BUYOUTS: Momo Drops Privatization Amid Difficult Market

Bottom line: The scrapping of a buyout offer for Momo could reflect growing obstacles to re-listing in China, and could presage the abandoning of more similar buyout bids for US-listed Chinese companies.

Momo abandons privatization bid

In a relatively surprising development in the wave of privatization bids for US-listed Chinese companies, social networking app operator Momo (Nasdaq: MOMO) has just announced a group proposing to buy out the company has withdrawn its offer. No reason was given for the reversal, and instead Momo used the official announcement to focus on its latest financial results and outlook. The move came as a surprise because the buyout deal had very strong financial backing from a group that included e-commerce giant Alibaba (NYSE: BABA) and venture capital giant Sequoia Capital.

Investor reaction to the news was initially negative, with the stock opening 4.4 percent lower in the trading session after the announcement. But then the shares reversed course and ultimately ended up 2.8 percent from their previous close.

The reversal was probably partly due to Momo’s guidance in the same announcement, which was quite strong for the operator of a location-based dating-style app similar to Tinder of the US. But I suspect the rebound was probably also fueled partly by behind-the-scenes reassurances by Momo managers that reasons for the buyout collapse weren’t related to its finances.

Momo didn’t provide any details on the withdrawal of its original buyout offer, which the company received more than a year ago at a proposed price of $18.90 per American Depositary Share (ADS). The stock currently trades at about $16, a gap similar to many of the other US-listed Chinese companies that received buyout proposals but have yet to complete the transactions.

That discrepancy reflects investor skepticism that many of the approximately 40 similar deals announced since the beginning of last year may ultimately collapse due to lack of financing. Momo’s deal differed in that regard, since the buyout group included a well-respected field of cash-rich investors like Alibaba and Sequoia.

Like many of the buyout offers, Momo’s was led by the company’s top managers, including its founder and CEO Tang Yan, who were hoping to de-list from New York and re-list back in China at higher valuations. But since many of the buyout offers were first proposed, China has slowed the pace of new IPOs and also sharply curtailed a backdoor listing route that some companies were using.

Strategic Decision?

The fact that Tang’s name was included at the head of the latest announcement suggests he had an instrumental role in the decision to withdraw the offer. Without his consent such a deal would have been nearly impossible, since he probably controls a majority of Momo’s shares both directly and indirectly.

Thus we can guess that perhaps Momo’s management team was quietly calling a few leading investors and analysts after the announcement to reassure them that the decision to scrap the deal was Tang’s and not due to financial problems. In the current climate a quick re-listing in China would have been nearly impossible. What’s more, many Chinese companies are discovering that New York listings do have their benefits, since the market is more stable due to its better regulation than China.

Momo also used the occasion to refocus investor attention on its latest quarterly results released earlier this week, which included a sharp rise in profits and also a new forecast that revenue would more than triple in the current quarter. One other company, YY (Nasdaq: YY) also announced the withdrawal of its buyout offer back in June (previous post), and I suspect we could see quite a few of the other previously announced bids get scrapped by the end of the year.

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