Chinese Privatisation – 13% Upside
This is yet another privatization of a US-listed Chinese company. These deals tend to close successfully after reaching the binding agreement stage, with only a couple of exceptions. You can refer to our historical analysis of similar transactions.
Cancer screening firm Genetron Holdings is getting acquired by a consortium led by its co-founder/chairman at $1.36/ADS, or $1.31 after ADS cancellation fee. Spread stands at 13%. Definitive agreement has just been signed. Buyer consortium owns 60% of GTH and the transaction is expected to close in Q1 2024. Downside to pre-announcement levels is around 25%.
All remaining conditions are very likely to be satisfied.
- Approval by 2/3 of shareholders is kind of guaranteed by 60% ownership by the buyer consortium.
- Various ‘Requisite Regulatory Approvals’ should not be an issue either. It’s a delisting from the U.S. market – Chinese authorities are unlikely to object to this. The only new-sounding item here is outbound direct investment (ODI) approval by regulators for four parties in the buyers’ consortium. I do not recall coming across the requirement defined this way for other transactions. However, this is a rather standard privatization of a Cayman-registered entity with an operating business in China, thus not a real ‘outbound direct investment’. I would be surprised if this is a new-sounding requirement was added specifically for GTH or if such an approval would be difficult to receive. A short expected timeline (closing in Q1) is indicative of a likely smooth approval.
- Not more than 15% of shareholders exercise appraisal rights – this is a very high threshold and would require objections by more than a third of minority shareholders. The price offered comes at a 15%-20% premium to GTH trading prices before the non-binding proposal in Aug’22 and also a 50% premium to trading prices over the last year. So I doubt anyone would object, let alone one-third of shareholders.
An absolute majority of US-listed Chinese privatizations that reach a definitive stage tend to close successfully. Over the last 8 years, we have so far seen only 3 failed cases (we might’ve missed some though): SVA, CXDC, and GSMG. CXDC was dropped due to prolonged lawsuit-related delays, while SVA and GSMG were terminated as management eventually changed their minds and chose to raise equity instead of going private. Given that GTH privatization has already been almost 1.5 years in the making and has attracted financing from large state-owned sponsors (vs. mostly some small PE sponsors in SVA/GSMG cases), I think the chances of the deal falling apart are much lower.
The preliminary non-binding offer at exactly the same price was made in August 2022. That seems to be plenty of time to arrive close to the finish line. The buyers’ consortium now involves a number of highly credible state-owned sponsors and rollover shareholders, e.g. China Construction Bank (one of big 4 banks in China), Wuxi Guolian Development, CICC Healthcare Investment Fund, etc. The transaction is not contingent on financing and minority shareholders will be cashed out using “cash contributions from certain members of the Consortium pursuant to their respective equity commitment letters”
Another point reducing the likelihood of the buyers walking away is the opportunistic angle of this privatization (albeit my understanding of the business and its prospects is very limited).
The company IPOed in June 2020 at $16/ADS (vs current $1/ADS price). The IPO was very successful and upsized from the initial range of $150-$170m to $256m. The pandemic played a big role, as investors saw GTH’s diagnostic expertise as a potential opportunity to develop tests for the virus. Right around the IPO, the company rolled out its COVID-19 diagnostic kits, which received approval from the FDA. However, with the hype on COVID test manufacturers subsiding (e.g. see Moderna and Pfizer share prices at the time) and strict Chinese lockdowns hitting the company’s core cancer screening business (reducing product sales, patient visits, and slowing development trials), GTH financial performance and share price suffered. 2023 is supposed to be a year of normalization for GTH. However, the latest financials are as of Dec’22, so there is no visibility if the performance started improving.
In its core division, GTH provides cancer detection/screening services. It has developed a portfolio of already approved products in China and also has an active development pipeline, some of which was/is aimed to anter the US market. The company sells diagnostics products, including platforms and assays to hospitals. It also has its own laboratories where it provides more complex outsourcing services to hospitals and clinical testing directly to patients. The company is partnering with some local governments in China (Wuxi, Dofang), China’s Ministry of Science and Technology, and the likes of Astra Zeneca for developing their cancer screening projects. One of their products in development has also received a breakthrough device designation from the FDA.
Regarding the rationale behind the privatization, it’s my understanding that US-listed companies in China are more likely to do this so they can avoid increasing regulatory scrutiny / hassle and possibly also re-list in a home stock exchange where investors might have a better understanding of the company’s target market. Does that sound about right to you?
Also, how is it that they can not have updated their financials since their last annual report? Are they not subject to these rules for some reason, or are they just delinquent? https://www.sec.gov/education/smallbusiness/goingpublic/exchangeactreporting
The rationale sounds about right. Also, my understanding is that in the current environment there’s basically no chance cash burning Chinese microcaps such as GTH could raise financing in the US, so the rationale to stay listed and incur public costs is limited. Regarding the financial results, they are only required to file annual reports (20-F) plus NASDAQ also requires companies to at least file 6-K interim report after the second quarter. It’s interesting they’ve chosen to skip Q1 this year, but maybe we will at least see Q2 report before the merger closes.
So reading the study this has just transition to the 95% success rate definitive category from the 70% success rate non-binding category. Since the sample size is so small I’d probably back that rate back down to 90%, but even with the lower success rate my math gives is a 22% annualized return with an April 1 close.
The way I see being delinquent on US filings is both concerning and comforting. Concerning in that its a reason to trust management less, and comforting in that it means they’ve pretty much committed to privatization;)
Another take on the lack of financials is that they are very likely much improved but management is holding them back to ensure they can buy it back cheap. If they were actually getting worse I’m not sure why they wouldn’t share them to reduce their cost of acquisition.
GTH released preliminary proxy, no meeting date yet, but it seems largely a formality, given that the buyer consortium owns 60%, while a 2/3 majority of votes cast is needed. The merger is still expected to close in Q1 2024. Current spread just under 10%.
I see the ADR tradable on IBKR for $3.69, so a %10 spread to the $4.08 offer per ADS. However I’m seeing everyone reference the $1.36 per ADS. I’m 99% positive its an ADS ratio, but for the life of me, I can’t find the listing/details. Could someone please enlighten me ? Thanks in advance
https://www.sec.gov/Archives/edgar/data/1782594/000110465923108574/tm2328041d2_6k.htm
Absolute gentleman. Thank you Sir.
Shareholder meeting is set for February 21. Remaining spread is at 8%. https://www.bamsec.com/filing/110465924004243/2?cik=1782594
After GTH’s change from 5 shares per ADS to 15 shares per ADS, would the $0.05 per ADS cancellation fee remain the same or does it change to $0.15? (i.e. is it based on $0.05 per ADS share or is it $0.01 per underlying share?) Thanks.
The 5 cent ADS fee is calculated from the current offer price of $4.08/ADS. So the actual offer is $4.03/ADS (6% upside).
https://www.bamsec.com/filing/110465924004243/2?cik=1782594
Thank you, Lukas.
Any sense on timing post shareholder meeting on the 21st?
The proxy released in mid-Jan indicated: “We are working toward consummating the Merger as soon as possible and currently expect the Merger to consummate during the first quarter of 2024, after all conditions to the Merger have been satisfied or waived.”
Shareholder approval might be the last remaining condition. The others were rather general, such as non-objection by regulators – I assume these have been met already.
Does that mean the transaction might close promptly after the vote? Probably, but you can never be sure when it comes to Chinese privatizations.
GTH shareholder approval has been received and the spread has narrowed down to 2.5%. The privatization should be finalized soon although the press release didn’t provide a specific date yet. The idea has pretty much played out as expected generating +13% in 4 months (so far). Total upside in this setup slightly improved due to the ADS ratio change in October.
https://www.bamsec.com/filing/110465924025749?cik=1782594
I got a message from IBKR today saying “GTH@NASDAQ (Name: GENETRON HOLDINGS LTD-ADR) is the subject of an announced merger, effective 20240401.” Just mentioning it in case those with other brokers haven’t seen something similar.
The spread closed completely on March 21 during market hours in high volume. Yet the press release announcing the closing was only published on March 28. Clearly some people knew a week earlier. Is there any publicly available source that pre-signals closing in such cases?
I wondered the same thing but I noticed there was an update published on NASDAQ Trader on the 21st: https://www.nasdaqtrader.com/TraderNews.aspx?id=ECA2024-142
It looks like you can set up email alerts on NASDAQ Trader if you set up an account.