Quick Pitch: Best Inc (BEST)

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.

18 Comments

18 thoughts on “Quick Pitch: Best Inc (BEST)”

    • Not sure I understand your question – the non-binding offer is in cash, so not there is no need for hedging.

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      • Is the current share px at the pre-bid level? If the current share px is significantly higher, how are you hedging any deal falling apart?

      • BEST currently trades close to pre-bid levels. So if the deal falls apart, I would not expect the shares to fall materially.

        But in any case, I do not see any ways to hedge this kind of setup. In stocks with options market, one could buy puts, but usually option prices already reflect probabilities that a transaction might fall apart.

  1. I might be mis-remembering but didn’t you do a study of how often these chinese going private transactions actually get completed? If so, can you remind us of the results, if I’m not totaly senile I thought they were good?

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    • When it comes to YI, I’m simply baffled by the prolonged wait for management to finalize a definitive agreement. For BEST setup, the main factor is the involvement of Alibaba, which I think will make a difference in terms of timeline and likelihood of closing.

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  2. I think this is a pass for me until there is a binding offer. Beyond the low success rate of non-binding offers in China from the study, BEST is running low on cash and it’s quick ratio is terrible, current liabilities are nearly double current assets. So there is some risk of implosion before a binding offer arrives, and one might speculate on whether the offer was only made in order to pump the stock to make raising another round of financing easier.

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    • I do no think Alibaba would be playing games and would join privatization consortium “in order to pump the stock to make raising another round of financing easier.” Intentions in this case seem solid.

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  3. A bond of theirs that’s maturing in Oct 2024 traded yesterday for 40c on the dollar, 178% yield. This looks like it’s either getting bought out or going bankrupt.

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  4. Can someone help explain why their bond is trading 40c on the dollar with the company going private?

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    • I don’t think it meaningfully trading. Bloomberg only shows $11,000 of the bond left outstanding ($200mm at original issued back in ’19). The trade last Thursday was for $2k – so could just have been someone willing to liquidate at any price give no market.

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  5. I used to like this idea but then I found out that the Best Take Private idea seems to drag on for years now. I found the following interesting article on Reuters dated 20. Januar 2021. Read yourself.

    Alibaba-backed logistics firm Best weighs sale in strategic review
    https://www.reuters.com/article/idUSKBN29P0Y6/

    The comment von crandyhill above seems to fit now very well: “…one might speculate on whether the offer was only made in order to pump the stock to make raising another round of financing easier.”

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    • DT any thoughts? Risk seems esp low here but the waiting game goes on.

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  6. The spread has widened and now stands at 25%. However, I think the situation is less attractive than when I published the write-up.

    During a recent conference call, Alibaba’s management stated that the company has delayed the expected IPO of its logistics arm Cainiao due to unfavorable current market conditions – management said the public listing would not reflect the “true intrinsic value” of the subsidiary (see quote below). This might put the acquisition of BEST into question.

    “I’ll address the question about the IPO of [indiscernible] and Cainiao. The — so last year, when we announced our reorganization, part of the goal was to make sure that we take steps to reflect the intrinsic value of our various business units in the valuation of Alibaba Group, okay? And we — and there are multiple ways we could do it. And we specifically talked about spinning off companies and raising capital in business units like [indiscernible] and Cainiao so that we could put a valuation mark on these businesses. But the caveat when we made the announcement was that all these transactions were subject to market conditions. And market conditions currently are just not in a state where we believe we can really truly reflect value — true intrinsic value of these businesses. So in the last few months, Eddie and his team have taken a very close look at our core business, and we’ve come to the conclusion that right now, focusing on generating synergies within the companies in our group will be the best way to reflect the value of the entire Alibaba Group.”

    The unfavorable market conditions for Cainiao’s IPO seem to be at least partially related to the ongoing fierce price war in the Chinese express delivery market. Falling prices, coupled with softening volume growth, have significantly reduced operating margins across the entire industry in Q3’23. Industry players have experienced substantial share price declines since the non-binding acquisition proposal, including ZTO Express (-29%), YTO Express (-19%), STO Express (-17%), and Yunda (-32%). The issues seem to have impacted Cainiao, which offers its own express delivery service within China while also partnering with other express delivery providers and providing services such as warehousing. Cainiao/Alibaba hold sizable stakes in a number of express delivery companies, including YTO Express and ZTO Express.

    It is not clear if these dynamics will have a significant impact on BEST’s operational performance, given that the company is primarily focused on freight delivery as opposed to express delivery (the Chinese express delivery business was divested in 2021). However, it might impact Alibaba’s willingness to acquire BEST and combine it with Cainiao. Also, one of the elements of the thesis was that due to the upcoming Cainiao IPO, Alibaba was under time pressure to complete the acquisition of BEST. With the IPO postponed, there is no longer any rush. Finally, if the price movement in the express delivery players is at least directionally indicative of where BEST would trade if the offer is withdrawn, then the downside might be significant.

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  7. Apparently my initial take that “due to Alibaba’s involvement the deal is more likely to close and the timeline should be shorter” turned out to be correct.

    Despite my subsequent concerns (see the previous comment) definitive agreement was signed yesterday at the original terms of $2.88 per ADS. Multiple investors, including Alibaba, are rolling over their equity. The spread has narrowed to just 5%. The merger is expected to close in Q3 2024. Shareholder meeting date has not been set yet; however, with 94.5% votes from the buyers consortium, this will likely be just a formality.

    A nice win for anyone holding on or buying at the dip on Alibaba’s cancellation of the Cainiao IPO. The cancellation did not appear to have been a meaningful factor in this privatization. In fact, just recently on a Q1 2024 earnings call, BABA reiterated its support for the expansion of Cainiao’s global logistics network and the importance of its infrastructure to the BABA’s core e-commerce operations. BEST’s assets are, of course, well-suited for these expansion plans. This comment from Alibaba should have been a sign that BEST privatization is still on tract – everything seems easy with a hindsight 😉

    “In March this year, we withdrew Cainiao’s IPO application. Cainiao provides essential infrastructure to Alibaba’s core e-commerce business, and we hope Cainiao will strengthen its synergies with our Chinese domestic and international e-commerce operations. Alibaba Group will continue to support the expansion of Cainiao’s global logistics network.”

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