Analysis of US-Listed Chinese Going-Private Transactions

US-listed Chinese companies (especially smaller caps) are very often surrounded by a cloud of skepticism due to multiple fraud stories of their peers in the past. Most vivid examples of the current year so far are Luckin Coffee and iQiyi, while in 2017 there was actually a whole documentary released just on this topic (The China Hustle). Because of this distrust, in case of acquisition or going private transaction proposals, the spread usually stands wider than normal and offers relatively high potential upside.

In this article, we take a look at 42 announced acquisitions (mostly going-private transactions involving management) made over the last several years to assess certain characteristics (e.g. buyer type, price changes between definitive agreement and non-binding offer, timeline, etc.) and success rate of these transactions. The details of every single transaction are shared in the table below and also

Some of the situations have already been covered on SSI in more detail:

• Sky Solar (SKYS) +100% in one month
• 58.com (WUBA) +14% in 1.5 months
• Bitauto (BITA) +48% in 3 months
• China New Borun (BORN) -11% in 3 months
• SORL Auto Parts (SORL) +19% in 5 months
• Jumei International (JMEI) +5% in one month
• eHi Car (EHIC) -9% in 9 months

Additionally, at the end of this article, we provide short notes on all currently open cases (9) as well.

 

Summary Results

The results below indicate that there is no free lunch for arbitrageurs in the US-listed Chinese going-private transactions.

• A significant portion of these proposals ends up rejected/withdrawn, while the timeframe from the non-binding offer till the definitive agreement and then till the final closing is relatively long – 6 and 5 months respectively (excluding outliers). In that time shareholders are usually left out in the dark and can only speculate on the eventual outcome.
• If the transaction is still in a non-binding proposal stage, staying on the sidelines pays-off on average. There is a large number of failed cases (18 closed and 15 failed) and at the early stages of the transaction (non-binding offer) it is hard/impossible to distinguish between a potentially successful proposal and the one that is going to end up rejected/withdrawn. Positions that were initiated right after the announcement of a non-binding proposal lost 4% on average. Delaying initiation of position by 1 or 3 months somewhat reduced the losses, but does not make the strategy profitable.
• If the initial offer goes through and a definitive agreement is signed, then the transaction has a very high chance of closing. Data shows that only 1 out of 22 cases with a definitive agreement was terminated (SVA). The strategy of open ing the position right after the definitive agreement is signed returned +7% on average with 5 months holding period. Once a definitive agreement is signed the market’s trust in successful closing seems to increase with time – average returns for positions initiated 1 month after the definitive agreement announcement shrunk to +6% and to +4% if delayed by 3 months.
• Revised proposals (non-binding) seem to offer an attractive opportunity – average returns for position initiated after the announcement of a revised non-binding proposal delivered +12%. The returns increased to +18% if positions were initiated with a 1-month delay. Moreover, none of the situations where a non-binding proposal was revised have failed so far and on average it takes about 10 months for a revised non-binding proposal to close. However, the sample size consists of only 4 cases (excluding 1 open case), so the data is not sufficient to draw any firm conclusions.

 

Data

A detailed table with the covered cases is provided below. In the transactional information section, we have included:

• Time of the non-binding offer and the remaining spread post-announcement.
• Date of the revised offer (non-binding), size of the price amendment (consideration change) as well as the remaining spread post-announcement.
• Definitive agreement announcement date, size of the price amendment (consideration change), and the remaining spread after the announcement was made.
• Date of the withdrawal/rejection and the provided reason (if any).

In most cases “the management” means founder/CEO/Chairman (usually the same person). Only 1 out of 30 cases did not have the founder/CEO/Chairman involved with the buyer’s group (China Biologic Products in Sep-19; see the section on the Open Transactions below).

We have calculated returns for two potential arbitrage strategies:

• ‘After non-binding’ – Initiating position right after the announcement of non-binding proposal and holding till termination or closing of the transaction.
• ‘After definitive’ – Waiting for the transaction to enter the definitive agreement stage and only then initiating the position. As with above, the trade is exited after termination or closing of the transaction.

Results:

 

Some Background on Chinese Going-Private Transactions

Apparently, the process of privatization offers for the US-listed Chinese companies goes by initially providing the non-binding proposal (all of them in cash). The process usually goes like this >> non-binding intent letter is received by the target company >> in a few weeks a special committee (2-3 independent directors) is formed to evaluate the proposal >> the committee approves or disapproves the offer and the definitive agreement is then signed >> if all the necessary conditions are eventually satisfied, the transaction is closed. This process is quite different from what is common in the western world, where the market usually learns about the transaction only after the definitive agreement is signed. In one case only (SKYS) the buyer has withdrawn the non-binding offer and filed a tender offer instead.

After the definitive agreement is signed, the shareholder approval condition depends on the place of incorporation of the target company. Most US-listed Chinese companies are incorporated in the Cayman Islands, where any special resolution requires approval from 2/3rds of the voting power of shares present and voting in the meeting. If the company is incorporated in the US – usually in Delaware or Nevada (CXDC) – the merger will require consent from the majority of unaffiliated shareholders.

Also, rarely there are cases (JMEI and CYOU), where a transaction is done in a “short form” merger and shareholder approval was not required at all – only a copy merger plan had to be distributed to shareholders. According to the Cayman Law:

If a copy of the Plan is given to every shareholder of each subsidiary company to be merged, and unless shareholders agree otherwise, a shareholder resolution is not required where a parent company registered in the Cayman Islands seeks to merge with one or more of its subsidiaries that are also registered in the Cayman Islands. Typically, this is referred to as a “vertical amalgamation”.

 

Further Overview Of The Results

• Overall, at the non-binding stage, there seems to be almost no way of discerning between a potentially successful proposal and the one that’s bound to fail. Neither the price premium paid (to last-close) nor the amount of economic interest owned by the buyers seems to indicate much. Even the timeline is not very useful – the number of months it takes from the non-binding offer until definitive agreement and close is quite volatile and certain closed cases indeed took a very long time until the definitive agreement was announced (CYOU – 32 months, JASO – 29, KANG – 21, KZ -18, etc.). Therefore, it can’t really be told that if a certain amount of time has passed since the preliminary offer – the case is ultimately going to fail.
• Nonetheless, the only decent indicators seem to be the actual buyer. It seems that the proposals where the management is not actively involved with the buyer’s group have significantly lower chances of succeeding. Only 2/12 such cases closed – QUNR and DATE. This is likely due to the fact that usually in the US-listed Chinese companies the management holds a significant amount of the common shares/voting power and, therefore, can rule out the unwanted takeover offers more easily. In the example of DATE, the management also held a major stake (41%), however, still agreed to sell the company to another shareholder (22% ownership), whereas the management of QUNR held less than 1% of ownership and a third-party buyer was supported by major shareholders that held 64% of outstanding shares. Additionally, it is important to note that sometimes the management joins the offer at the definitive agreement stage (WUBA, EHIC), which can not be predicted at the non-binding stage.
• The timeline for the failed cases is quite volatile. 7/15 proposals were withdrawn/rejected relatively fast – in 3.5 months on average, however, the other 8/15 cases end up significantly prolonged – 18.6 months on avg.
• Nonetheless, after the definitive agreement is signed, the transaction usually closes successfully. Only 1 going-private proposal (Sinovac) was terminated after 9 months after signing of the definitive agreement (that also came with a 13% price increase) as the company has decided to take a PIPE (private investment in public equity) instead of proceeding with the offer. All other 18 transactions (excluding open cases) which had a signed definitive agreement were closed.
• 14/22 definitive agreements came with an amended price – 12 cases had their price sweetened (from non-binding or revised offer) by 6% on avg. and 2 cases had its price cut by 11% on avg.
• Rarely (only for 5 cases) after a long period of silence the initial non-binding offer is revised. The amendment comes after a strong shift of the target company share price since the non-binding offer and is usually at a strong discount to the initial offer. 4/5 cases (GSUM, CYOU, KZ, JASO) had the initial offer price reduced by 42% on avg. and there is only 1 case (DATE) where the price was revised by 34% upwards. Nonetheless, so far there seem to be cases when a revised proposal ended up failing. The time from the non-binding offer until the revision ranges from 3 months (DATE) to 40 months (CYOU).

 

Quick Notes On Currently Open Transactions 

Already covered on SSI:

Sky Solar (SKYS) – tender offer priced at $6/share will expire on the 31st of July. A 10% upside remains. The idea was closed with a 100% profit in 1 month.

58.com (WUBA) – the definitive agreement has been signed.  The idea was closed with a 14% profit in 1.5 months. 1% upside remains.

Bitauto (BITA) – the definitive agreement is signed. The trade was closed with 48% gains in 5 months. 1% upside remains.

 

Other currently open cases:

SINA Corp (SINA) 3% Spread

On the 6th of July, the company received a non-binding proposal letter at $41/share in cash. The buyer owns 12% of common shares, 58% of voting power, and is controlled by SINA’s Chairman/CEO.

Given the size of the spread and the non-binding stage of the proposal, the attractiveness of the situation seems low.

SINA owns a major Chinese social media platform Weibo.

 

China Distance Education (DL) <1% Spread

On the 8th of June, Chinese Distance Education has received a non-binding acquisition proposal from Mr. Zhu (founded the company 20 years ago and currently acts CEO/Chairman) and his wife (co-founder and vice-chairman). Consideration stands at $9.08/share in cash per each ADR. 2/3rds majority shareholder approval is required, however, buyers already control 39% of votes. On top of that, 19% of shares are owned by YM Investments, which has been a major shareholder of DL since 2008. So it would be hard to imagine that management did not consult with YM before making the proposal. Other directors (except for the Zhu family) own 3.5% of DL and are also expected to vote in favor of the merger.

On the 22nd of June special committee (2 independent directors both of whom are on the board since 2008) was formed to evaluate the proposal.

The transaction will be financed by a combination of debt/equity and it seems that management already expects additional parties to join their consortium: “Equity financing is expected to be provided by the Buyer Group and from any additional equity investor who may be admitted to the Buyer Group”.

China Distance Education offers online professional development courses with a primary focus on accounting, healthcare, engineering, and legal spheres. The company has been strongly hit by the COVID-19 (all license exams were suspended) and has withdrawn its guidance for 2020. Q2 results (ending Mar’20) showed significantly slowdown in the revenue growth (8% vs 30.3% growth YoY), while during Q3 (ending in June) revenues are expected to decline by 15% YoY (first quarter with negative revenues growth over the last decade).

Currently, DL share price trades with less than 1% spread, which is quite unusual for a case with a non-binding offer (initially stood at 10% after the announcement). The recent price appreciation (with no further news regarding the offer) is likely driven by the overall positive sentiment in the Chinese online education sector (DL peers TAL and EDU are +18% and +13% in the last month) due to the recovery after COVID. So now the management should be strongly incentivized to push the proposal to further stages, however if DL ends up outperforming its guidance and share price of the company continues to go up/goes above the offer price, getting the required approval from shareholders might prove to be difficult and the proposal could get revised (or terminated).

 

China XD (CXDC) 2.5% Spread

On the 8th of May CXDC announced a non-binding going-private proposal from Mr. Han (co-founder, CEO, and Chairman) priced at $1.1/share in cash. Just after 1 month, on the 15th of July, a definitive agreement was signed at a sweetened $1.2/share price. A preliminary proxy was filed on the 22nd of June. Overall it seems that the buyer wants to use the opportunistic timing (CXDC traded above $2/share in Jan’20) and is moving relatively fast.

The chairman holds 70% of voting power and owns 50.1% of common shares. Approvals include a majority of disinterested shareholders. Minority shareholder base is fragmented as it seems that CXDC has no other major shareholders except for Mr. Han at the moment.

Mr. Han has already made a privatization offer before – in Feb’17 together with a certain Morgan Stanley fund. The offer was priced at $5.21/share, however, after that, the parties went silent until Oct-19 when Morgan Stanley announced that they are exiting the consortium.

Given that the definitive agreement has already been signed (only a month since the new non-binding proposal), the chances of it being terminated are low.

China XD manufactures and develops modified plastics for the automotive industry, primarily in China. Due to COVID-19, the auto industry in China saw a drastic fall of production and sales (over 30% in Q1) and CXDC results reflect that as well – in Q1 revenue and gross profit fell by 52% and 89% YoY respectively.

 

Gridsum Holding (GSUM) 150% Spread

On the 16th of July’19, Gridsum Holdings announced a non-binding proposal from a consortium of buyers (chairman/CEO + CFO + major shareholder) priced at $3.80/share. Since then the parties went silent, while the share price of GSUM continuously deteriorated. On the 1st of May’20, the consortium issued a revised proposal at $2.00/share (47% cut). The consortium owns 31% of common shares.

The revised offer comes shortly after another bidder and major shareholder (owns 8% currently) FutureX has withdrawn its non-binding proposal. FutureX made the preliminary bid in May-18 and then withdrew it 1.5 years later (Jan-20) stating no intentions to join the current consortium.

As indicated by the size of the spread, the market does not believe the offer is legit. Shareholders are likely exhausted after two years of complete silence from the special committee despite 3 (including the revised) offers being put at the table and, overall, the risk is things going south here is very high.

Gridsum generates revenues from the sale of its data analytics (big data and AI) software to multinational and domestic companies in China. Q1 results have not been released yet as the company was late to file the annual results (the report was released only in June’20), however, the company states that due to COVID-19 outbreak its operations were impacted adversely (temporary office closures, lower marketing budget, decrease in sales) and the effect will continue through 2020.

 

China Biologic Products (CBPO) 12% Spread

On the 18th of September’19, China Biologic Products announced an all-cash $120/share privatization offer from a consortium of buyers (director + major shareholders). Consortium owns 51% of common shares of CBPO. A week later, a special committee was formed to review the offer. No updates were provided since then.

In 2018 the company had two other privatization proposals – one from the private equity firm CITIC Capital in June-11 at $110/share and another from the ex-CEO + outsiders in Aug-18 at $118/share. Three days after CBPO received the latter offer, the company announced that CITIC withdrew its proposal and that special committee decided has decided to reject the proposal from ex-CEO stating that it undervalued the company. Interestingly, after a year, CITIC then joined the current consortium with an offer priced at $120/share.

China Biologic Products manufactures and develops plasma-based biopharmaceutical products.

 

Global Cord Blood (CO) 121% Upside

On the 19th of June’19, Global Cord Blood announced a non-binding privatization offer from Cordlife (listed in Singapore) at $7.50/share. The consideration is supposed to be paid by the issuance of new Cordlife (P8A.SI) shares at S$0.50/share.

Again, the market doubts the legitimacy of the proposal – and so far, no further announcements/updates were made for over a year. 65% of the company is owned by a controlling shareholder (Nanjing), therefore any offer from an outsider is very unlikely to be completed. Moreover, despite more than 1 year since the announcement Cordlife has recently (June’20) stated that the discussions are still in the preliminary stage

The company was already involved in two failed privatization proposals during 2015-2018. In April-15 it received a non-binding offer from Golden Meditech (major shareholder with 38% stake) for $6.40/share. Then in Aug-15, it received a competing offer from Nanjing. Eventually, in Jan-16 Nanjing decided to buy Golden Meditech’s stake instead, while Golden Meditech’s proposal was terminated a year later in Apr-2017 citing the transaction between the two bidders and lack of overall viability of the proposal.

The company provides cord blood processing and storage services.