BUYOUTS: iKang’s Poison Pill, CMGE’s China Homecoming

Bottom line: iKang’s poison pill plan will kill a hostile offer for the company but could force a management-led group to raise its earlier bid, while CMGE’s China backdoor listing shows a quickening of the process for US-listed Chinese companies to return home.

iKang launches poison pill plan

The first bidding war for a Chinese company looking to privatize from New York has taken an interesting twist, with word that medical clinic operator iKang (Nasdaq: KANG) has launched a shareholder rights program often called a “poison pill”, aimed at preventing hostile takeovers. Usually I’m relatively neutral on this kind of defensive move, as it’s often aimed at getting shareholders better value for their money. But in this case the move seems like a somewhat abusive use of power by iKang’s founder and chief executive to protect his own earlier and significantly lower buyout offer for the company.

Meantime another headline from the recent wave of US-listed Chinese companies to privatize has gaming company China Mobile Games (CMGE) already preparing to re-list in China. If successful, CMGE’s homecoming would be remarkably quick, since it only completed its privatization from New York 3 months ago. 

We’ll begin with iKang, which first announced a management-led buyout offer in August at a price of $17.80 for each of its American Depositary Shares (ADSs). But that deal was trumped earlier this week when a high-profile rival group offered $22 per ADS. (previous post) That prompted iKang’s CEO Zhang Ligang to reportedly say on his microblog that he would never sell his shares to any third party.

Now Zhang appears to be backing up his earlier threat by launching the shareholder rights program or poison pill, designed to flood the market with new shares in the event of this kind of hostile takeover bid. (company announcement; Chinese aritcle) iKang says it took the move to ensure that “all shareholders” receive “fair and equal treatment” in the event of such a hostile takeover attempt.

I find this wording quite ironic, because the move is clearly designed to protect Zhang’s own interests, and doesn’t seem particularly favorable to minority shareholders. After all, most independent shareholders would almost certainly prefer to get $22 for each of their ADSs, rather than the $17.80 that Zhang and his group previously offered.

But this is China, and unfortunately CEOs often treat their companies like personal fiefdoms and do what’s best for themselves but not necessarily their other shareholders. iKang ADSs fell 2.7 percent in the latest session to $18.37, which is above the management group offer but well below the rival bid. That probably reflects a reality that will see the management group forced to raise its bid slightly after this new offer, but also signals that the rival bid will fail.

Lighting-Speed Homecoming

Next let’s look at CMGE, which announced its privatization bid in May at the height of a wave that saw around 3 dozen Chinese companies announce such bids to de-list from New York this year. Unlike many of the other deals that have yet to be completed, CMGE finished its buyout at the end of August and de-listed, and now media are saying it is already set to re-list back in China.

In this case it appears that CMGE’s privatization was part of a larger plan by its private equity buyer, which is now moving to inject CMGE along with assets from 5 other peers into a Shenzhen-listed company called Zhejiang Century Huatong Group (Shenzhen: 002602). (English article; company announcement) Huatong will purchase the assets using a private placement worth 11 billion yuan ($1.7 billion).

Previous similar homecomings have taken much longer, which makes this latest deal look quite unusual. The only 2 companies to nearly complete the process so far have been outdoor advertising specialist Focus Media and gaming company Giant Interactive, and both of those required more than 2 years. (previous post) The CMGE deal looks like it was probably part of a bigger plan that was crafted before the actual privatization offer in May, but also does seem to indicate that re-listings in China could become easier and faster as companies gain more experience at the process.

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