Bottom line: Meitu’s Hong Kong IPO plan is likely to get a positive reception due to strong sentiment for Chinese tech companies, while a plan to list US-focused Media.net in China via a backdoor IPO is likely to fail due to numerous obstacles.
A couple of IPO stories are in the headlines, including what could become the largest listing for a Chinese tech firm this year by Meitu, operator of an app that helps users make self-enhanced selfies. The other deal looks quite unusual, and has a Chinese investor group buying US advertising services startup Media.net, with plans to list the company in China through a backdoor-style process. In all my years covering China this is the first time I’ve seen this kind of deal, which looks both interesting but also quite speculative.
Each of these deals is quite different, and both have one or two notable points. Meitu looks most notable not only for its size, which could be up to $1 billion, but also for its location. IPOs for this kind of high-tech company have traditionally come in New York, and more recently on China’s Nasdaq-style ChiNext board, but are seldom seen in Hong Kong.
Meantime, reports on the Media.com plan are drawing attention to the uniqueness of the backdoor listing plan, which is occurring in a two-step process using an existing listed Chinese firm. We’ve seen a number of similar backdoor listings in the last year, mostly the result of a conservative regulator that has sharply slowed approval of conventional new offerings. But most of those listings have been engineered by managers of companies making the listings.
By comparison, this particular deal appears to be orchestrated by a third-party group of investors looking mostly to make some money. That has some predicting that this kind of IPO could become a future template for Chinese middlemen looking to make some money by buying foreign assets and then listing them in China at higher valuations.
We’ll begin with a closer look at Meitu, which is reportedly looking to list in Hong Kong around the fourth quarter. (English article; Chinese article) The company was previously valued at $3.8 billion during a funding round earlier this year, and is hoping to boost that to around $5 billion through the IPO, according to unnamed sources who disclosed the plan.
I’m not a user of Meitu, but have read about it and know some younger folks who are quite big fans, similar to apps in the US like Instagram and Snapchat. Given the generally positive climate for China tech stocks these days, I would expect this particular offering could do quite well, especially since this would be one of the first major new Chinese social media stocks to list in a while.
Two-Step Back Door
Next there’s Media.net, a provider of technology that helps advertisers better target prospective customers and is a partner of Yahoo and Microsoft’s (Nasdaq: MSFT) Bing search engine. The company, which is based in New York and Dubai but does most of its business in the US, has announced it will sell itself to a Chinese consortium for a hefty $900 million. (English article)
But that purchase is just an intermediate step. After that deal closes, the group would then sell the company to an obscure China-listed telecommunications company called Beijing Miteno Communication Technology Co. The finances involved look rather complex, since Miteno only has about $23 million in cash. But I suspect the bottom line is that the investors buying Media.net would ultimately hope to get a much higher valuation once the company is listed than the $900 million they are paying. Then they could sell some or all of their shares in the company to make a profit.
As I said at the outset, this particular plan looks rather unique and will probably face numerous challenges. One of those will be raising the money to do the deal, and then moving all that cash offshore to complete the purchase. China’s securities regulator may also not look favorably on such a plan and create obstacles or simply withhold its approval of any asset swaps. Accordingly, I would give this plan very little chance of ultimately getting done, with the chances of success at 20 percent or less.
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