Offer Price: $6.50
Expected Closing: TBD
This is US-listed Chinese company privatization.
On the 12th of March, China Customer Relations Center signed a definitive agreement with a group of insiders consisting of CEO/chair, CFO, certain directors and other shareholders. Consideration stands at $6.50/share. Buyers own 71.1% of the company and shareholder approval is virtually guaranteed. Financing has been secured with China Merchants Bank.
The remaining 6% spread is likely a result of the company's reputation and previously failed management's attempt at privatization in 2018. However, today's situation is very different and it is likely that this time the transaction will close as expected.
The company provides business process outsourcing services, including customer relationship management, technical support, sales, customer retention, market surveys, etc. for certain major enterprises in the PRC, including two major telecommunications carriers China Mobile and China Telecom.
- Nov 2018 - CCRC received a non-binding privatization proposal at $16/share from its founder/chairman and Guangzhou Cornerstone Asset Management, which was supposed to finance the transaction.
- May 2020 - after almost two years of silence, the offer was withdrawn due to Guangzhou Cornerstone's decision to exit the consortium.
- Nov 2020 - CCRC received another non-binding privatization offer at $5.37/share from CEO/chair, CFO and certain directors. Buyers' group owns 43.5% of CCRC shares.
- Mar 2021 - definitive agreement was signed and the offer consideration was increased to $6.50/share (21% raise). Certain shareholders joined the consortium bringing total ownership to 71.1%.
Positive aspects of the situation
- The definitive agreement has already been signed, which signals a very high chance of the transaction going through. In our study (see here) only 1 similar US-listed Chinese privatization with a definitive agreement was canceled.
- The definitive agreement came with a 21% price increase over the non-binding offer, which is quite rare and could also signal firm intentions of the management this time.
- A preliminary proxy was filed just 5 days after signing the definitive agreement, which potentially indicates that management wants to complete this transaction fast.
- The offer is very opportunistic and will allow management to steal CCRC from the minority shareholders on the cheap. The proposal values CCRC at 5.3x EV/TTM EBITDA and 6.5x P/E. Furthermore, $6.50/share seems like a relatively small premium to the IPO price (2015) of $4/share, while during the 6 years since the IPO CCRC has grown substantially: revenues increased from $59m (2015) to $173m (2019), EBITDA from $6.5m to $16m (same time periods) and net income from $4.8m to $13m. Additionally, CCRC growth seems to have accelerated in 2020 with H1'20 results showing revenues +33% YoY, EBIT +89% YoY, and EPS +107% YoY due to increased demand and addition of new customers.
- The previous offer (Nov 2018) came at 14x EBITDA and 18x TTM earnings. The valuation at the current offer price is considerably more attractive for the buyer group, which adds further confidence in management's intention to proceed.
- The previous offer had to be funded by Guangzhou Cornerstone, which was not a credible financier and its ability to raise enough funds was heavily criticized by the short-seller Jcap (here). This time the funds are secured with China Merchants Bank, which is a major US$200bn market cap Chinese bank.
- Trump's legislation signed last year (that would kick Chinese firms off the American exchanged unless they adhered to American auditing standards) might provide the additional incentive for management to proceed with the transaction.
- CCRC management lacks credibility in the eyes of the minority shareholders. It has been heavily blamed by Jcap in its report shortly after the $16/share offer. The short-seller claimed that CCRC is inflating profits, criticized its corporate structure, undisclosed transactions with certain related third-party companies as well as undisclosed previous sanctions by Chinese regulators. This adds some uncertainty to the situation, however, I think that the current incentives and other aspects described above more than compensate for this (potentially historical) track record risk.
- The pre-announcement (non-binding) price is $4.72/share. However, theoretically, the downside should be considerably lower due to very positive H1 results released after the offer announcement in December. Nonetheless, management's track record makes it difficult to estimate the actual downside and low valuation seems warranted here in no-privatization scenario. It's hard to believe that shareholders would ever attach a higher valuation multiple to CRCC business with the current management in place.