Bitauto (BITA) – Merger Arbitrage – 50% Upside

Current price: $10.45

Consideration price: $16.00

Upside: 50%

Expiration date: TBD

Press release

 

This is another interesting opportunity created by the recent market downfall. The spread has widened significantly (from 8% to 50%) since the 4th of March, while the risks have remained generally unchanged.

On the 13th of September'19 Chinese internet content, marketing and transaction services provider Bitauto Holdings has received a preliminary non-binding proposal from Tencent and Hammer Capital (privately held investment firm) at $16/ADS. Tencent currently holds 7.81% in BITA and, moreover, 48.5% of the shareholders have already agreed to support the transaction. These shareholders are: 

  • JD.com - 20% owned by Tencent and holds 25.1% in BITA. JD will also be rolling over not more than 15% of its stake in the transaction.
  • Cox Automotive - 12.8% stake.
  • Mr. Bin Li - founder & chairman. Owns 11%.

So as the shareholder approval condition requires 2/3rds of votes being in favour, only ~13% additional votes will be needed for the merger to go through.

On the 19th of September Bitauto has formed a special committee to evaluate the transaction and since then no major updates were provided.

So on one hand this is a Chinese deal with a severe lack of updates from the management. On the other hand, Tencent is definitely a credible strategic buyer. Not only that the financing is not a problem here, but Tencent has been a major shareholder of BITA for a long time now (since 2015) and should know the company quite well (recent poor performance of the subscription business due to the declining automotive industry in China should not scare it). Considering this as well as the support from major shareholders it seems that the transaction is likely to close.

The major risk is that the business of BITA (transactions, automotive, digital advertising) is strongly exposed to the coronavirus impact and the merger might get cancelled or at least amended because of that. Nonetheless, the opportunity mainly comes from the increase of the spread itself. Before the fall market used to value the overall risk (including coronavirus) at 8% spread and now it has widened tremendously mainly due to the general market downfall, while the risk essentially remained the same.

Similar transactions typically seem to close in 3-6 months, however this merger might be taking longer due to the increased complexity from the additional MBO transaction and overall market conditions. If the deal goes through, the buyer consortium will be required to make an MBO to BITA subsidiary Yixin (transaction service company) as Tencent already owns 20.59% of Yixin and Hammer has 1.5%. Full write up can by found here.

 

Bitauto

BITA provides internet content, marketing and transaction services for China’s automotive industry. Three main revenue streams come from: 

  • 53% - transaction services.
  • 36% - advertising and subscription business. Bitauto.com is the second largest automotive online classified in China.
  • 11% - digital marketing solutions businesses.

BITA is growing strongly in terms of revenues (36% on average for the last three years), however it is not profitable (816m CNY or $116m loss on average for the last 3 years). The company is exposed to the coronavirus impact and should take a significant hit as a result - new car sales have already dropped by almost 90% since the start of the year.

2 COMMENTS

  1. Ilja

    From comment on the Yixin Group idea:
    In 2019 BITA revenue growth has stopped (used to be 36% for the last 3 years), while net loss has increased 2x from 2018 (RMB 1.2bn in 2019). Current revenue outlook for Q1’20 is 20% lower than Q1’19 results.

    Overall, taking the prolonged timeline and the lack of proper updates on top of that, the likelihood of this trade to end profitable is questionable.

  2. Ilja

    Definitive agreement has been signed and the spread decreased to 2%. The idea is closed with 48% gains in 3 months.

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