BUYOUTS: Wanda Wavers, Qihoo Hits Currency Snag

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Bottom line: Qihoo’s privatization from New York is likely to move ahead after it resolves a temporary impasse with the foreign exchange regulator, while Wanda’s privatization is also likely to proceed on its belief it can make a quick backdoor re-listing in China.

Qihoo shares fall on latest buyout obstacle

New ripples are spilling through the realm of Chinese companies seeking to return to China after getting lukewarm receptions with offshore listings, reflecting the complexity and difficulty of such deals. Two of the largest such deals are in the headlines as we round out the week, led by word that a privatization plan by software security specialist Qihoo 360 (NYSE: QIHU) may be running into trouble due to China’s strict foreign exchange controls.  The other major deal has real estate giant Dalian Wanda (HKEx: 3699) reportedly moving ahead with a plan to privatize the company, after indicating earlier this week it might abandon its original plan.

It’s becoming quite a challenge to write about this so-called “homecoming trend” by Chinese firms these past 2 weeks, since new obstacles seem to be popping up almost daily on this road back to China. The process was never an easy one, and involves raising hundreds of millions or sometimes even billions of dollars to take a company private. Then the buyout groups, usually led by company managers, must convince New York or Hong Kong shareholders to sell their stock, often at modest premiums.

But perhaps the hardest part of the process is re-listing in China, since China’s regulator is notoriously bureaucratic and conservative. That fact is the real reason that led most of these companies to list overseas in the first place. These homecoming candidates thought they had solved this regulatory obstacle by discovering they could make backdoor listings using existing publicly traded shell companies in China. But then they learned last week that the regulator was preparing to clamp down on that path. (previous post)

Qihoo’s shares have been on a roller-coaster ride this week, plunging one day on worries about a regulatory clampdown in China, only to soar the next on more positive signals. The shares were on the downward track again in the latest session, falling 3.5 percent after media reported the company’s $9.3 billion buyout deal had hit impasse with another Chinese regulator, the State Administration of Foreign Exchange (SAFE). (English article; Chinese article)

In this particular case SAFE’s biggest concern appears to be Qihoo’s plan to convert billions of yuan into dollars and move the amount offshore all in one or two single transactions. SAFE has been working hard to control the movement of capital out of China lately, worried about pressure on the country’s own currency as investors concerned about a slowing domestic economy try to move their money overseas.

A Bloomberg report on the matter says that Qihoo is negotiating with SAFE to resolve the situation, and in this case the concerns look more technical rather than philosophical. Accordingly, this particular instance looks like a temporary setback, and I expect that Qihoo and its strong-willed founder Zhou Hongyi will ultimately reach a compromise that allows for this privatization to move ahead.

Waffling Wanda

Next there’s Wanda, whose Dalian Wanda property unit recently became the largest Hong Kong-listed company to consider a similar privatization just a year after making its IPO. But word last week that China’s regulator might put a halt on backdoor listings reportedly prompted Wanda to consider scrapping that bid. Now the latest reports are saying that Wanda is once again moving forward with the plan, following the latest signals that some backdoor listings will be allowed in China but at a very controlled pace. (English article)

In this case Wanda’s flip-flop is directly tied to the mixed signals coming from the China Securities Regulatory Commission (CSRC). Wanda is very well connected with Beijing through its mutibillionaire chief Wang Jianlin. Accordingly, I suspect the latest signal that the CSRC will permit some backdoor listings has led Wang to believe he will be able to secure the necessary regulatory approvals to bring his company back to China through such channels. The report adds an actual buyout offer could come as early as next week.

At the end of the day we can probably expect to see more volatility for these homecoming stocks, most of them traded in New York, until the CSRC finally comes out and clearly states how it intends to regulate backdoor listings. Even then, the regulator is notoriously fickle and could still decide to stop all backdoor listings at any time if China’s stock markets enter a new period of volatility and another major correction begins.

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