Chinese Privatization – 19% Upside
This is yet another Chinese privatization with a 19% spread to the non-binding offer. Such setups generally have extended timelines and are quite risky, with a high percentage of cases failing to reach definitive agreements (see our study on US-listed Chinese privatizations). But I think this one is different – Alibaba is BEST’s largest shareholder and is most probably the driving force behind this privatization together with management. Due to Alibaba’s involvement the deal is more likely to close and the timeline should be shorter. Also, the stock is already at pre-announcement levels which at least theoretically limits the risk if the deal falls apart.
BEST provides freight delivery and supply chain management (sourcing, procurement, warehousing, etc.) services in China and Southeast Asia. In early November, the company received a non-binding acquisition proposal from a buyer consortium (49% economic and 94% voting stake) led by its founder/CEO/chairman at $2.88 per ADS. BEST has formed a special committee and hired a financial advisor to evaluate the proposal. The spread has widened from the initial 4% upon the announcement to the current 19%.
Alibaba is the largest shareholder with 26% ownership and will be rolling its equity stake in privatization. The Chinese e-commerce giant should know BEST inside out as it was one of the earliest investors in the business, participating in Series A-F funding rounds, bought additional stock in the IPO (2017 at $200/ADS adjusted for stock splits), and currently controls two out of seven board seats. Over the recent years, the companies have partnered to launch cross-border delivery services between China and other Southeast Asian countries, with Alibaba using BEST’s sortation and distribution centers, as well as last-mile service stations (see here and here). Importantly, Alibaba has recently launched its cross-border delivery business and might be looking for a tighter integration with BEST services for geographical expansion. During a recent conference call, BABA’s management stated that the key focus of its logistics arm is to build out a global network. Alibaba is also planning the IPO of its logistics arm Cainiao and maybe BEST could be re-incorporated as part of this business after privatisation. I am just shooting in the dark here and have no idea what are Alibaba’s further plans for cooperation with BEST and how tight the integration already is, but there seem to be plenty of ways the two companies could expand the relationship and maybe some of that might be better implemented if BEST is a private company.
There is also an opportunistic angle to this privatization as BEST shares are sitting close to all-time-lows and the business might be inflecting. Since 2017 $200/ADS IPO the stock has been on a downward slope as the company faced challenges, including Covid-related restrictions and intense competition in the express delivery space. Amidst this backdrop, the business has been undergoing a restructuring. Over the recent years, BEST divested its China express delivery business and exited/wound-down several other non-core segments. With the restructuring now completed and a relaxation of Covid restrictions, the company has been inching towards profitability. Two key segments, Freight and Supply Chain Management (87% of revenues), have already turned profitable and are expected to generate positive operating cash flows in 2023.
Valuation wise, little can be said as is usually the case with most of similar US-listed Chinese privatizations. Revenues are volatile (mostly due to divestments) and the company is still burning cash. The transaction values BEST at 0.2x TTM sales. A significantly larger US-listed Chinese freight/express delivery provider ZTO Express trades at a 3.2x multiple, however it is a growing and profitable business with 20% operating margins, so probably not the closest comparable to BEST.