Chinese Privatization — 22% Upside (at $6.5)
This is a setup with a 22% spread on the privatization of a U.S.-listed Chinese company by its parent. Several SSI members have reached out about this opportunity. In short, I believe it is too risky, primarily due to a 400%+ share price run-up over the past six months, as well as related-party shenanigans. However, if I had to place a bet, I would expect the transaction to close under the current terms and relatively quickly. Below is my research.
A couple of weeks ago OneConnect Financial Technology (OCFT) received a non-binding acquisition proposal from its parent and 65% owner, Ping An Group, at $7.98/ADS. The buyer has explicitly stated that the price is final and non-negotiable. The merger will require approval from 75% of disinterested shareholders, with no more than 10% of minority holders voting against it. Both conditions seem likely to be met, as minority shareholders essentially have little choice but to support the transaction. Ping An should be very interested in finalizing this deal, as OCFT is being acquired at approximately net cash levels, meaning the buyer is paying little to nothing for the operating business.
OneConnect is a fintech company providing software for the banking and insurance sectors. Ping An is a Chinese insurance and banking conglomerate with a $130bn market cap. In addition to its 65% stake in OCFT and control of 5 out of 9 board seats, Ping An is also OCTF’s largest client, partner and supplier of data. Through this buyout, Ping An aims to re-privatize its tiny public subsidiary.
A decade ago, OneConnect was an internal department within Ping An, focused on developing and maintaining software for the insurance giant’s operations. In 2015, it spun off as an independent fintech arm, IPO’d in the US in 2019, and dual-listed in Hong Kong by 2022. The goal was to grow OCFT’s third-party revenue base and reduce its dependency on Ping An. The strategy tumbled, hit by macroeconomic slowdowns and regulatory crackdowns. Instead of revenue diversification, OneConnect’s dependence on Ping An only deepened, with its revenue share climbing from 56% in 2020 to 65% in 2023. The overall business performance wasn’t inspiring either. Despite a promising start and doubling of revenues in a few years post-IPO, profitability lagged, and by 2022-2023 revenues began to decline. Given these results, it seems Ping An might have concluded that keeping OneConnect public no longer makes sense.
The preparations for this buyout have likely started a while ago, marked by two developments:
- At the end of 2023, Ping An acquired OneConnect’s nascent virtual banking division for $119m. This was a very big transaction to OCFT, considering its market cap was hovering around $120m at the time. The virtual bank had gotten its license only in 2019 and was still a tiny business. However, it was growing fast (37% growth in 2023). This transaction was finalized in April 2024.
- Then, in May 2024, Ping An terminated the contract for OCFT’s cloud services in favor of an in-house solution. Since Ping An generated most (~60%) of the cloud segment’s business, the whole segment was shut down, with a third of OCFT’s revenues being wiped out. Following these two events, OneConnect’s share price gradually declined from $3/ADS in November 2023 to a low of $1.1/ADS by September 2024.
It’s certainly unusual to see a giant parent company buy a significant part of its tiny public subsidiary, then quickly cancel a major contract comprising 30% of the remaining business, and then follow with a buyout offer for what’s left. Why not buy the whole thing and then re-arrange the businesses privately?
The only way these developments make sense is if Ping An was strategically preparing OneConnect’s shareholders for the buyout. By demonstrating its full control and ability to cripple the business at will, Ping An has increased the likelihood of shareholder approval for the current takeover. Why go to such lengths when the buyout premium is already substantial? My guess is because of the 10% minority opposition condition. Given that the blocking stake is a mere 3.5% of shares outstanding, this might explain why Ping An went through all this trouble. After all of this (and given large premium to OCTF’s trading price just a few months ago) it’s hard to see minority shareholders choosing to block the transaction.
From the financial standpoint, the transaction is very attractive for the buyer. OCFT is down 90% since the IPO. The buyout consideration for minority shareholders stands at only US$100m, compared to US$680m raised in IPO and secondary during 2019–2020. Furthermore, OCFT is getting acquired at net cash levels, which stood at around US$285m as of Sep’24.
The risks are that the deal either doesn’t happen, or takes a very long time to move into a binding stage, leaving shareholders stuck in an information vacuum. Downside to pre-announcement levels is around 30%, but it could be higher as it’s not really clear why the stock started running up at the end of last year, and esp. since Feb’25. The only relevant announcement in February was a CEO change – the previous one was replaced with Ping An’s guy. So either the market saw it as a sign that Ping An was getting serious about creating value at OCFT, or takeover rumors had already started circulating at the time.
OCFT reported Q4 results. As expected, revenues declined substantially in Q4 (-53% year-over-year), driven in large part by the termination of the cloud business, as well as continuing weak performance in the banking-focused segment due to a decrease in transaction volumes. No updates were provided on the pending privatization. OCFT’s share price has barely budged since the earnings release, and the spread to the non-binding offer remains wide at 20%.
Yesterday, OCFT provided a brief update on the pending takeover by Ping An, stating that discussions between the two sides remain ongoing. The spread to the non-binding bid remains wide at 19%.
https://www.bamsec.com/filing/110465925031444?cik=1780531
OCFT’s spread has widened to 30%.
I think the China-US tension has made the delisting of both OCFT and EM from the US market more likely.
However, the deteriorating market and economic conditions work the other way.
I think OCFT’s sponsor is more likely to carry through regardless of market conditions, because OCFT is just tiny (but strategic) to Ping An.
Not sure if the geopolitical tensions might have an impact on the pending transaction, but, as you suggest, they could incentivize a more expeditious privatization of OCFT/EM. I agree that the risk of Ping An walking away is low. My research on Ping An’s historical acquisitions shows that the company has only walked away from an acquisition once—the acquisition of a 50% stake in Fortis Investment—which was called off in 2008 by mutual agreement due to “turbulent market circumstances” (i.e., the Global Financial Crisis).
OCFT’s secretary had resigned amid the ongoing privatization offer review. The role will be jointly assumed by two appointees, including the company’s CFO. Spread has narrowed again to 26%.
Last week, OCFT provided another brief update on the pending takeover, reiterating that discussions between Ping An and OCFT are still ongoing. The spread remains wide at 30%.
https://www.bamsec.com/filing/110465925043712?cik=1780531
Offer has been received. HK$2.068/share or $7.976/ADR.
A great outcome, and it’s played out fairly quickly. The spread has already narrowed to 8%-10%. I think the key closing conditions — approval from 75% of disinterested shareholders, with fewer than 10% voting against — are likely to be met. M&G Investments, which holds 8% of the minority shares, has already pledged its support. The spread will likely tightened a bit more in the short term.
Scheme document has been delayed, apparently due to some bureaucratic timing issues with court dates and SEC review. That said, the delay seems unusually long. It was originally supposed to come out before June 5, but now they’re expecting it “no later than” October 31.
Spread has widened to 13%
https://www.bamsec.com/filing/110465925056634?cik=1780531
OCFT just got the green light from China’s antitrust regulator SAMR, which was one of the key conditions. The deadline for despatching the scheme document was also approved for October 31. Stock’s been moving up the past couple of days, and the spread to the offer is now down to 6%.
Looks like the long stop date is now set for June 30, 2026. It will probably close sooner, but still, the remaining spread doesn’t really seem worth the wait.
Court Meeting and EGM is on 28 Oct, and 4% spread remains.
The deal has been approved.
Last trading day is 29 Oct for OCFT and 30 Oct for 6638.
Payment date is around 28 Nov for 6638 and 8 Dec for OCFT.