51job (JOBS) – Merger Arbitrage – 10% Upside

Current Price: $71.72

Offer Price: $79.05

Upside: 10%

Expected Closing Date: TBD

Press Release

This idea was shared by hshane123

 

On the 17th of September, Nasdaq-listed Chinese online recruiter 51jobs ($5bn market cap) has received a non-binding takeover offer at $79.05/share from DCP Capital. DCP capital is a PE firm run by a former KKR / Morgan Stanley PE Asian team and definitely seems like a credible buyer. JOBS hired Duff & Phelps as the financial advisor/Davis Polk as legal counsel and formed a special committee to review the offer, so it seems that the proposal is being seriously considered. JOBS management always used to host a conference with quarterly earning, however, the call was skipped this quarter and the acquisition wasn't mentioned at all in the results report. The proposal comes at about 19xFCF (at 2019 figures, 2020 results were affected by covid), which seems cheap for a market-leading online business in China. Overall, I believe that negotiations are still ongoing and there is a decent chance some kind of an agreement is reached between JOBS and DCP Capital.

The downside seems limited as shares are currently trading just slightly above the pre-announcement price, while recent Q3 results were rather positive (previous revenue guidance was beaten).

 

JOBS

51jobs is a top online recruiter in China closely competing with its nearest peer Zhaopin.com. JOBS operates two segments - online recruiting (about 2/3rds of revenue mix) and HR services (training, etc.). The company is run by two co-founders Rick Yang and Kathleen Chien, who own 19.2% of the shares.

The company has IPO'ed in Nasdaq in 2004. Since then, it has been consistently growing and increased its revenues by over 8x, while net income grew 22x:

Currently, the company is overcapitalized (no debt, US$1.5bn in cash and short term investments) and generates about US$270m of FCF annually.

Nonetheless, since 2019 the growth has been slowing down due to negative macro trends, trade tensions, and an overall downturn in the Chinese economy, which have pressured Chinese companies and reduced the hiring demand. Additionally, the company has been hit by the COVID-19 outbreak. Revenues in the first 2 quarters fell by 13% and 14% YoY, however, Q3  showed a significant improvement over Q2, with revenues declining by only 8.4% YoY. Q3 revenues (RMB 906m) also beaten the previous management guidance of RMB 820m - RMB 870m. In Q2 the company stated that recovery is underway:

While economic recovery is underway in China and we have seen steady improvement in labor market activity since March, hiring tends to be a lagging indicator, and companies remain careful and selective in adding headcount amid lingering uncertainty from the COVD-19 pandemic and geopolitical tensions.

However, the Q3 release, unlike the previous quarterly releases, excluded any comments from management, had no discussions on the outlook, and no mentions of the takeover proposal.

Aside from two co-founders, other major shareholders include: Recruit Holdings - owns a 35% stake and is a royalty-based partner of JOBS (provides training and online assessment materials), RY Holdings - 18.5% stake, and Massachusetts Financial Services with 5.4% ownership in JOBS.

 

DCP Capital
DCP is a PE firm founded by David H. Liu and Julian J. Wolhardt.

Apparently, this is the 3rd business they're doing together - previously they've been working in KKR and founded its Greater China investment business (KKR Greater China). Liu was a partner and a CEO - responsible for investment decisions for the whole Asia region, while Wolhardt served as a partner and regional leader. Both investors are regarded as "some of China’s most astute PE investors", have an excellent track record (KKR has compounded a 26% annual rate of return in China over the last 40 years), market knowledge, and connections in China. You can find more about their background and investment style here.

In April'19 DCP closed their Greater China focused US dollar PE fund with $2.5bn of total commitments (was significantly oversubscribed due to strong demand from institutional investors).

1 COMMENT

  1. R

    Thanks for this idea. With JOBS trading back around the pre-announcement price without any debt this appears to be an attractive risk/reward to me. Perhaps the offer could even be renegotiated higher given the positive vaccine developments since September? Anyone else participating in this one?

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