BUYOUTS: Giant, Ming Yang Get Chilly Reception in China Migration

Bottom line: Weak share reaction to Ming Yang’s new buyout offer and a low valuation for Giant Interactive’s China backdoor listing reflect weakening investor sentiment towards poorly performing Chinese Internet companies.

Chilly reaction for Ming Yang buyout plan

After a brief period of relative quiet, movement is picking up again in the tide of Chinese companies privatizing from New York to re-list back in China. This time former new-energy high flyer Ming Yang (NYSE: MY) announced it has received a management-led buyout offer, becoming the latest firm to receive such an offer. Meantime in China, one of the earlier firms to privatize, gaming company Giant Interactive, has taken the latest step for a backdoor listing in Shenzhen using a shell company called New Century Cruises. (Shenzhen: 002258).

But in an interesting twist to the homeward migration story, a chilly reception from investors seems to reflecting shriveling interest in these poorly performing Chinese companies. In the Giant story, the proposed new valuation for the company looks quite low — far less than what Giant was worth when it de-listed from New York in 2013. That’s quite a switch from what Giant’s talkative chief was saying just 4 months ago, when he boasted his company might be able to get valued as much as 5 times the $3 billion it was worth when it was still listed in New York.

The rapidly changing market sentiment was also reflected in investor reaction to the Ming Yang buyout announcement, which saw the company say a management-led group has offered to buy its New York-listed American Depositary Shares (ADSs) for $2.51 apiece. (company announcement) Rather than greeting the news with gusto, investors actually thumbed their noses at Ming Yang by bidding down its shares by 4 percent after the announcement came out. That means that at their latest price of $2.13, the shares now trade 15 percent below the buy-out price.

That would seem to indicate investors have become highly skeptical of this and many of the other 3 dozen buyout bids that have come for US-listed Chinese companies since the beginning of the year. Funding sources for many of those offers were never really very clear, and Ming Yang’s own announcement is equally vague. But that said, it does seem like the timing of Ming Yang’s announcement indicates it believes it has the funding commitments to complete its deal. Accordingly, I would expect this particular deal could have a better chance of closing than many of the earlier ones that are still pending.

Shrinking Valuation

Next there’s Giant, whose talkative chief Shi Yuzhu said in July that Chinese investors might value his firm at as much as 100 billion yuan ($16 billion), or 5 times what it was worth at the time of its New York de-listing 2 years ago. (previous post) That number contrasts sharply with the latest public filing from New Century Cruises, Giant’s backdoor listing vehicle, which says it will issue 13.1 billion yuan worth of new shares and exchange them for all Giant’s assets. (English article; Chinese article)

Some quick math will show that amount translates to a purchase price of about $2 billion, which is actually a third less than what Giant was worth when it de-listed from New York. That’s certainly a far cry from Shi’s earlier boast, and probably indicates that market sentiment is rapidly cooling towards Chinese companies that are losing money or performing poorly like Giant. Such changing sentiment was probably a factor that drove together 2 recent shotgun marriages on the Chinese Internet, one bringing together online travel rivals Ctrip (Nasdaq: CTRP) and Qunar (Nasdaq: CTRP), and the other group buying enemies Dianping and Meituan. (previous post)

Giant’s low valuation certainly doesn’t bode well for many of the other US-listed Chinese companies that were hoping to leave New York and get much higher values by re-listing back in China. It also doesn’t look good for high-flying startups like smartphone maker Xiaomi that achieved meteoric valuations last year when sentiment was strong, but could see their values stagnate or even start to shrivel when they return to market for more funds. We’ll have to wait and see how the next big investment goes before making any assessment. But the trends certainly seem to be pointing downward for Chinese high-tech start-ups looking for cash and lofty valuations.

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