Current Price: HK$4.10
Offer Price: HK$5.00
Expected Closing: end 2021
This is a short note on Blackstone’s partial acquisition of a Chinese real estate developer. The spread exists mostly due to regulatory approval concerns and significant potential downside (37%).
On the 16th of June, Chinese real estate developer SOHO China announced a voluntary conditional cash offer from Blackstone at HK$5/share (valuing the company at a total US$3bn equity value). SOHO founders (Chinese billionaire power couple – chair and CEO) have agreed to sell a majority of their 64% stake in the company. Further shareholder approval is not required. The price looks favorable for the buyer – it is 17% below the $6/share negotiated in the Q1’20 last year (the talks were abrupted by the COVID) and also comes at just 0.65x BV vs second largest peer China Evergrande (US$13bn market cap) trading around its book.
Initially, SOHO price jumped up to $4.60/share (leaving 9% spread), but over the month, the spread has gradually widened to 20%+ due to regulatory concerns. A pre-condition to this offer is consent from the Chinese antitrust watchdog – China’s State Administration for Market Regulation (SAMR). Blackstone has already submitted the relevant documents and both parties are waiting for the review. Scheme document dispatch was also adjourned till the receipt of regulatory consent. The longstop date is Dec’21.
Despite significant skepticism from the market, there are a few reasons to believe that the regulatory approval should eventually be granted:
- Blackstone is a purely financial buyer with over 10 years of experience in Chinese RE investments (i.e. here, here, here). It currently owns 6m sq. m. of properties in China. The fact that they are pursuing SOHO for over 1.5 years gives confidence that the regulatory environment was investigated in detail before putting this acquisition in motion.
- SOHO will remain listed and the buyer intends to continue the “business as usual” – no big management changes or asset sales are planned.
- Chinese real estate market is highly fragmented and Sohu is a relatively small player.
- Founders (chair and CEO) will remain the second-largest shareholder with a combined 9% stake but will resign from their managerial positions.
Nonetheless, the regulatory risk still remains and the downside in case of rejection is significant – pre-announcement price stands at HK$3.80, however, SOHO stock started soaring two weeks prior to the announcement. This was probably due to some kind of rumor although the only rumor I found was released just one day before the announcement. Anyways, the real “last-close” price is probably much lower and in case the deal breaks, Sohu’s share price could tumble to around HK$2.60 (37% downside).
One more note – the fact that Blackstone intends to make the offer for all SOHO shareholders and yet keep the listing is a bit ambiguous as the stock exchange can delist the company if the float goes below 25%. However, the acquisition document didn’t mention anything about the proration and stated that if the float gets below the satisfactory amount, shares may get temporarily suspended until sufficient float is attained. The offer is most likely structured this way in order to incentivize shareholder participation. I expect Blackstone to cash out all tendering shareholders.
The company develops high-class buildings, mostly office, and commercial, in Beijing and Shanghai. SOHU is regarded as “one of the country’s most high-profile real estate firms”, which buildings are recognized for their unusual futuristic and modern designs.