51job (JOBS) – Merger Arbitrage and Appraisal Rights Opportunity – 37% Upside

Current Price: $51

Expected Offer Price: $70 (updated offer $57.25)

Upside: 37%

Expected Closing: TBD

This idea was shared by Joshua

 

Situation Overview

On September 17, 2020, 51job, the largest online and outsourced HR company in China with 171mm user accounts and 154mm resumes posted on its site, announced that it had received a preliminary non-binding proposal from DCP Capital Partners, L.P. to acquire all of its outstanding shares at $79.05 a share. On May 4, 2021, the Company announced that its CEO Rick Yan and Ocean Link Partners Limited had joined with DCP to form a “Consortium” to acquire 51Job, Inc. and take it private, still at the original offer price of $79.05 per share. The Consortium initially controlled 17.62% of the Company’s voting power. The September Proposal represented a premium of 19% to the Company’s volume-weighted average price during the last 30 days, and a premium of 16% to the Company’s last closing price on September 16, 2020. The transaction was anticipated to close by December 2021. On June 21, 2021, the Company filed the merger agreement and announced that Recruit Holdings, which holds a 35% stake, had joined the Consortium, bringing its holdings to 55%. Upon closing of the transaction, Recruit Holdings would own a 43% stake in the private company in the form of common shares and a convertible bond instrument, as well as retain its board seat. In addition, Recruit will monetize a portion of its interest in 51job at closing through the sale of a portion of its shares to other consortium members. Under Cayman law, the Consortium needs 2/3 of the shareholders to approve the transaction, which will require an additional 11% of shares to vote in favor of the transaction. Given that many of the holders are passive investors or investment managers that typically vote in favor of proposed transactions, there is little chance that the transaction is voted down absent an unacceptable proposed deal price reduction, particularly given the recent selloff in Chinese equities and volatility in 51Job’s stock price. 

The board formed a special committee advised by Duff & Phelps and Davis Polk to advise them on the fairness of the transaction, with a fairness opinion delivered on 6/21/2021. The transaction Termination Date is March 21, 2022, unless it is extended by the Consortium. China Merchants Bank has committed $1.825bn of acquisition financing to be borrowed by 51Job Inc, as well as $450mm to CEO Rick Yan to fund his participation in the go-private transaction. The financing commitment expires at the earlier of the Termination Date or June 21, 2022, with a potential 12-month extension subject to a new commitment letter. The Termination Fee is $160mm ($2.37 per share or $5.16 excluding the Consortium’s shares) if terminated by the Consortium and $80mm if terminated by the Company. However, if there is a Mutual Termination, no fee is payable be either party. 

On September 1, 2021, 51Job Inc.’s stock was trading at $76.66, ~3.1% below the deal price. Shortly thereafter the market for Chinese equities experienced a significant selloff and by October 1st, the stock was trading at $68, near its pre-announcement price. Investors were now pricing in a belief that the transaction price would be reduced and by Friday October 29th, the stock was trading at $59.50, a low not seen since the global pandemic began in March 2020. However, the following Monday, November 1st, Rick Yan filed a 13-D, and attached to the filing were the fully committed financing agreements for his $450mm and the Company’s $1.8bn, which implied the deal price would be maintained given that the financing matched the initial financing for the $79.05 transaction price. The stock price quickly shot up to ~$67 as it now seemed that the transaction price would not be lowered and should still close by year-end. 

What came next has been fodder for various theories regarding the merger and has caused substantial volatility and uncertainty regarding the stock and the transaction, as well as a unique investment opportunity for those with conviction. On Monday, November 8th, the Company filed a 6-K announcing that “certain membersof the Consortium had approached regulators in China to determine if there were any “regulatory changes that would be applicable to the transaction”. The fact pattern here is highly suspicious given that there were no specific regulatory approvals specified as conditions precedent in the merger agreement and just a week prior the CEO’s 13-D filing committed financing documents were filed that were predicated on the $79.05 transaction price. The 6-K was deliberate in that the filing identified “certain members”, meaning that not all the members sought a regulatory consultation that was not a precondition to the transaction’s closing and effectively amounted to an unheard-of regulatory reverse-inquiry. The market appeared to interpret the event to be a pretext to a price reduction or possibly an indication that the deal would be terminated. Post the filing of the 6-K the stock traded down to a low of $48.80 and as high as $58.42. On Tuesday, 12/7/2021 51Job Inc.’s stock sold off again and closed at $51.83, (now ~35% below the $79.05 deal price), after the Company reported that it was not holding its AGM in 2021. Consortium member DCP Capital Partners is the most likely party behind the reverse inquiry, and possibly with the participation of Ocean Link, as they are PE investors and are more likely to be aggressive in exploiting the current market selloff. 

 

Investment Thesis (also see Return Sensitivities and Financial Model at the end of this report)

Purchasing 51Job Inc.’s stock at ~$52 currently represents a highly attractive investment opportunity that is significantly de-risked against a price reduction at this time and is also an attractive valuation even if the deal were to be terminated. Assuming the deal price is reduced by 11.4% to $70 per share would result in a 35% return, 183% IRR to the 3/21/22 Termination Date, and a 107% IRR to the 6/21/22 financing commitment expiration. Moreover, under Cayman law shareholders can seek appraisal rights (discussed in detail later) without having to risk receiving a lower price should the court find the actual value was worth less than the deal value. Unlike Delaware, the courts in the Cayman Islands do not ascribe much weight to the deal price, particularly when insiders are involved. Instead, the Cayman valuation process tends to be based on a long-term DCF value. 

Given the selloff in Chinese equities since September of this year, the base case assumption is that the deal price will be reduced probably sometime in early January. This will be followed shortly by a 6-K conveniently announcing there are no regulatory impediments to closing the deal and the transaction will close by the 3/21/22 Termination Date and no later than the 6/21/22 financing commitment expiration. The question then becomes what will the price be reduced to? I believe the price will be reduced by no more than 10-12%, with an expected reduction of 11.4%, or $70 per share. 

Duff & Phelps provided a fairness opinion in June stating that $79.05 was a fair price, and the Company saw its net revenue grow 32.6% YoY in 2Q 2021, with online recruitment services revenues increasing 17.4% and other human-resource-related revenues increased 56.2%. This indicates that job market and hiring activity is accelerating out of the pandemic and there is no reason to believe the businesses’ intrinsic value has been impacted by the pandemic. While COGS and SG&A showed unusually abnormal and highly suspicious increases in the first 6 months of 2021 vs 2020 of ~$58mm or 50% growth YoY, this is typical of Chinese companies domiciled in the Caymans that are engaged in a go-private transaction as they attempt to mitigate the impact of appraisal rights litigation (discussed in detail later in the writeup). The notion that unadjusted operating income declined by 67% in the first 6 months of 2021 vs the 2020 period, which was the height of the pandemic, while revenue increased by more than 8% for the first 6 months of 2021 vs the first 6 months of 2020 is absurd and is not indicative of future lower operating margins, but gamesmanship for leverage in the expected appraisal rights litigation. 51Job Inc had 90% FCF conversion in 2019 and 99% in 2020, CAPEX was $23mm in 2019 and $1.1mm in 2020, and working capital is historically a source of cash for the Company. 51Job does not file 10-Qs, only press releases so the last detailed financials available are the 2020 20-F, making it difficult to adjust the YTD EBITDA without a cash flow statement. However, in normalizing 2021 YTD EBITDA to adjust for the abnormal COGS and SG&A increases by applying the Company’s historical 35-37% EBITDA margin, implies YTD normalized EBITDA of approximately $110mm to $96mm respectively using their 2019 margin of 36.7% and 2020 pandemic EBITDA margin of 31%. 2019A Adj. EBITDA was ~$225mm and 2020A Adj. EBITDA was ~$180mm. 

The transaction multiple at $79.05 is 17.7x 2019 EBITDA and using a blended 2019-2020 Adj. EBITDA of ~$200mm, 19.8x EBITDA. As of June 30, 2021, the Company has $1.47bn of cash and short-term investments net of $203mm of customer deposits, or approximately $21.60 cent per share. That excludes long-term time deposits which have a maturity over 1 year but less than 3 years of $113mm and long-term investments, which are classified as public and non-traded equity and debt securities, of $241mm. The significant excess cash on the balance sheet is one reason that makes a going private transaction so attractive to the Consortium. Upon closing, net debt will be $350mm, which is <1.5x net leverage on 2022E EBITDA 1.9x 2020A EBITDA. The Transaction multiple at $70 per share, representing an 11.4% price reduction, implies a TV/EBITDA multiple of 15.6x vs 18.6x at the $79.05 price using 2019 EBITDA. The current EV/EBITDA as of 12/7/2021 is ~10x. Historically JOBS has traded at an average EV/LTM EBITDA of 25x (typically 20-25x), with a high/low of 15-40x. Those multiples may be inflated by 1-2x given that financial data providers do not appear to adjust EBITDA for several non-cash items on the CF statement or reflect the short-term investments, they are well above the multiple implied by the deal price. Recruit Holdings is currently trading at 25x EBITDA while Chinese comp Tongdao Liepin Group traded at an average of 57x EBITDA in 2019 and 46x in 2020 and is currently trading at 19.8x LTM EBITDA of $53.8mm and has an EBITDA margin of ~17% vs 51Job’s 34% blended 2019-2021 margin. 

Moreover, Duff & Phelps’ valuation practice is well known for providing “fairness opinions” to boards of Chinese companies where there are serious questions as to conflicts of interest. In fact, Duff & Phelps as recently as November of 2021 was exposed for its role in providing a fairness opinion to Renren Inc. in a highly controversial spinoff transaction that resulted in over $1.5bn of assets being spun off to insiders at a $500mm valuation (see RENN’s write-up here). A shareholder derivative suit was brought against Renren, its BoD, as well as Duff & Phelps for its role in aiding and abetting the insiders self-dealing and asset stripping. When the judge in the case ordered unredacted valuation materials produced by Duff & Phelps to be posted to the court docket in October of 2021, Duff & Phelps filed an emergency appeal and shortly thereafter settled as part of a $300mm global settlement with the shareholders. Given the negative attention that case has brought to Duff & Phelps, they are likely to be much more careful regarding a valuation supporting a reduction in the 51Job Inc. transaction price. 

While there has been a selloff due to Chinese regulatory crackdowns, this is a Cayman domiciled Chinese company with a US ADS listing that is going private, not going public, so regulatory concerns regarding data privacy and influence from US regulators do not seem to apply. 51Job’s data is akin to LinkedIn and Indeed.com, which is not inherently proprietary given that it is posted online. Moreover, there are no valuable algorithms with national security implications associated with the Company’s business that would justify regulators blocking the transaction outright. Recruit Holdings is a Japanese company, which does provide some pretext to raise a regulatory issue, but there are already the largest shareholder and any concerns regarding Recruit’s access to what could ostensibly be deemed as is proprietary or sensitive data can be addressed in the private company’s bylaws. 

While the Consortium has billed this as an attractive opportunity to shareholders, they are clearly looking to exploit the dislocation caused by the pandemic given that DCP specifically described the proposal as “an attractive opportunity for the company’s shareholders amidst a backdrop of ongoing Covid-19 uncertainty.” In its Q4 2020 earnings Management noted that “the decline was primarily due to the impact of the COVID-19 pandemic and global economic uncertainty on the business operations of companies in China, which has been disruptive to general recruitment market activity and has negatively affected customer spending on the Company’s online recruitment platforms in 2020.” The impact from Covid is clearly temporary as the Company highlighted the improving environment in 2021 stating that:  

The 2021 post-Chinese New Year peak recruitment season has progressed without interruption thus far, and early indicators on market demand and activity have been positive. The Company believes there will be continued recovery in its online recruitment business and favorable monetization opportunities for its campus recruitment, training and outsourcing services this year. The Company plans to add headcount and increase investments in sales and marketing as well as product development in 2021 to strengthen its brands and service offerings.

In mid-January of 2020, just as Covid was starting to spread the Company’s stock was trading just over $90 per share and nothing has altered the long-term fundamental outlook for the business. 51Job’s stock had reached an all-time high as recently as June 2018 of $107 per share, so the current $79.05 share offer appears to be substantially below what the stock would trade at under normalized market conditions. 

 

Valuation

As mentioned earlier, the Company’s shares were trading at just over $90 per share in January 2020 just prior to the global pandemic lockdown and the shares had reached an all-time high in June 2018 of just over $107 per share. While the pre-lockdown share price is not the sole indicator of the company’s intrinsic value, it certainly represents a benchmark as to what the fair value for the company’s value is in under normalized market conditions. In estimating a normalized valuation for 51Job, Inc. we looked at several factors, including its historical growth rate and margins, analyst projections for 2022 Revenue and EBITDA, and the overall fundamentals of the business, and found that they support a substantially higher share price than the current offer using DCF analysis, EV/2022E EBITDA and comparable transaction analysis. 

Citigroup’s equity research department published a report on August 11, 2020, a little more than a month prior to DCP’s going-private proposal, estimating 2022 Revenue of RMB 4,723mm (18% growth over 2019 levels) and EBITDA of RMB 1,652 (12.6% growth from 2019 levels). Applying the Company’s average EV/EBITDA multiple in 2019 of 21x to 2022E EBITDA would result in a share price of ~$100 per share (RMB/UDS 6.52), significantly above the $79.05 offer price from the Consortium, which conveniently now includes the Company’s co-founder and CEO, Rick Yan and largest shareholder Recruit Holdings. Moreover, the Company has $21.60 per share in cash on its balance sheet after adjusting for customer deposits, or 27% of the offer price. Given the significant FCF generation, the Company carries an excessive cash balance. Assuming a cash cushion of 10% of revenue would imply normalized balance sheet cash of ~75mm, assuming the company was to maintain a minimum cash balance of $150mm, 2x the required amount, then there is $1.3bn of excess cash on the balance sheet (~$19.25 per share), that should have or could have been returned to shareholders. The $79.05 per share offer represents only a $59.80 per share offer price excluding excess cash, or 10.9x 2022E EBITDA and 12.5x 2019A EBITDA. 

51Job, Inc. is the largest online recruiting and outsourced HR company in China with 171mm user accounts and 154mm resumes posted online as of December 31, 2020. The Liepin Group, their next largest competitor has ~72mm user accounts. Liepin traded at 57x LTM EBITDA in 2019 and 46x in 2020 and currently trades at 19.8x LTM EBITDA according to Bloomberg. Other comparable companies include: 

  • Recruit Holdings (owner of Indeed.com) is the largest public jobs classifieds company in the world and trades at an estimated 25x EV to LTM EBITDA, 24x 2021 EBITDA and 43x 2022 earnings. Of note, JOBS has the largest market share in China of the higher value white collar recruitment market and Microsoft paid 8x revenue and 84x EBITDA for LinkedIn in 2016 which has a similar focus as JOBS.
  • Seek Ltd. (ticker “SEK AU”) is an Australia-based online employment, educational, commercial and volunteer businesses. The Company recently sold a non-control stake in Zhaopin to Primavera Capital that valued Zhaopin at ~17x 2022 EBITDA. The Primavera press release states an equity value of $1.7bn USD plus ~$400mm USD of net debt per SEK AU annual report compared to Goldman Sachs’ estimated Zhaopin 2022 EBITDA of $127mm using an exchange rate of 77 US per Australian Dollar. That sale does not include a control premium, which using the standard 30% would imply a 20.5x EBITDA multiple for a controlling stake. 

Using a 7-year DCF model we estimate that the intrinsic value of the Company is approximately $100 per share ($48 above the current share price) when averaging the DCF scenarios using EV/EBITDA for a terminal value and the perpetuity method. The lowest valuation estimate was ~$83 per share using EV/EBITDA terminal value, which is 5% above the current proposal from the consortium and 37% below the current trading price, or a 60% return in an appraisal rights litigation at the low end, representing significant upside potential. The lowest price using the Perpetuity method was ~$85. It appears the Consortium members, including the 51Job, Inc.’s CEO, believe that as well and that is why they are attempting to capitalize on the disruption from Covid and now the selloff in Chinese equities. 

In generating a DCF valuation for 51Job, Inc. the following cash flow assumptions were made: 

  1. Revenue growth for 2022 was set at 12% over 2019 levels vs 18% projected by Citigroup’s equity research team. Growth was assumed to decline at a .5% per year for the duration of the forecast, which reduced the annual growth rate to 9% by 2028. 
  2. The adjusted EBITDA margin began at 37.5% in 2022 vs 36.7% in 2019 to account for Covid related cost reductions for 2022, the for the remainder of the model the margin was reduced by .5% per year until 2027 and then remaining at 35%. 
  3. Since 2009 the Company’s PRC-based operating subsidiary Tech JV qualified for preferential tax status that allows it to pay a 15% tax rate vs the standard 25% tax rate. This status must be renewed every 3 years and has been with the last renewal occurring in 2018. We assume that the Company continues to receive its current preferential tax treatment given its 9-year history.

 

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Note: Operating Margins are EBIT, not EBITDA, and include certain non-cash items such as stock compensation.

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  1. WACC Assumptions – We applied a discount rate range of 9%-11 based on the CAPM based on a Beta of .7 and applying a 6% country risk premium for US investors. We used the yield on the 10-yr Chinese Treasury bond for the risk-free rate. For the Equity Risk Premium, we used the market-implied equity risk premium model which solves for the equity risk premium implied by current market prices for equities based on the earnings yield, dividend yields and dividend growth. 

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  • For the terminal multiple, we used a range of 14x-18x, which is a 9-7x discount to the Company’s historical multiple and a discount to Liepin whose EBITDA margins are half of 51 Job Inc.’s. It is also only slightly above the 17x paid by Primavera Capital for a non-control-based investment in Zhaopin and below an estimated 20.5x multiple were a control premium paid. I believe these multiples are reasonable given the Company’s significant M&A opportunities as a result of its $1.4bn in cash, as well as the potential for 51Job to be a target for a strategic buyer willing to pay an appropriate control premium as well as the opportunity for cost reductions as scale increases. Given the 84x Microsoft paid for LinkedIn, the 14-18x range discounts substantially what a strategic acquirer might pay for JOBS. For the terminal value, a growth rate of 5-6% was used, which reflects the long-term growth opportunity given China’s rapidly growing professional class. 

 

Recruit Holdings Historical EV/EBITDA

222

51JOB Inc. Historical EV/EBITDA

333

 

Liepin Historical EV/EBITDA

444

 

Company Overview

51job is a leading provider of integrated human resource services in China. The Company has several online recruitment platforms as well as mobile applications, connect millions of people with employment opportunities every day. The Company also provides other value-added HR services, including business process outsourcing, training, professional assessment, campus recruitment, executive search and compensation analysis. 51job has a call center in Wuhan and a nationwide network of sales and service locations spanning more than 30 cities across China. 

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The Company commenced operations in 1998 and in March 2000, it was incorporated as a new holding company, now called 51job, Inc., as an exempted company with limited liability in the Cayman Islands under the Cayman Islands Companies Law. Subsequently, 51job, Inc. acquired 51net.com Inc., or 51net, a British Virgin Islands business company and the registered owner of its www.51job.com domain name, and other subsidiaries to become the holding company of our corporate group. On September 29, 2004 the Company completed its initial public offering of 6,037,500 ADSs, and commenced trading on the NASDAQ Global Select Market under the symbol “JOBS.”As of December 31, 2019, the Company mainly operated its business through the following significant PRC subsidiaries and affiliated Chinese entities: 

  • Qianjin Network Information Technology (Shanghai) Co., Ltd., or Tech JV, which is owned by 51net, Qian Cheng and Wuhan AdCo, and holds licenses which allow it to provide online advertising, human resource related and value-added telecommunications services; 
  • Beijing Qian Cheng Si Jin Advertising Co., Ltd., or Qian Cheng, which is wholly owned by Run An, is a joint venture partner in Tech JV and has an equity interest in Shanghai Qianjin Advertising Co., Ltd., or AdCo: 
  • Beijing Run An Information Consultancy Co., Ltd., or Run An, which is jointly owned by Jingwu Chen and Tao Wang, two senior executives of the Company; 
  • Qian Cheng Wu You Network Information Technology (Beijing) Co., Ltd., or WFOE, which is wholly owned by 51net Beijing, a Cayman Islands company wholly owned by 51job, Inc., and owns the trademarks and registered copyrights; and 
  • Wuhan Mei Hao Qian Cheng Advertising Co., Ltd., or Wuhan AdCo, which is wholly owned by Qian Cheng and has an equity interest in Tech JV. 

 

Overview of Appraisal Rights Litigation

As the Delaware courts have increasingly lent more weight to “Deal Price” in appraisal rights litigation, and investors bear the risk of receiving less than the deal price should the court determine the value should be less than the Deal Price, appraisal rights litigation has dwindled and many investors have lost interest in pursuing such claims. Meanwhile, as a result of changes in US law in the Holding Foreign Companies Accountable Act, which now require Chinese-based companies to make their audit work papers and other items available for inspection, there are a bevy of going private transactions over being announced by Chinese-based companies with US listed ADRs. Most of the companies are domiciled In Caymans and BVI alone, and it is estimated that there are approximately $500 billion dollars of market capitalization in US-listed, foreign incorporated, Chinese-based companies that are ripe for going private. In just the past few months over $14 billion of going private transactions have been announced. 

Given that a large portion of the public float is in the hands of retail investors who are unlikely to exercise their appraisal rights, it is in the buyers’ (generally comprised of company insiders) interests to make low-ball bids to acquire as much stock as possible at lower prices. That makes paying a higher price to those exercising appraisal rights more palatable. Indeed, the vast majority of cases settle before there is a final determination made by the court, and there is no need to settle collectively, shareholders can settle separately with the buyers or proceed to a judgment. 

 

Mechanics of Exercising Appraisal Rights

Since 51Job, Inc. is domiciled in the Cayman Islands, shareholders who believe the $79.05 per share does not represent a fair value for the transaction may exercise appraisal rights. In order to exercise these rights, the shareholders must opt out of receiving the offer price when it receives its proxy statement. Since the shares are initially held in street name by the prime broker the shareholder must work with its corporate actions specialist to make sure it is receiving any and all notices regarding the transaction, the vote and the record date for voting. However, once the shares are acquired, the holder must begin the process of transferring the shares out of street name and strip it of the ADS in order to directly register the shares in the investor’s name with the Company’s transfer agent. 

 

Legal Process

Pursuant to section 238 of the Cayman Companies Act (“Section 238”), upon a merger or consolidation, a dissenting shareholder is entitled to a determination by the Grand Court of the “fair value” of its shares, along with a fair rate of interest. Under Cayman law, a hearing is held in the first 90 days in which the court determines what percentage of the deal price must be returned to the appraisal rights claimants in what is known as an “Interim Payment.” In all but a few cases, the court has ordered that 100% of the consideration price be paid over to the dissenters within that 90-day time frame. In others, the court may permit the Defendants to argue for lower fair values and thus require only a percentage of the deal price (e.g. the floor value on a fairness opinion) to be paid. Regardless of whether the Interim Payment is 100% of the deal price or less the Interim Payment makes exercising appraisal rights highly attractive from an IRR standpoint given that claimants are receiving back a substantial portion, if not all, of the Initial Investment relatively quickly. While there will be some time lag between the date the deal closes and the day that suit can be filed, the Interim Payment should occur within 180 days of going private transaction. 

Another important aspect of appraisal right litigation is that Cayman law is much less deferential to the deal price than in Delaware, which has been moving further and further toward the deal price representing as representing the best estimate of value. In Cayman appraisal rights litigation, the cases thus far have given substantially more weight to a DCF approach. This means that unlike Delaware cases where the deal price is heavily factored and becomes the “anchor” for any valuation analysis, the Cayman courts are far less deferential to the deal price – particular in cases where a majority of controlling insiders acquire the assets without an auction or other process. Moreover, there is no downside risk to the court determining that the fair value is lower than the deal price, as there is in Delaware where the Delaware Supreme Court found that the fair value was below the deal price in Fir Tree Value Master Fund, LP v. Jarden Corp., 2020 WL 3885166 (Del. July 8, 2020) 

Cayman is a “loser pay” system which can be good if the claimant wins, although it presents modest downside risk – however, these costs would be borne pro-rata among all the claimants, it is possible to mitigate this risk with “after the event” insurance, depending on how substantial one views that risk and is willing to sacrifice some of the return to obtain it. It is believed that 90% or more of appraisal cases settle prior to a final judgment being issued. 

In addition to the ability to receive a price above the deal price, the Cayman Courts award interest to winning appraisal rights claimants. Typically, the interest rate is determined by reference to the claimants’ average cost of capital and expected returns, which typically means a greater interest rate than most US jurisdictions would award. Not only do the claimant receive interest on the excess value of the stock in relation to the deal price, but in those cases where the Interim Payment is less than the deal price, the court will award interest on that shortfall as well, which is accretive to the overall IRR. 

 

Risks/Mitigants

Risks include a termination of the deal outright resulting in only receiving a $160mm termination fee, $2.37 based on all shares outstanding, and $5.16 if the consortium shares are excluded from the calculation. A reduction in the purchase price well below the estimated 10-12% range. 

The current share price is $16 below the pre-announcement trading price, $27 below the current transaction price and $18 below the estimated reduced price of $70 per share providing a significant margin of safety. In the event the transaction is terminated, management will need to increase transparency and focus on delivering shareholder value, including the potential return of ~$19 per share in excess cash on the balance sheet. Given that the CEO owns 22% of the stock, his incentives will be aligned with shareholders absent the opportunity to usurp value in a going-private transaction. In addition, at the current depressed share price a strategic bidder may seek to acquire 51Job in the event the merger terminates. 

 

IRR Sensitivities

Assuming you purchase the shares today at $52 and exercise appraisal rights (assume 3/21/2022 closing date as exercise date) you would likely receive the initial payment of $70 in June of 2022 with an additional payment of $10 (assumed settlement) six months later in December of 2022 ($20 below what the average DCF value and $3 below the low-end DCF value), the IRR is 107.8%, with no beta post the close and no downside risk as long as the transaction closes. The arithmetic return is 35% at a $70 transaction price, 60% to the low-end DCF estimate of $83, and 92% to the average DCF value of ~$100 per share. 

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14 Comments

14 thoughts on “51job (JOBS) – Merger Arbitrage and Appraisal Rights Opportunity – 37% Upside”

  1. How does one exercise appraisal rights on Interactive Brokers?

    And it might be worth it to post a condensed version of this write up on Seeking Alpha at some point. The more people see it the better, it would also create more of an incentive to just stick closer to the original deal price.

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  2. You would need to have the stock taken out of street name and put into your name directly. Then you need to have the shares registered on the share ledger of the Cayman parent. You need to do this prior to the vote and vote against the transaction. Once the transaction closes you can exercise your appraisal rights in the Caymans. Doing this without local counsel in the Caymans would be very difficult, so the appraisal option is something I recommend for institutional investors or those with resources to pursue.

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  3. 51Job Q3 numbers released. Revenue up 19%. However, they continue to play games with expenses in a bald faced attempt to mitigate the impact of appraisal rights in Cayman Islands. With sales and marketing up 46% (advertising expense component up 123%) and opex up 35%.

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  4. I sold at $50. Find it really puzzling what is happening. Doesn’t this mean that Recruit stake will actually increase? And the foreign ownership argument doesn’t make sense either, aren’t those funds Chinese? Will the company get the break fee?

    Also the regulator did not seem to have a problem with it, as they did not approach the company. Yet they made some pretty large changes.

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  5. The termination fee should apply, however, the BoD is unlikely to enforce it. I would argue that the BoD and the IC are in breach of their fiduciary duty to the company and the company is being harmed by the actions of the consortium and NewCo (acquirer). That opens the door to a potential derivative action in the US similar to Renren. The basis would be that the IC and the BoD are harming the company but forcing a deeply undervalued sale process, amending the merger price (a material adverse event) and not seeking the termination fee (as of yet). While the fee is only $2.50 per share, it is an asset of the company, which opens the door to derivative liability.

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  6. The Cayman appraisal rights was always the key to providing a margin of safety in this position. I suggest anyone who can or is willing, to get their shares out of street name and into their own name. Then have them listed on the parent share ledger in the Cayman Islands, vote against the deal and notify the company within 20 days of the deal’s close that they are seeking appraisal rights. Once in the Cayman process, the costs are distributed pro rata, so small holders portion should not be significant.

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  7. 51job follow up to report that company is near deal to be acquired for $61/ADR.

    An investor group backed by DCP Capital Partners and Ocean Link Partners reached a deal to buy the Nasdaq-traded firm for $61 per American depositary share, according to a statement Tuesday, which confirmed an earlier Bloomberg News report. The transaction is set to be one of the largest take-private deals for a U.S.-listed Chinese firm this year.

    51job Chief Executive Officer Rick Yan and Recruit Holdings Co., the Japanese firm that ranks as the company’s largest shareholder, are also part of the consortium. The directors of 51job have approved the revised agreement, following a unanimous recommendation from a special board committee, and the deal is expected to close during the first half of the year.

    The revised offer of $61 represents about an 18% premium to 51job’s last closing price and an increase from the latest proposal of $57.25 per share in cash. 51job’s American depositary shares jumped 12% in U.S. pre-market trading Tuesday to hit as high as $58.22.

    https://www.bloomberg.com/news/articles/2022-03-01/buyout-group-is-said-to-near-4-billion-deal-for-china-s-51job?sref=QY7kFAuy

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    • I haven’t been following the story closely but it looks like there is still a huge spread with the stock trading at $56.93. What do you think of the risk/reward at this point?

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  8. $50.80 price now, back down to the level 2 weeks ago before the $61 deal was announced. Probably due to China stocks generally down. 17% spread.

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  9. We are closing JOBS position for tracking portfolio purposes, 15% return in three and a half months.

    4% spread remains to $61 offer price. Shareholder meeting is set for the end of April and the transaction might close soon afterward (still questionable). However, given the volatility of the developments so far, I do not think it is worth the risk.

    Joshua’s advocated path of seeking higher compensation through shareholder appraisal rights is still a possibility.

    Joshua, thank you for sharing this idea and please update the board when possible on the proceedings regarding the appraisal rights. Very interested to hear the outcome.

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  10. There is a significant backlog of appraisal cases in the Cayman’s, expect this will now take 18-24 months to conclude. Will update as events unfold.

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