Bottom line: A bidding war for iKang could see prices rise above the current highest offer of $25 per ADS, while a buyout bid for TCL Communication will be priced at a slight premium to the current stock price and meet with little resistance.
The twisted privatization tale of private clinic operator iKang (Nasdaq: KANG) has just taken a new turn, with its receipt of another buyout offer from Yunfeng Capital, the private equity investor with ties to e-commerce giant Alibaba (NYSE: BABA). This development makes Yunfeng the third party to bid for iKang, which has easily become the most contested of some 40 US-listed Chinese companies trying to privatize from New York. Meantime, a far less contested buyout offer has just come in Hong Kong, where faded cellphone maker TCL Communications (HKEx: 2618) has just received a buyout offer from its China-listed parent.
Both of these stories are significant in the bigger story that has seen dozens of offshore-listed Chinese companies launch privatization bids since the start of last year, most aiming to getting higher valuations by re-listing in China. US investors have complained that many of the buyout offers, mostly by management-led groups, grossly undervalue the companies. And yet despite that fact, few of the offers so far have sparked bidding wars, making iKang a rare exception.
TCL Communications’ buyout is mostly interesting because it’s coming in Hong Kong, which has been home to relatively few similar privatization bids. TCL is also one of China’s earliest successful cellphone makers and has been listed in Hong Kong for more than a decade. But its inability to play in the fiercely competitive market means it’s probably destined for extinction, most likely through a slow, quiet death after it de-lists.
We’ll begin with iKang, whose lively bidding war involving a management-led team, a rival clinic operator and now Yunfeng Capital, is a refreshing departure from most of the buyout deals that have gone largely uncontested. The entry of 2 independent bidders reflects the big growth potential of private clinics in China, as Beijing opens the sector to private investment to supplement its older system of government-owned clinics and hospitals.
Yunfeng is taking the relatively unusual approach of offering a price range for its buyout offer, saying it would pay anywhere from $20 to $25 for each of iKang’s American Depositary Shares (ADSs). (company announcement; Chinese article) By comparison, iKang’s original management-led group offered $17.80, and a later group led by rival clinic operator Meinian, or Health 100 (Shenzhen: 002044), offered $22.
There’s no additional comment in the announcement, but any deal will have a hard time getting approved without the consent of iKang CEO Zhang Ligang, who has strongly opposed the Meinian offer. That will leave Zhang with the difficult decision of whether to raise his management group’s bid, or try to force through a buyout at the $17.80 offer price and almost certainly risk shareholder lawsuits.
Higher Bids Coming?
Yunfeng’s use of a range for its bid rather than a specific price could force Zhang to raise his group’s bid to as high as $25, or nearly 30 percent higher than its original offer. It’s also quite possible that Meinian could raise its own offer, since it sees iKang as a strategic purchase and not just a simple financial investment.
Let’s close very quickly with a look at TCL Communications, which was China’s first major homegrown cellphone superstar when it burst onto the stage more than a decade ago. I can remember a time when TCL cellphones were quite fashionable in the early 2000s, though the company stumbled badly when it later purchased the handset business of French giant Alcatel.
Since then TCL Communications has gone through a number of ups-and-downs, but lately investors have largely lost interest in the stock. The shares have lost nearly half their value over the last 2 years and now trade at around the same level where they were a decade ago.
In the face of such lackluster performance, parent TCL Corp (Shenzhen: 000100) has said it will privatize the unit, though no price has been given. (English article; Chinese article) I expect the final offer price may come at a slight premium to the current share price, and the buyout is likely to get easily approved since investors stopped caring long ago about this company.
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