BUYOUTS: 21Vianet Divorces Xiaomi, Boosts Tsinghua Ties

Bottom line: 21Vianet could get a new privatization offer from Tsinghua Unigroup by year end, following withdrawal of a previous bid; while Xiaomi chief Lei Jun may start selling non-core assets to raise money for his struggling company.

Buyout group scraps 21Vianet bid

Data center operator 21Vianet (Nasdaq: VNET) has finally done the inevitable and formally scrapped its de-listing plan, becoming the second company to do so among some 40 US-listed Chinese firms trying to privatize from New York. This particular move has been coming for a while now, and signs appeared as early as May that 21Vianet was abandoning its privatization plans. But new Chinese media reports are casting some light on why this particular bid collapsed, and it appears the reasons are linked to struggling smartphone maker Xiaomi, whose chief and co-founder Lei Jun was helping to finance the deal.

At the same time, 21Vianet has issued a series of separate announcements that indicate it’s boosting its ties with Tsinghua University, an acquisitive institution that previously privatized 2 US-listed Chinese chip designers. Tsinghua Unigroup was actually one of the partners backing 21Vianet’s privatization bid announced a year ago. Thus these latest announcements hint that one of the Tsinghua companies may soon come back and mount a new solo bid for 21Vianet.

Let’s start by reviewing the new series of announcements from 21Vianet, led by word that the group trying to privatize the company has formally withdrawn its offer. (company announcement; English article; Chinese article) That bid was being backed by a Tsinghua affiliate, as well as software maker Kingsoft (HKEx: 3888), which is closely tied to Xiaomi chief executive Lei Jun.

At the same time, 21Vianet announced a $200 million share repurchase program (company announcement), and also a new tie-up with Unigroup. (company announcement) Under its new Tsinghua tie-up, 21Vianet will join the university’s 50 billion yuan ($7.5 billion) Cornerstone Plan as it seeks to transform from its roots as a data center operator to owner of an Internet infrastructure ecosystem.

Shareholders seemed to collectively like all the news, and bid up 21Vianet stock by 5.4 percent after the 3 announcements came out. I suspect that many believe these announcements could presage a new solo buyout offer for 21Vianet from Tsinghua Unigroup, which privatized US-listed chip designers Spreadtrum and RDA Microelectronics 2 years ago.

The Tsinghua group of companies, which also includes a sister firm called Unisplendour, has billions of dollars in cash and is trying to use that to build up a chip-making giant to rival better known global names like Intel (Nasdaq: INTC) and TSMC (Taipei: 2330). But foreign governments in the US and Taiwan have rebuffed acquisition bids by the Tsinghua group due to suspicions that it is tied to Beijing.

Less Controversial

A bid by Tsinghua for 21Vianet would be far less controversial, since the company is already based in China. What’s more, 21Vianet’s current market value stands at just $900 million, meaning a new buyout bid would be quite affordable for Tsinghua.

21Vianet’s abandonment comes just 2 weeks after social networking site YY (Nasdaq: YY) became the first US-listed Chinese company to formally abandon its privatization bid. (previous post) A Chinese media report points out that both of those bids were tied to Lei Jun, since YY’s bid was also backed by the billionaire who is chief executive of Xiaomi and a major investor in Kingsoft.

The abandonment of both deals underscores Xiaomi’s own troubles as its growth stalls, and reflects its recent shift into cash-conservation mode. Xiaomi was on top of the world and quite cash rich in early 2015 after raising more than $1 billion, but its recent woes have made it become far more conservative with its money. The scrapping of these 2 buyouts is probably a direct result of that conservatism, and we may see Lei and Xiaomi start to abandon some of their other non-core investments soon to raise more cash.

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