BUYOUTS: 21Vianet Tries Bonds as Privatization Stalls

Bottom line: 21Vianet’s new convertible bond indicates it may be abandoning its previous plan to privatize from New York, and could help to boost its shares by bringing in more investors from China.

21Vianet abandoning privatization?

Nearly a year after announcing a plan to privatize from New York, data center operator 21Vianet (Nasdaq: VNET) has just issued an unusual plan that could see it sell a major stake of itself to a group of Chinese buyers through a convertible bond issue. The plan comes as quite a surprise, since one wouldn’t expect this kind of move from a company that was expecting to imminently privatize.

Accordingly, we could interpret this move as hinting that 21Vianet is quietly abandoning its de-listing plan in favor of an approach that could appeal to many other US-listed Chinese companies whose own privatizations have also stalled over the last year. Such an approach would see these companies bring in major new Chinese investors through this kind of convertible bond issue, which could ultimately help those companies to achieve their target of raising their valuations.

I’ll explain the logic to my argument shortly, but first let’s recap what has happened over the last year that has led to this latest move by 21Vianet, China’s largest private operator of data centers. 21Vianet listed its shares in 2011 and saw them double at one point amid a wave of bullishness towards China stocks. But since then investors have lost interest in the group, and the stock has given back most of the gains and now trades around 20 percent above its IPO price.

21Vianet’s story is quite common among lesser-known US-traded China stocks, leading around 40 to complain they were undervalued and launch privatization bids last year. Most hoped to ultimately re-list in China, where they believed they would get higher valuations due to better familiarity among local investors with their names and business models.

But while many of the bigger names like Qihoo 360 (NYSE: QIHU) and Homeinns (Nasdaq: HMIN) look set to complete their buyouts, smaller ones like 21Vianet are running into problems due to the complexity of such deals. Accordingly, some of these smaller names may be looking for alternatives that would boost their share prices by tapping demand for their stocks from a recent flood of China-based private equity looking for investments.

This kind of scenario appears to be the case for 21Vianet, which says it has agreed to issue 1.75 billion yuan ($270 million) in convertible bonds to a group of Chinese investors from a wide range of places, including Shanghai, Beijing, Ningbo and Shenzhen. (company announcement; Chinese article) The bonds mature in 5 years, but are convertible to 21Vianet shares at various times during that period at premiums of 15-25 percent to the company’s share price around the time of the conversion date.

Unusual Arrangement

Such an arrangement seems a bit unusual, since the conversion price for such bonds is usually set when the bonds are first issued. In this case it appears the investors are willing to pay premiums over the stock price at the time of the conversion date, which looks like a smart way for 21Vianet to try and boost its share price. 21Vianet can probably get such favorable terms because there’s currently a huge amount of private equity in China looking for deals, creating a shortage of good investment opportunities.

In terms of actual numbers, this particular deal looks like it would give the Chinese investors about 10-15 percent of 21Vianet’s stock if they choose to exercise their conversion rights. Bringing in such investors could help not only 21Vianet, but also some of the other US-listed Chinese companies that are experiencing difficulties with their own privatization plans.

That’s because these investors are willing to value the Chinese companies more highly than US stock buyers, and thus create a more vibrant market for the shares. The big risk factor in this formula is that everything could change if China’s nascent financial crisis accelerates. That seems quite possible as China’s economy slows, and would quickly force many of these Chinese investors to sell down their US shares and bring their money back home.

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