major stake of itself to a group of Chinese buyers through a convertible bond issue. The plan comes as quite a surprise, since one wouldn’t expect this kind of move from a company that was expecting to imminently privatize.

Accordingly, we could interpret this move as hinting that 21Vianet is quietly abandoning its de-listing plan in favor of an approach that could appeal to many other US-listed Chinese companies whose own privatizations have also stalled over the last year. Such an approach would see these companies bring in major new Chinese investors through this kind of convertible bond issue, which could ultimately help those companies to achieve their target of raising their valuations.

I’ll explain the logic to my argument shortly, but first let’s recap what has happened over the last year that has led to this latest move by 21Vianet, China’s largest private operator of data centers. 21Vianet listed its shares in 2011 and saw them double at one point amid a wave of bullishness towards China stocks. But since then investors have lost interest in the group, and the stock has given back most of the gains and now trades around 20 percent above its IPO price.

21Vianet’s story is quite common among lesser-known US-traded China stocks, leading around 40 to complain they were undervalued and launch privatization bids last year. Most hoped to ultimately re-list in China, where they believed they would get higher valuations due to better familiarity among local investors with their names and business models.

But while many of the bigger names like Qihoo 360 (NYSE: QIHU) and Homeinns (Nasdaq: HMIN) look set to complete their buyouts, smaller ones like 21Vianet are running into problems due to the complexity of such deals. Accordingly, some of these smaller names may be looking for alternatives that would boost their share prices by tapping demand for their stocks from a recent flood of China-based private equity looking for investments.

This kind of scenario appears to be the case for 21Vianet, which says it has agreed to issue 1.75 billion yuan ($270 million) in convertible bonds to a group of Chinese investors from a wide range of places, including Shanghai, Beijing, Ningbo and Shenzhen. (company announcement; Chinese article) The bonds mature in 5 years, but are convertible to 21Vianet shares at various times during that period at premiums of 15-25 percent to the company’s share price around the time of the conversion date.

Unusual Arrangement

Such an arrangement seems a bit unusual, since the conversion price for such bonds is usually set when the bonds are first issued. In this case it appears the investors are willing to pay premiums over the stock price at the time of the conversion date, which looks like a smart way for 21Vianet to try and boost its share price. 21Vianet can probably get such favorable terms because there’s currently a huge amount of private equity in China looking for deals, creating a shortage of good investment opportunities.

In terms of actual numbers, this particular deal looks like it would give the Chinese investors about 10-15 percent of 21Vianet’s stock if they choose to exercise their conversion rights. Bringing in such investors could help not only 21Vianet, but also some of the other US-listed Chinese companies that are experiencing difficulties with their own privatization plans.

That’s because these investors are willing to value the Chinese companies more highly than US stock buyers, and thus create a more vibrant market for the shares. The big risk factor in this formula is that everything could change if China’s nascent financial crisis accelerates. That seems quite possible as China’s economy slows, and would quickly force many of these Chinese investors to sell down their US shares and bring their money back home.

Related posts:

• BUYOUTS: Autohome, E-House Drive Back to China
• BUYOUTS: Focus Media Raises Cash at Rich Value in China Homecoming
• BUYOUTS: Youku Bids Adieu to NY, Wanda Properties Eyes HK Exit
• Today’s top stories

(NOT FOR REPUBLICATION)

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Bottom line: Zhaopin’s slight raising of its privatization price could reflect minority investor complaints about undervaluation, while Autohome’s buyout price could rise up to 20 percent in a game of strategic maneuvering with Ping An.

Minority investors have long complained that a wave of privatization bids for US-listed Chinese companies are grossly undervalued, and now the companies may finally be responding to those grievances. That’s my assessment based on the latest reports that say online recruitment site Zhaopin (Nasdaq: ZPIN) has quietly raised the bid price for its privatization plan, as valuation questions also threaten to derail a similar plan by online car site Autohome (NYSE: ATHM).

Minority investor complaints about undervaluation center on the fact that top managers often control a majority of their companies’ shares through direct and indirect relationships. That means they can choose whatever bid price they want and be assured of its acceptance at shareholder votes. But threats of lawsuits and rival bids, and also perhaps worries about being seen as greedy and unethical are forcing some of the management-led buyout groups to rethink their prices and offer more.

That could be the case in the latest news that Zhaopin has raised the bid price for its buyout plan to $17.75 per American Depositary Share (ADS), versus $17.50 when the company first announced its privatization plan in January. (company announcement; Chinese article) There’s no explanation given for the increase, which is a relatively modest 1.4 percent over the earlier price.

Zhaopin shares surged 7.6 percent after the announcement of the latest proposal, though at their latest close of $16.05 they are still about 10 percent below the actual offer price. One media report is attributing the big stock price jump to the addition of venture capital giant Sequoia Capital to the buying group, which is boosting confidence that the deal will get completed. (English article)

Frankly speaking, the deal shouldn’t be that difficult in monetary terms because it will only value Zhaopin at around $1 billion. Instead, one could postulate that investors might be excited by the slight rise in the buyout price and be hoping another suitor could emerge to start a bidding war. A similar war has already broken out for iKang (Nasdaq: KANG), after a rival suitor trumped an earlier management-led privatization offer for the clinic operator. (previous post)

Buyout Brinkmanship

Next let’s turn our attention to the intriguing story of Autohome, which launched a privatization bid last month at $31.50 per ADS. (previous post) On the same day of that announcement, Autralian telco Telstra (Sydney: TLS) announced it was selling its sizable 48 percent of the company to financial services giant Ping An for $29.55 per ADS, representing a 6 percent discount to the buyout offer.

When the deal was announced I said the Telstra sale looked like part of the broader buyout package, assuming that Ping An had agreed to support the deal in advance that would give it an instant 6 percent premium to its own purchase price. But it soon became clear the 2 moves weren’t coordinated, and now a former Autohome executive is accusing Ping An of trying to derail the privatization bid. (Chinese article)

Former Autohome vice president Ma Gang vented his frustrations in a post on his microblog titled “Autohome’s Elegy: A Dream Sapped by Capital Game Playing”. Based on the content of the post, it appears that Autohome managers were crafting their buyout deal when Telstra suddenly announced the plan to sell its stake to Ping An. Autohome managers then rushed to publish their own buyout plan the same day, possibly raising it above what they had original envisioned to beat Ping An’s price.

Autohome’s shares now trade at about $28, or 10 percent less than the buyout price, which isn’t too far from the offer. But Ma Gang’s microblog post indicates that perhaps Ping An might try to force Autohome to raise the buyout price or threaten to vote against it. That means investors who enjoy risk might be able to profit by buying Autohome shares at their current levels, which could rise more than 10 percent if a game of pricing brinkmanship breaks out between the company and Ping An.

Related posts:

• BUYOUTS: 21Vianet Tries Bonds as Privatization Stalls
• BUYOUTS: Autohome, E-House Drive Back to China
• BUYOUTS: Youku Bids Adieu to NY, Wanda Properties Eyes HK Exit
• Today’s top stories

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Bottom line: Many privatization bids by Chinese firms hoping to re-list in China could collapse if the CSRC cracks down on backdoor listings, though de-listing plans backed by big private equity names could still succeed.

Rumors that they might get a chilly reception from China’s securities regulator has sparked a major sell-off for shares of US-traded companies trying to privatize and re-list at home in search of higher valuations. The dive is one of the largest I’ve seen for any single group in quite a while, and could present a great buying opportunity for anyone who believes these companies can still successfully privatize and re-list in China.

But in this case I might be more inclined to agree with the pessimists, since China’s securities regulator is quite conservative, even though I’ve said it should continue to allow these re-listings. (previous post) In this case the China Securities Regulatory Commission (CSRC) may also be acting under direct orders from Beijing, which is already worried about another major sell-off on domestic stock exchanges like one early this year.

Before we look more closely at what’s happening behind the scenes, let’s first review the dramatic carnage on Monday that wiped out billions of dollars in shareholder value for many of these US-listed Chinese companies now in the process of privatizing. Two cases drawing the most attention are security software specialist Qihoo 360 (NYSE: QIHU) and social networking app Momo (Nasdaq: MOMO), whose shares fell 11 percent and 16 percent, respectively. (English article)

Another big victim was e-commerce company Dangdang (NYSE: DANG), whose shares fell 13 percent. But the most dramatic case was data center operator 21Vianet (Nasdaq: VNET), whose shares lost nearly a quarter of their value in the latest session. At their current levels, Qihoo and Momo now trade 16 percent and 35 percent below their buyout prices, respectively, representing an attractive buying opportunity for anyone who thinks the deals will get completed.

But skepticism is rapidly growing that many of these deals may ultimately collapse, following the rumors late last week that the CSRC was considering slowing or even halting the preferred re-listing route for many returning companies. That route was seeing many such privatizing companies aiming to make backdoor listings in Shanghai and Shenzhen through reverse mergers using publicly-traded shell companies.

Several companies are near completion of such deals, including Focus Media and Giant Interactive, and are being rewarded with sharply higher valuations than what they had on Wall Street. These returning companies probably would have preferred to make traditional IPOs in China, but were deterred by a huge backlog of other companies waiting to list.

Powerful Position

The CSRC is in quite a powerful position here, since it has to approve many of the steps involved in the backdoor listing process. After the initial rumors emerged that it might shut down the process completely, an official said the regulator was simply studying the phenomenon to figure out its implications for the market.

The reality is that even if all these companies were to re-list at home, most are relatively small and their combined market value would probably be less than $30 billion, a relatively small amount for markets of China’s size. But the regulator also needs to worry about the perception of fairness, since many other companies have been waiting for years to list and would probably complain if the CSRC let others jump the queue through backdoor offerings.

In order to figure out what might happen next, you probably need to look at the backers of each privatization bid and figure out their motivations. Private equity backers looking to make some fast profits through backdoor listings at higher valuations are likely to get cold feet and abandon their plans. But others bids backed by global private equity firms that are willing to wait for several years to recoup their investment might still have a stronger chance of completion.

Related posts:

• BUYOUTS: Rival Bid Worries Heat Up Zhaopin, Autohome Deals
• BUYOUTS: 21Vianet Tries Bonds as Privatization Stalls
• BUYOUTS: Autohome, E-House Drive Back to China
• Today’s top stories

(NOT FOR REPUBLICATION)

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Bottom line: Privatization plans by Autohome and iKang will face long delays due to shareholder resistance and rival bids, while Wanda Commercial’s similar buyout will proceed soon after some technical issues are resolved.

Three of the larger privatization bids by offshore-listed Chinese firms are running into snags, hinting at a growing wave of resistance to such offers considered by many as too low and opportunistic. Two of the most colorful tales involve online car site Autohome (NYSE: ATHM) and private clinic operator iKang (Nasdaq: KANG), whose management-led buyout deals both hit snags due to unexpected third-party developments. In the latest twist to those stories, Autohome is now taking legal action to prevent a separate share sale that could kill its own management-led buyout bid; while iKang is playing legal games with a rival bidder that trumped an original management-led buyout plan.

Meantime, the largest of this particular trio of buyout bids for real estate giant Wanda Property (HKEx: 3699) has hit its own new snag, with Hong Kong’s securities regulator holding up announcement of a formal offer as it requests additional information on the deal.

The broader theme behind all 3 stories is that privatization is a difficult process because it involves big capital raising and also an attempt to value a company at levels that are acceptable to minority shareholders. Snags in the Autohome and iKang cases are at least partly due to the belief by certain shareholders and rival buyers that the original management-led buyout offers were undervalued.

Let’s begin with Autohome, which last month announced a buyout deal on the same day that its biggest single shareholder, Australia’s Telstra (Sydney: TLS), announced a deal to sell its 48 percent of the company to Chinese financial services giant Ping An. (previous post) While the 2 moves initially looked coordinated, it later became clear that Telstra was unhappy about the management-led buyout plan and decided to independently sell its stake to Ping An over the buyout group’s objections.

Now media are reporting that the original management-led buyout team has taken action in a Cayman Islands court to try and halt Telstra’s planned stake sale to Ping An for $2.1 billion. (English article; Chinese article) The reports say the buyout group has also filed a complaint with the US securities regulator, and apparently both objections are related to the way in which Telstra may have manipulated Autohome’s board to get its deal approved.

Bidding War for iKang

Next there’s iKang, which is also a twisted tale that started with the usual management-led buyout offer last August. But then in November, a rival group that included iKang’s chief rival, known both as Health 100 (Shenzhen: 002044) and Meinian, made a surprise higher offer for the company. That prompted iKang’s founder to say he would never sell his stake to the second buyer group, and then iKang launched a poison pill shareholder rights plan to prevent a hostile takeover. (previous post)

Now iKang has held a press conference this week accusing Meinian of copyright infringement related to some of its health management software. (Chinese article) Meinian has responded with its own statement saying the allegations are groundless and designed to create negative publicity to derail its hostile takeover bid. This story is obviously still far from finished, and I do expect that the original buyout group will either have to raise its price to beat the Meinian bid or ultimately concede defeat.

Finally there’s the Wanda Commercial buyout deal, which hasn’t even been formally announced even though chief Wang Jianlin as talked about it extensively. In this case requests for more information from Hong Kong’s securities regulator are apparently related to the deal’s unusual nature, involving the way in which Wanda Commercial would be privatized. (English article)

Of the 3 deals discussed in this post, this particular setback involving Wanda is probably the least controversial because the delays appear to be mostly technical. But the reports do note that some original cornerstone investors from Wanda Commercial’s original 2014 Hong Kong IPO believe they are being treated unfairly in this current buyout process. Thus they may also need to be placated before the final announcement of an actual offer in the next few weeks.

Related posts:

• BUYOUTS: Rival Bid Worries Heat Up Zhaopin, Autohome Deals
• BUYOUTS: iKang’s Poison Pill, CMGE’s China Homecoming
• BUYOUTS: Wanda Wavers, Qihoo Hits Currency Snag
• Today’s top stories

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Bottom line: Dalian Wanda’s de-listing plan from Hong Kong is likely to succeed, while eLong could re-list in China and become the travel services provider for WeChat following its New York privatization.

A trio of new headlines are part of the recent homeward migration of offshore-listed Chinese companies, led by a highly anticipated $4.4 billion offer to privatize property giant Dalian Wanda (HKEx: 3699). Also making news is faded online travel agent eLong (Nasdaq: LONG), whose shareholders have just approved a privatization that will soon end its 12-year-old listing in New York. Finally there’s film production house Yongle Film and Television, which would have been a strong New York IPO candidate in a earlier era but is now in the process of making a backdoor listing in Shenzhen.

Each of these stories has a slightly different angle, but their common theme is how they reflect the growing divide between western and Chinese investors in valuing Chinese companies. Western investors are a relatively skeptical and realistic group, whereas Chinese are much more impulsive and often buy stocks based on company names and friends’ recommendations. That different approach has led to a current state where the Chinese-traded shares of dual-listed companies now trade at a 34 percent premium to their Hong Kong-listed counterparts.

Such higher valuations are clearly on the radar of Dalian Wanda boss Wang Jianlin, who has made a relatively unusual offer to take his company private just a year and a half after its Hong Kong IPO. Under his deal, Wang has set up a special company to buy out Wanda’s Hong Kong-listed shares, and is offering investors in that company up to 12 percent interest if the company fails to re-list in China within 2 years. (English article; Chinese article)

Current owners of Dalian Wanda stock would get HK$52.80 ($6.80) for each of their shares, representing a premium of 45 percent to the company’s March 29 closing price and valuing the company at about $31 billion. Interestingly, Wanda’s shares have dropped 4 percent in the 2 sessions since trading resumed, and at their latest close of HK$49.25 they are now about 7 percent below the buyout price.

Investor Skepticism

That discrepancy shows there’s a bit of investor skepticism towards the deal, which is probably justified due to its large size and the huge uncertainties in China’s economy. But barring a collapse of China’s real estate market or a severe broader economic downturn, I do think this deal will get done and Wang will meet his 2-year re-listing target.

Next there’s eLong, whose privatization is notable because it’s probably the oldest New York-traded company to de-list in the current buyout wave. eLong has just announced that its shareholders have approved its buyout offer, and that after the deal it will become jointly owned by a group whose largest shareholder include leading online travel agent Ctrip (Nasdaq: CTRP) and Internet giant Tencent (HKEx: 700). (company announcement)

This story was also interesting because at one point it seemed like Tencent and Ctrip might make competing buyout offers for the company, though they eventually settled into a compromise where both hold large stakes. (previous post) Following the buyout, we might see eLong try to re-list in China, and it could soon become the travel agency partner on Tencent’s popular WeChat platform, replacing Tongcheng as the current provider.

Last we’ll briefly mention Yongle, which is a relatively big-name maker of movies and TV shows that are suddenly in huge demand from China’s booming online video industry. Media are reporting that Yongle is eyeing a backdoor listing using the Shenzhen-traded Hongda Building Materials (Shenzhen: 002211). (Chinese article) Anyone who thinks they’ve seen Hongda’s name before would be correct, as this company was originally the planned backdoor listing vehicle for the formerly New York-traded Focus Media.

The latest reports say Yongle has already submitted an initial application to inject all of its assets into Hongda, which would pay for those using new shares valued at 3.26 billion yuan ($500 million). As I’ve said above, this deal is part of the homecoming trend because Yongle looks like the kind of company that might have pursued a New York IPO in the past. But now the company is opting for a domestic listing, and will probably get a significantly higher valuation if it can successfully execute the plan.

Related posts:

• BUYOUTS: Autohome, iKang, Wanda in Twisted Buyout Tales
• BUYOUTS: Dangdang Lowers Buyout Offer, Momo Still Mum
• IPOs: Focus Media Eyes Shenzhen Backdoor With Hongda
• Today’s top stories

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Bottom line: YY’s abandonment of its privatization plan and concurrent share buyback look like savvy moves to build confidence and attract attention from investors, and could soon be followed by similar withdrawals by other big buyout candidates.

Following a steady stream of signals hinting at new obstacles for US-listed Chinese stocks trying to privatize, social networking site YY (Nasdaq: YY) has become the first to formally abandon its plans to abandon New York.  I’ve been predicting that up to half or more of the 40-odd privatization plans announced since the start of last year could ultimately collapse, and have to commend YY for being brave enough to be the first to openly discuss the abandonment of its buyout offer. The original buyout group led by YY’s chairman and CEO could have easily just remained quiet on the subject until everyone assumed the offer was dead. But in this case they’ve taken the more responsible route of admitting to failure.

Investors seemed relieved at the announcement, bidding up YY’s shares by a modest 1.8 percent after it announced its abandonment of the buyout plan, as well as a separate new $200 million share buyback program. (company announcement; Chinese article) But it’s also worth noting that at their latest close of $38.82, YY’s shares are a full 43 percent below the $68.50 buyout price that the management-led group first announced nearly a year ago. (previous post)

Back when the plan was first announced, the buyout price represented a nearly 20 percent premium to YY’s shares. But since then the stock has moved steadily downward to its current levels, in sync with similar declines for China’s stock markets. Other companies to announcement privatization bids have seen similar erosion in their stock prices, prompting some to revise bid prices to lower levels. But many have simply remained mum on the matter, meaning their original offers may follow a similar fate to YY’s.

YY wasn’t too talkative in its breakthrough announcement, citing only “recent unfavorable market conditions” for the group’s change of heart. Its new $200 million share repurchase program is rather significant, representing about 10 percent of YY’s current market value of around $2.1 billion.

Similar Signals from 21Vianet

Last month, data center operator 21Vianet (Nasdaq: VNET) gave off similar signals that it might be getting set to abandon its own privatization bid. Those came in the form of its announcement of plans to sell 1.75 billion yuan ($270 million) worth of convertible bonds, which could be exchanged for a major stake in the company. No specific amount was given, though the stake could be around 20 percent, based on 21Vianet’s latest market value. Such a plan seemed inconsistent with its earlier privatization bid, leading me to speculate that 21Vianet had quietly abandoned the de-listing plan. (previous post)

Many of these buyout plans looked shaky from the start, as most seemed to be backed by opportunistic private equity expecting to make some quick profits by quickly re-listing the companies in China at much higher valuations. Since then, however, China’s securities regulator has slowed the rate of new IPOs to a crawl, in response to market volatility. Many companies were hoping to circumvent that problem by making backdoor listings using existing shell companies. But the regulator has also recently clamped down on that process. (previous post)

I’ve previously said that New York may not be as unfriendly as these Chinese companies believe, even though many complain that their stocks are undervalued by US investors. Sector leaders like 21Vianet and even YY have exciting stories to tell that could boost their share prices, but are simply being lazy by failing to publicize those stores and expecting investors to come to them instead.

Then there are other privatizing firms that really aren’t very high quality and really should go back to China, where local investors are far less discerning. But recent regulatory obstacles, and the complexity of the process, means that many of these companies are also likely to see their bids collapse. At the end of the day, formally announcing the abandonment of its buyout bid and the accompanying buyback program look like savvy moves to build confidence and attract attention among investors. Accordingly, I would expect to see a few similar announcements by larger firms, probably in the $800 million to $2 billion market cap range, during the summer months.

Related posts:

• IPOs: Better Oversight, Not Ban, Needed for China Backdoor Listings
• BUYOUTS: Dangdang, YY, Baixing Line Up for China Listings
• BUYOUTS: Regulator Re-think Boosts Privatizing China Stocks
• Today’s top stories

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Bottom line: A new China Life bid for iKang could trump Yunfeng, while 21Vianet could be mounting a stealth privatization bid that would see it slowly sell most of its shares to big buyers before mounting a formal de-listing attempt.

A few strange twists are taking place in the story that has seen some 40 US-listed Chinese companies launch privatization bids since the start of last year, led by the surprise re-heating of a bidding war for private clinic operator iKang (iKang). In a separate headline, data center operator 21Vianet (Nasdaq: VNET) gave a new signal that it will abandon a previous buyout offer and may launch a stealth de-listing bid instead. And in the strangest development, the board of web portal operator Sohu (Nasdaq: SOHU) has rejected an investment plan by the company’s founder that looked like a prelude to a possible buyout offer at the time.

Let’s start with iKang, which is the most hotly contested of the more than 3 dozen buyout offers so far. Most of those have been launched by management-led groups, with no rival offers ever received. The iKang story began the same way last year, but quickly attracted a rival bid from one of its top competitors, Meinian. Then last week a fund connected with e-commerce giant Alibaba (NYSE: BABA) founder Jack Ma entered the contest, prompting the other 2 to withdraw. (previous post)

Everyone thought that was the end of the story, but now local financial publication Caixin is reporting that leading insurer China Life (HKEx: 2628; Shanghai: 601628; NYSE: LFC) is preparing a new bid for iKang. (Chinese article) China Life was part of the original management-led group to make an offer for iKang at $17.80 per American Depositary Share (ADS), but would raise that to more than $20 under the new offer, the report says.

Yunfeng was quite vague with its surprise offer last week, saying only it would pay between $20 and $25 per ADS. The Caixin report says that China Life’s offer would be slightly above the $20 level, and implies that the new deal may have the support of iKang founder Zhang Ligang. That would be a critical factor since Zhang controls a big chunk of iKang’s shares and would probably like to stay at the helm of the company, despite offering to resign if the Yunfeng deal succeeds.

New Investor for 21Vianet

From iKang, let’s move to 21Vianet, which announced a privatization bid last year but then appeared to back away from that plan by announcing a new plan to issue 1.75 billion yuan ($265 million) worth of convertible bonds last month. (previous post) No conversion price was given, but I calculated at the time that a full conversion of the bond would probably give the investor group 10-15 percent of 21Vianet’s shares.

Now 21Vianet has just announced it has received another major equity investment of $388 million from a company called Tus Holdings, and has given Tus’ president a seat on its board. (company announcement) That investment amount would imply purchase of a large 40 percent stake, based on 21Vianet’s latest market value, which includes a 4 percent stock decline after the latest announcement.

The stock has actually lost almost half of its value since the original convertible bond announcement last month, so perhaps investors see these purchases as a form of stealth buy-out. Such a deal could see 21Vianet slowly sell off all of its shares to other big investors, and then force through a de-listing deal at a much lower buyout price than the $23 per ADS it originally offered about a year ago.

We’ll close with a quick look at Sohu, whose eccentric founder Charles Zhang made a cryptic offer late last year to invest $600 million in his company using a vague announcement that implied a price of about $50 per ADS. (previous post) I said at the time that perhaps the offer was testing market sentiment for an actual buyout that was also rumored at that time at $56 per ADS.

But no buyout ever came, and now Sohu has announced it is no longer considering Zhang’s earlier proposal. (company announcement) This latest development was almost certainly dictated by Zhang, who runs Sohu like a personal fiefdom. It’s not too surprising, since Sohu’s shares have sunk steadily since the original investment offer last year, and now trade at around $39, or well below the earlier suggested prices.

Related posts:

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• BUYOUTS: iKang Gets New Suitor, TCL’s Tired Phone Unit Bows
• BUYOUTS: 21Vianet Tries Bonds as Privatization Stalls
• Today’s top stories

The post BUYOUTS: iKang War Re-heats, 21Vianet in Stealth De-Listing? appeared first on Business China : news for investors in China.

Bottom line: Autohome’s shares will come under pressure after a mass defection of its middle management, most likely to start a rival company, while Ku6 is likely to close shop within the next 2 years following its de-listing from New York.

A couple of new twists are bubbling through the headlines in a wave of buyout offers for US-listed Chinese companies, led by the latest signs that a privatization for online car site Autohome (NYSE: ATHM) is effectively dead. Those signs are coming in reports of a wave of resignations by mid-level company executives, following a failed management-led buyout bid. Meantime, online media site Ku6 Media (Nasdaq: KUTV) has formally completed its own buyout offer, meaning this insignificant player that was once a leader in China’s new media space will probably de-list very soon and could disappear completely within the next 2 years.

We’ll begin with the Autohome story, which is by far the more interesting of this pair of buyout tales among around 40 US-listed Chinese companies to announce such privatization plans since the start of last year. Most of those bids have been launched by management-led groups, who believe they can get higher valuations by privatizing their companies and re-listing them back in China.

Autohome’s story is one of the more colorful among the batch, and illustrates how difficult such deals are to execute. The company’s managers were in the process of crafting such a deal, when their controlling stakeholder, Australia’s Telstra (Sydney: TLS), reached a separate deal to sell its nearly 50 percent of the company to Chinese financial services giant Ping An.

Telstra took its action because it wanted to sell the stake by a June 30 deadline, and believed the management-led buyout group couldn’t meet that time frame. The buyout group tried to stop the deal through legal actions, but Telstra ultimate prevailed and sold its stake to Ping An just before the June 30 date. (previous post) The sale saw many of Autohome’s top executives and board members replaced by Ping An appointees.

Now the latest reports are saying many of Autohome’s mid-level managers are also defecting from the company, including many of its co-founders who were currently vice presidents. (Chinese article) Autohome shares actually rose 1.2 percent in the latest trading session, though I suspect investors weren’t aware of the latest mass defections and the stock could fall in the next few days. The stock is still down nearly 20 percent from mid-June when the battle for control began.

New Rival Start-Up?

As a longtime watcher of Chinese companies, I can say with relative certainty there’s a strong possibility that the Autohome team will reassemble soon and launch a new company to rival their former employer. That could cause headaches for Autohome, which will also face growing competition from Bitauto (NYSE: BITA), a rival that recently won big new backing from Internet giants Baidu (Nasdaq: BIDU) and Tencent (HKEx: 700).

Meantime, Ku6 has just announced the formal closing of its own buyout deal, bringing it one step closer to ending its decade-long history as a listed company. (company announcement; Chinese article) Unlike many of the other privatizations, Ku6’s move was driven by its shrinking size and the threat of a forced de-listing for failing to meet Nasdaq’s minimum requirements. The company’s current market value is a tiny $50 million, meaning the buyout was probably quite easy to finance.

I remember much headier days for Ku6, which was one of several companies to discover big profits in fee-based text messaging services in the days before the mobile Internet. Ku6 later tried to transform into an online video site, but failed in that effort. In what’s likely to be its final buyout announcement, Ku6 describes itself as an Internet video company focused on user generated content. Perhaps it has found a new formula for success, but more likely Ku6 will disappear completely in a few years following its bow from New York.

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• INTERNET: Tencent, Baidu Travel Together with Bitauto Investment
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• Today’s top stories

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Bottom line: Wanda may need to raise its offer price again to buy Carmike, while a plan to privatize its property unit stands a good chance of winning shareholder approval.

Conglomerate Wanda Group is in a couple of a major headlines, one involving its traditional real estate business and the other for the newer entertainment unit it’s building up as part of a diversification drive. The real estate headline centers on Hong Kong-listed property developer Dalian Wanda (HKEx: 3699), which has just received an endorsement from a major shareholder in its bid to go private. The second item centers on Wanda’s fast-growing cinema business, and has the company boosting its offer for US theater operator Carmike (Nasdaq: CKEC) after minority stakeholders complained a previous bid was too low.

The pair of stories nicely summarizes Wanda’s two core businesses, and its broader efforts to move beyond its older estate business that catapulted founder Wang Jianlin to one of China’s richest men. With China’s real estate market due for a major correction over the next decade, Wang is placing his bets on rapid growth for entertainment among China’s growing middle class. That bet has seen him aggressively build up an entertainment empire that includes theme parks, movie theaters and film studios.

We’ll start with the Carmike story, which began in March when Wanda’s AMC Entertainment (NYSE: AMC) offered $30 for each of Carmike’s shares, representing a premium of about 50 percent to the stock’s price before the offer. But several of Carmike’s big shareholders said the price was too low and the company was worth around $45.

AMC’s said earlier this month there was no way Wanda would pay more than $40 for Carmike’s stock, and I predicted the offer would get raised to around the $33-$35 level. (previous post) Now AMC has done just that, with the latest reports that it has offered $33.06 per share. (English article; Chinese article) The deal also offers Carmike shareholders the option of exchanging each of their shares for 1.0819 shares of AMC stock if they want to continue investing in the cinema sector.

Investors didn’t seem too impressed by the news, with Carmike shares dipping 1.4 percent to $30.69 in the latest session. That appears to show that investors believe Carmike’s shareholders will still balk at this latest offer, and the deal could collapse unless Wanda and AMC are willing to raise their bid again.

Property Privatization Endorsement

Meantime, Wanda’s separate bid to privatize its Dalian Wanda property arm has gotten a vote of confidence with word that major stakeholder China Life (2628.HK; 601628.SS) has agreed to support the deal. (English article) Word of the privatization plan first emerged earlier this year, and was part of a broader wave of de-listings by offshore-traded Chinese companies that believed their stock was undervalued by foreign investors.

The latest reports cite Wanda saying that China Life, which owns about 7.4 percent of Dalian Wanda’s shares, has sent a letter saying it officially approves of the proposal to privatize the company for HK$52.80 per share. The price represents a 9 percent premium to Dalian Wanda’s IPO price from about a year earlier, but some shareholders have said the offer is still too low.

We’ll have to wait until August 15, which is when Wanda has scheduled a shareholder meeting to vote on the privatization. Wanda needs at least 75 percent of shareholders to support the deal and less than 10 percent to oppose it for the buyout to succeed.

This China Life announcement is clearly a public relations move by Wanda to influence public opinion about the deal, and probably reflects the fact that approval of the buyout at the August 15 meeting is far from certain. I don’t know very much about broader sentiment towards the deal, but would say it has a greater than 50 percent chance of approval since it’s relatively close to the slightly higher valuations that some were hoping for.

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Bottom line: Jumei could formally abandon its stalled buyout plan soon, putting more downward pressure on its stock, while iKang needs to enter serious negotiations with two bidders for the company.

Ever wonder what happened to a handful of buyout plans for US-listed Chinese companies that were announced more than two years ago but never got completed? That’s certainly not a question that keeps most of us up at nights, but it’s suddenly popping into the headlines with a series of scathing letters from a minority investor called Heng Ren, which is criticizing two of the unfinished deals.

Specifically, Heng Ren is blasting online cosmetics seller Jumei International (NYSE: JMEI) and clinic operator iKang (Nasdaq: KANG), which both announced plans to privatize quite a while ago but have yet to complete those. These aren’t the only two whose privatization plans, which were part of a wave in the first half of 2015, failed to get completed. But most of the others that failed to complete their buyouts, including YY (Nasdaq: YY) and Momo (Nasdaq: MOMO), made specific announcements that they were abandoning their plans.

Before we go any further, we should take a step back for the uninitiated and recount the bigger picture behind these two deals now coming under fire. Jumei and iKang were just two of many US-listed Chinese companies whose managers felt their shares were undervalued and underappreciated by US investors back in 2014 and 2015. Feeling they could get better valuations back in China, where their names were better known, some 3 dozen such companies launched privatization bids around that time, with the wave peaking in the first half of 2015.

Fast forward to the present, when around three-quarters of the deals have been completed, and a few have re-listed back in China. Of the quarter that couldn’t complete their deals, probably about half have announced they are officially scrapping the plans. That leaves a handful like Jumei and iKang that announced deals but haven’t ever formally abandoned them.

Heng Ren’s two letters that are in the news look a bit similar, and basically blast both companies for allowing hundreds of millions of shareholder value to be wiped out as their buyout plans languished. He does have a point, as Jumei’s shares have lost about half of their value since its buyout was announced in early 2016, while iKang’s have lost about a third since it announcement in late 2015.

Heng Ren has been critical of these companies before, as it’s basically a hedge fund that specializes in finding undervalued US-listed Chinese companies and then watching their shares rise. But again, it does have a point in criticizing these firms for letting their status remain in limbo for so long without providing us with an update. Among the pair of companies, Jumei’s founder is the only one to reply so far, addressing several of the points raised in Heng Ren’s open letter without commenting on the status of its original buyout plan. (Chinese article)

Lackluster Company

Word around the time that deal was stalling was that Jumei was having trouble finding financing for the buyout, which probably speaks to the company’s spotty results. A look at its webpage shows the company doesn’t seem to have much interest in staying public, as the most recent quarterly results I could find there were from the second quarter of 2016, which showed revenue was flat in the first half of the year and profits declined sharply.

iKang presents quite a different picture, and was on track to conduct a management-led buyout when it suddenly got a rival bid from its leading competitor. (previous post) It later got yet another bid from a group that included Yunfeng Capital, the investment fund led by Alibaba (NYSE: BABA) founder Jack Ma. iKang’s defiant founder, unwilling to accept a good deal when he saw one, launched a poison pill plan, and the buyout has basically been in limbo ever since. Heng Ren is calling on iKang to make a final decision on what it plans to do.

I basically agree with Heng Ren that both of these cases need to be resolved one way or another. Jumei is currently worth just $500 million, meaning its buyout wouldn’t be that costly to complete. But I suspect the company’s finances continue to be weak, and private equity isn’t interested in financing the deal, in which case it may have to remain public and should admit that.

iKang is a different story and looks like a strong growth opportunity, but its founder needs to make up his mind about what he wants to do. If the stock doesn’t rise soon and he can’t come up with his own buyout to match the other two, he really needs to enter into serious negotiations with both of the rival bidders and strike a final deal. To keep his company in limbo isn’t fair to anyone, and goes against the whole idea of having publicly listed shares.

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