Current Price: $3.68
Offer Price: $4.00
Expected Closing: TBD
This is a US-listed Chinese firm privatization by its previous and current management with a signed definitive agreement. Situation offers 9% upside to the announced buy-out price. The company has a somewhat shady history, however, there are a few credible parties involved, which make this situation stand out from most other Chinese privatizations.
On the 8th of December’20, professional and K-12 education company Tarena International announced a non-binding offer from its founder/ex-CEO/current director at $4/share. The definitive agreement was signed on the 30th of April – consideration remained unchanged, while the CEO was joined by a consortium of certain shareholders and Ascendent Capital Partners (financier). Buyer consortium owns 45% of economic and 74% of voting power, which guarantees shareholder approval. Meeting date has not been announced yet.
Based on our previous research, these types of special situations with a signed definitive agreement are rather safe as in several years only 1 such privatization had failed. However, recently we saw another example of a terminated transaction (CXDC), which has now visually increased the risk for all remaining transactions (notably, most spreads for currently ongoing similar transactions have also slightly widened).
There are a two more major positives in TEDU case:
- Apparently, one of the major shareholders of TEDU is KKR, which owns 14.1% of outstanding shares (increased the stake from 12.3% in May’21). The PE giant is holding shares since 2016 – annual report shows that it owned 42.3% of TEDU at the time. KKR agreed to support this transaction and roll over its shares. Its fair to say that a long-term involvement of KKR hints that TEDU shady history is potentially in the past and significantly reduces likelihood of unexpected issues with the privatization process.
- No financing condition is included. The company has already secured financing with Ascendent Capital – Chinese PE firm, which seems somewhat credible and at least there’s some visilibity in its ability to fund this transaction. In the beginning of 2020, Ascendent raised $1bn+ for its third China fund (apparently the sam vehicle which will finance this deal). Unrelated, but in Dec’20 Ascendent also formed a SPAC – Silver Crest Acquisition and raised $300m.
- The company has a shady history. It IPO’ed in 2014 at $9/share with shares more than doubling in a few years after riding the online education hype wave, however, from time to time, different sources, mostly independent research firms (here, here and here) warned about accounting irregularities at TEDU. Then in Nov’2019, TEDU officially announced results of independent research, which found numerous accounting irregularities, conflicts of interest in related party transactions, intereference with external audit process, etc. It was estimated that from 2014 to 2018 revenue misstatement could amount to 11.5% of the total revenues. After that, TEDU quickly announced management and board change, replaced a few people including its CEO and CFO, annd regained compliance with NASDAQ in May’20. The founder/ex-CEO, which leads the current privatization is the same guy, which managed the company till end-2019. This definitiely doesn’t add credibility to the current transaction, however, I believe that the involvement of the above mentioned credible parties, especially KKR, somewhat neutralizes the risk of founder’s track record.
- TEDU business has not been performing well lately. Since 2017 the company continues to generate losses and revenues are in decline (albeit a slow one).
- If the deal breaks, the downside might be significant – pre-announcement price (Nov’20) stands at $2.40/share (40% downside).
The company offers combined learning solutions (both online and classroom-based) for adults and school children. For adult professionals, they provide practical education in IT and non-IT subjects, especially preparing people for sectors with high growth and strong hiring prospects. For K-12 they specialize in robotics and IT. TEDU currently offers courses in 7 IT subjects, 3 non-IT subjects and 7 K-12 education programs.
Historical financials (10-K):