BUYOUTS: E-House Lowers Buyout Price, Investors Flee

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Bottom line: A new round of buyouts for US-listed Chinese firms is being greeted with skepticism due to China’s volatile economy, and could offer a good buying opportunity for investors with strong appetite for risk.

Investors dump E-House shares after new buyout offer

In what looks like an emerging new trend, investors are dumping shares of online real estate services firm E-House (NYSE: EJ) after it announced a new lower offer price for its shares under a privatization bid first announced in June. This lowering of the price doesn’t come as a huge surprise, since US-listed Chinese shares have tumbled since many first announced privatization bids in the first half of the year with an eye to re-listing back in China.

But what does come as a surprise is US investor reaction to the new offer. In the case of E-House, the company’s shares fell more than 5 percent after it announced the new buyout price, which still represented a nearly 7 percent premium to the stock’s last close. Normally one would expect the shares to rise after such an announcement to approach the new bid price. But in this case the sell-off seems to reflect investor skepticism that the new deal will ever get completed, even at the lower price.

This particular share reaction looks almost identical to one that occurred just a day earlier when wind energy equipment maker Ming Yang (NYSE: MY) announced its own new buyout offer. (previous post) In that instance Ming Yang’s bid also represented a modest premium over its last closing price, but that didn’t stop investors from dumping the shares. Ming Yang shares have now fallen 6.2 percent in the 2 trading sessions since its original buyout announcement, and now trade 16 percent below the offer price.

We’ll try to understand why investors are greeting these deals with such a cold shoulder shortly, but first let’s review E-House’s latest offer and the history of this particular buyout. A management-led group first offered to privatize E-House back in June, bidding $7.38 for each of its American Depositary Shares (ADSs). (previous post) That represented a hefty premium of more than 20 percent to the stock price at the time, and was just one of about 3 dozen similar privatization bids in the first half of the year for undervalued US-listed Chinese companies.

Of course everyone knows what happened next, namely that China’s surging stock markets went into a tailspin that saw them plunge during the summer, sparking a concurrent sell-off for US-listed Chinese companies. That sell-off saw most of the buyout candidates’ shares plunge well below their offer prices, prompting me to predict that many of the deals would collapse or perhaps that buyers would submit new lower bids once the markets stabilized.

Downward Revision

Now we’re seeing the first revised bid arrive with E-House, whose management has submitted a new offer of $6.64 per ADS to privatize the company. (company announcement; Chinese article) That’s about 10 percent lower than the June bid of $7.38. But as I’ve already noted, investors greeted this new bid by selling the shares, even though the new bid represented a modest premium to the last closing price. That reaction is a bit unexpected, since the fact that E-House announced the new offer shows it believes it has the necessary funding to complete the deal.

So now we come to the questions of: Why are we seeing this particular reaction, and are we likely to see similar things from the other buyout candidates whose bids are still pending? The short answer to the first question seems to be that investor skepticism is high that any of these deals will be completed, most likely due to the volatile situation in China’s economy that is scaring away both big and small investors.

I can certainly understand that skepticism, and also the fact that investors are probably feeling a bit duped after being offered a higher price for their shares earlier. But at the same I do think that many of the most recent bids like the one from Ming Yang and now this one from E-House probably have relatively secure funding sources and will get completed at their offer price. The same may not be true for many of the other pending bids, and I still do predict that half or more of those will ultimately collapse.

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