Acorn International (ATV) – Going Private – 11% Upside

Current Price: $13.70

Offer Price: $15.22

Upside: 11%

Expected Closing: TBD

Press release

 

Short note on another Chinese going private transaction to keep an eye on.

Marketing and branding company Acorn International has received a non-binding privatization offer from its co-founder and chairman Robert Roche who also owns 75% of ATV shares. Consideration stands at $15.22/share in cash. The proposal has to get approval from a special committee. Shareholder approval is guaranteed. Given, Robert’s position in this Chinese firm, it seems that the special committee’s approval shouldn’t be an issue either. The transaction is conditioned on financing – an agreement with an undisclosed third party lender has been signed, however, it is subject to due diligence by the lender.

This offer follows the previous privatization proposal by Robert Roche, which was made in Nov’19 at $19.50/share and then suspended in February due to COVID-19 (seems like a legitimate reason). The current offer comes at a significant discount (21%) to the previous one. Not really clear how the lower price is justified as ATV does mostly e-commerce business and impact from covid should be limited. Q1 net revenues fell by 7.2%, gross profit decreased by 12%. Q2 results have not been released yet. In any case, lower price means higher likelihood that the buyer will proceed with the offer.

The Analysis of US-Listed Chinese Going-Private Transactions indicates that revised offers have a higher chance of going through – although the sample is small (4 transactions only), all revised non-binding offers have closed successfully so far. On average it takes about 10 months for a revised non-binding proposal to close, however, the announcement of a definitive agreement usually narrows the spread significantly as well.

Couple additional points:

• A number of similar transactions (Chinese going private) have played out well recently (JMEI, WUBA, BITA, etc.), while from a high level the buyer here seems somewhat credible (Robert Roche’s bio).
• Despite that, it is worth noting that previously there were also certain cases where management with 74% share ownership made an offer, went silent for half a year, and then eventually terminated the transaction (e.g. CXDC in 2017), so the risk is definitely still in place here.
• The price action seems interesting – 10 days after the announcement the spread stood at 2%-3% and then started widening to the current 11% despite no new announcements/updates made by ATV.

 

Acorn International

The main operating segment of Acorn is the proprietary brand division – it sells its own healthcare products primarily through e-commerce channels in China. The main product line of ATV is Babaka – posture correction equipment/products, while the seafood line makes only a small part of the company’s brand division revenues (8% in 2019).

The brand division is complemented by the Digital Services Division in which ATV provides digital marketing and e-commerce services to third-party Chinese brands.

COVID-19 outbreak has created certain supply-side disruption and delivery Challenges in some parts of China. The demand for Babaka products has decreased, however, the seafood product demand has grown.