BUYOUTS: SouFun, 7 Days Deals Spotlight Funding Alternatives

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Bottom line: Recent moves by Baidu, SouFun and 7 Days reflect frustration by Chinese companies at lack of understanding by western stock buyers, but also spotlight the need for these companies to better educate investors about their stories.

Better investor education needed from Chinese companies

A trio of headlines last week highlighted the growing financial alternatives for high-growth Chinese companies that have lately felt unappreciated by global stock buyers. The news was quite varied, led by a threat from online search leader Baidu (Nasdaq: BIDU) to privatize its shares from New York, and a large new investment by 2 major private equity firms in online real estate services giant SouFun (NYSE: SFUN). Meantime, the formerly New York-listed 7 Days hotel chain was in headlines as it sold itself to Shanghai’s Jin Jiang International (HKEx: 2006; Shanghai: 600754).

Each of these stories is quite different, but all reflect a growing arsenal of tools that high-growth private Chinese companies have to boost their profiles and valuations as they become more skilled at playing in global financial markets. At a more fundamental level, each of these moves also represents a form of education for investors, which is critical to helping outsiders understand a group of companies from China’s vibrant but still largely unknown private sector.
Overseas-listed Chinese companies and those seeking to tap global financial markets should take similar steps that go beyond the simple release of financial results, and put more effort into educating investors about their stories. Such outreach could help to boost investor understanding, resulting in higher share prices that more accurately reflect these companies’ true worth.

Wall Street witnessed an explosion of privatization offers for Chinese companies in the first half of this year, with around 3 dozen buy-out proposals announced. Most came from company managers who were frustrated by years of indifference from US investors, and many were hoping to re-list in China where local investors might give them higher valuations.

But that roadmap has hit several obstacles, starting with a Chinese stock market sell-off that has seen the Shanghai composite index drop 40 percent since early June, making those markets look less attractive. At the same time, a plan by formerly New York-listed outdoor advertising firm Focus Media to become the first to re-list in China has been delayed several times due to complexity of the plan.

Surprise statement

With US-listed Chinese shares continuing to sag despite all the privatization offers, Baidu founder Robin Li surprised markets last week by threatening to privatize his company. (previous post) The threat was almost certainly mostly talk, since Baidu’s privatization would be extremely costly and complex due to the company’s $50 billion market value.

But Li also took advantage of the attention to explain his latest strategy that was eating away at company profits, leading to the recent investor worries. He elaborated that Baidu was sacrificing short-term profit growth to focus on building up its online-to-offline (O2O) businesses that he believes will become an important new growth engine.

Just days after Li’s threat, SouFun announced that 2 major highly-respected private equity firms, Carlyle and IDG, would team up with SouFun’s management to invest between $400 million and $700 million in the company. (company announcement; Chinese article) The investment came in the form of convertible notes and new shares, which the investors purchased for a slight premium. Once again, the move represented a certain form of education for investors, whose worries about a slowdown in China’s real estate market might be calmed by the introduction of such well-respected private equity leaders.

Finally there was 7 Days, whose shares were neglected for years on Wall Street before it finally privatized in 2013 in a deal that valued the company at around $700 million. Two years after that move, the company’s parent, Plateno Group, announced last week it was selling 81 percent of itself to Chinese hotel operator Jin Jiang for 8.3 billion yuan ($1.3 billion). (English article; Chinese article)

Doubled Valuation

That price would give Plateno a market value of $1.6 billion, or more than double the much lower 7 Days valuation when it privatized 2 years ago. The transaction served a double purpose by showing some of the financial alternatives available to companies like 7 Days, while also educating investors who could see industry veteran Jin Jiang paying a price that more fairly represented the company’s value.

At the end of the day, many smaller Chinese companies with global aspirations could still have a difficult time attracting global investor attention no matter what they do due to their size. Those firms might be better off selling themselves to bigger companies like 7 Days did, or listing on one of China’s small-cap markets. But there’s still plenty of room for bigger names like Baidu and SouFun to succeed on global equity markets if they can successfully use alternate financial tools and other initiatives to better educate investors about their stories.

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