Bottom line: A new management-led privatization bid for Homeinns and many other similar recent plans could stand a 50-50 chance of failing if they don’t complete the process before China’s stock market rally ends.
Leading budget hotel chain Homeinns (Nasdaq: HMIN) has become the latest US-listed Chinese company to receive a buyout offer, capping a record week that has seen at least 4 such bids. In the past, 4 privatizations in a 6-month period would be considered big, even though such bids have been coming at a slow trickle over the last 3 years for Chinese companies whose shares have languished on Wall Street. But that tickle has turned into a flood these last 2 months, fueled mostly by greed, as company owners look enviously at China’s rallying stock markets that have more than doubled over the last year.
It’s worth noting that most of the companies that have announced de-listing plans so far this year are relatively small, and only a handful are worth more than $1 billion. Thus the funds necessary to privatize all these firms combined are relatively minor, probably totaling less than $20 billion. By comparison, China’s Internet “big 3” of Alibaba (NYSE: BABA), Tencent (HKEx: 700) and Baidu (Nasdaq: BIDU) have a combined market value of nearly $500 billion.
All that said, Homeinns is one of the larger companies to get a buyout offer in this recent wave, with a market value of about $1.5 billion. The company was worth nearly twice that amount at its all-time high back in 2010, and even at their current level the shares now trade at more than double their 2006 IPO price. Still those gains look relatively modest for such a high-growth company, and Homeinns’ performance also looks so-so when compared with the big US bull market over that period.
Homeinns’ buyout offer looks relatively boiler-plate, mostly copying a format from this week’s other buyout candidates, online real estate firm E-House (NYSE: EJ), social networking site Renren (NYSE: RENN) and data center operator 21Vianet (Nasdaq: VNET). Like the others, the buyout bid is coming from a group led by Homeinns’ own management, offering investors $32.81 per share, or a 20 percent premium to the company’s American Depositary Share (ADS) price over the last 20 days. (company announcement)
Members of the group making the offer already own 35 percent of Homeinns shares, and their announcement contains no details on who is actually funding the proposal. I previously wrote that the lack of such detail in many of these recent offers hints that funding is coming from speculative sources that have profited from China’s recent stock market boom. (previous post) That’s quite significant, because it means that many of these deals could quickly collapse if and when China’s stock market rally runs out of steam, which seems likely within the next 6 months.
Homeinns shares rose nearly 4 percent to $31.35 after its announcement, which is close enough to the buyout price to indicate that investors are confident that this particular deal will close. Among the recent group of buyout targets over the last 2 months, Homeinns is one of the more valuable. Only E-House, Mindray Medical (NYSE: MR), Wuxi PharmaTech (NYSE: WX) and 21Vianet are worth more, valued at up to $10 billion in the case of E-House down to a more modest $1.8 billion for 21Vianet.
If I traded in these stocks, which I don’t, I would argue there could be some good short selling opportunities here. That’s because I really do think that perhaps up to half of these privatization deals could ultimately fail, especially in cases where the companies haven’t clearly stated the funding sources for their offers. The trickiest deals will be the big ones, as earlier listing candidates Focus Media and Shanda Games (Nasdaq: GAME) found out when their buyouts took far longer than expected due to funding problems. At this point it’s really a race against time, and I would wager that anyone who can’t close their de-listing within the next 4 months may not be able to complete the process.