BUYOUTS: iDreamSky Buyout Advances, Price Unchanged

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Bottom line: iDreamSky’s finalized buyout offer marks the start of a new wave that will see more than a half dozen US-listed Chinese firms sign similar offers by the Lunar New Year, mostly at the same prices from original privatization deals announced last year.

iDreamSky finalizes buyout bid

The New Year is kicking off with a shot of deja vu, as a wave of companies that announced privatization bids in the first half of 2015 are now returning to investors with concrete offers. In the latest chapter of this two-part wave, mobile game operator iDreamSky (Nasdaq: DSKY) has just announced its signing of a formal deal to take the company private.

iDreamSky announced its original intent to privatize last June, at the height of a wave that saw about 3 dozen such de-listing bids proposed last year, mostly in the first half. The wave of announcements skidded to a halt in mid June when China’s stock markets underwent a massive correction after an even larger rally. But with China’s markets showing signs of stability, the de-listing movement has resumed.

According to its new announcement, iDreamSky has signed a formal agreement with a management-led group that has agreed to pay $14 for each of the company’s American Depositary Shares (ADS). (company announcement) That price remains unchanged from the original buyout offer that iDreamSky received in June, and values the company at roughly  $600 million.

The decision to keep its buyout price unchanged is somewhat significant, because it reverses an earlier trend that was seeing some companies announce higher prices in their final buyout deals from the original proposals. Two weeks ago software security specialist Qihoo 360 (NYSE: QIHU) also announced a final buyout deal that left the final price unchanged from the original offer. (previous post)

Before that, a few companies like Homeinns (Nasdaq: HMIN) had announced final bids that were raised from original offers, hinting that more such final bids might be raised as Chinese private equity firms jostled to take part in the buyouts. Thus iDreamSky’s decision to maintain its original price could indicate many final offers we’re likely to see in January will also maintain prices from original privatization plans announced last year.

Short Life in New York

iDreamSky has the distinction of being one of Chinese companies with the shortest time as a US-listed company. It made its IPO in August 2014 at the height of a wave of Chinese firms listing in the US, culminating with the record-breaking $25 billion IPO for Alibaba (NYSE: BABA) in September that year. The company ultimately sold its ADSs for $15 in the offering, meaning this final buyout is about 5 percent below the IPO price.

Other recently-listed companies that have also received buyout offers include social networking app operator Momo (Nasdaq: MOMO), and mobile game developer Sungy Mobile (Nasdaq: GOMO). While a few companies have signed final buyout offers and even completed the privatization process, the big majority have remained silent since China’s summer stock market sell-off that seemed to put many of the plans in jeopardy.

We’re entering what’s usually a relatively quiet period of the year for corporate fund-raising by Chinese firms, usually lasting about 2 months between the Christmas and the Chinese New Year holidays. But I expect that this year will be different, and we could see quite a few more final privatization bids signed before China goes on holiday in the second week of February.

In this instance the unusual activity is being driven by a large pool of China-based private equity that is clamoring to help finance these privatization deals. One case last week saw the head of an overeager buyout group get sued and face criminal prosecution, after overselling shares in the ongoing privatization of Shanda Games (Nasdaq: GAME). (previous post) It’s quite possible we could see more buyouts run into similar problems due to big demand for deals, though I would still expect that up to two-thirds of the 3 dozen companies that have announced plans will ultimately de-list from New York.

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