BUYOUTS: Investor Blasts Unfinished Buyouts at Jumei, iKang

Bottom line: Jumei could formally abandon its stalled buyout plan soon, putting more downward pressure on its stock, while iKang needs to enter serious negotiations with two bidders for the company.

Jumei, iKang under pressure over stalled buyouts

Ever wonder what happened to a handful of buyout plans for US-listed Chinese companies that were announced more than two years ago but never got completed? That’s certainly not a question that keeps most of us up at nights, but it’s suddenly popping into the headlines with a series of scathing letters from a minority investor called Heng Ren, which is criticizing two of the unfinished deals.

Specifically, Heng Ren is blasting online cosmetics seller Jumei International (NYSE: JMEI) and clinic operator iKang (Nasdaq: KANG), which both announced plans to privatize quite a while ago but have yet to complete those. These aren’t the only two whose privatization plans, which were part of a wave in the first half of 2015, failed to get completed. But most of the others that failed to complete their buyouts, including YY (Nasdaq: YY) and Momo (Nasdaq: MOMO), made specific announcements that they were abandoning their plans.

Before we go any further, we should take a step back for the uninitiated and recount the bigger picture behind these two deals now coming under fire. Jumei and iKang were just two of many US-listed Chinese companies whose managers felt their shares were undervalued and underappreciated by US investors back in 2014 and 2015. Feeling they could get better valuations back in China, where their names were better known, some 3 dozen such companies launched privatization bids around that time, with the wave peaking in the first half of 2015.

Fast forward to the present, when around three-quarters of the deals have been completed, and a few have re-listed back in China. Of the quarter that couldn’t complete their deals, probably about half have announced they are officially scrapping the plans. That leaves a handful like Jumei and iKang that announced deals but haven’t ever formally abandoned them.

Heng Ren’s two letters that are in the news look a bit similar, and basically blast both companies for allowing hundreds of millions of shareholder value to be wiped out as their buyout plans languished. He does have a point, as Jumei’s shares have lost about half of their value since its buyout was announced in early 2016, while iKang’s have lost about a third since it announcement in late 2015.

Heng Ren has been critical of these companies before, as it’s basically a hedge fund that specializes in finding undervalued US-listed Chinese companies and then watching their shares rise. But again, it does have a point in criticizing these firms for letting their status remain in limbo for so long without providing us with an update. Among the pair of companies, Jumei’s founder is the only one to reply so far, addressing several of the points raised in Heng Ren’s open letter without commenting on the status of its original buyout plan. (Chinese article)

Lackluster Company

Word around the time that deal was stalling was that Jumei was having trouble finding financing for the buyout, which probably speaks to the company’s spotty results. A look at its webpage shows the company doesn’t seem to have much interest in staying public, as the most recent quarterly results I could find there were from the second quarter of 2016, which showed revenue was flat in the first half of the year and profits declined sharply.

iKang presents quite a different picture, and was on track to conduct a management-led buyout when it suddenly got a rival bid from its leading competitor. (previous post) It later got yet another bid from a group that included Yunfeng Capital, the investment fund led by Alibaba (NYSE: BABA) founder Jack Ma. iKang’s defiant founder, unwilling to accept a good deal when he saw one, launched a poison pill plan, and the buyout has basically been in limbo ever since. Heng Ren is calling on iKang to make a final decision on what it plans to do.

I basically agree with Heng Ren that both of these cases need to be resolved one way or another. Jumei is currently worth just $500 million, meaning its buyout wouldn’t be that costly to complete. But I suspect the company’s finances continue to be weak, and private equity isn’t interested in financing the deal, in which case it may have to remain public and should admit that.

iKang is a different story and looks like a strong growth opportunity, but its founder needs to make up his mind about what he wants to do. If the stock doesn’t rise soon and he can’t come up with his own buyout to match the other two, he really needs to enter into serious negotiations with both of the rival bidders and strike a final deal. To keep his company in limbo isn’t fair to anyone, and goes against the whole idea of having publicly listed shares.


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