IPOs: Pactera, New Oriental Online Unit Eye China IPOs

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Bottom line: Pactera is likely to get sold and re-listed in China later this year, while New Oriental is likely to make a domestic listing worth up to $100 million for its Xun Cheng online education in a similar time frame.

Blackstone shops around Pactera

The homeward migration of overseas-listed Chinese firms is moving ahead, with word that privatized IT outsourcing firm Pactera and the online unit of education giant New Oriental (NYSE: EDU) are both potentially eyeing domestic IPOs in the upcoming Year of the Monkey. These stories represent 2 different threads from the larger story of overseas-listed Chinese companies returning home to make new IPOs.

The thread represented by Pactera has seen around 40 US-listed Chinese companies receive privatization offers over the last year from buyout groups hoping to re-list the firms in China at higher valuations. The New Oriental bid represents a second, more recent trend that has seen US-listed category leaders indicate they will keep their primary listings in New York, but then spin off some of their smaller units for separate domestic listings in China.

The broader trend is being driven by a combination of factors, most notably low valuations for many US-listed Chinese companies and a growing range of new listing options for those same companies back in their home market. Those newer options include the Nasdsaq-style ChiNext board launched in 2009, and more recently an over-the-counter style board launched in 2014. Shanghai is also planning to launch a strategic industries board later this year, again focusing on high-growth, privately funded companies.

Pactera is one of China’s leading homegrown providers of outsourced IT services for other companies, but has had difficulty competing with larger, more experienced rivals from the US, Europe and India. It was one of the first Chinese companies to privatize back in 2013, well before last year’s wave, in a deal worth more than $600 million led by US private equity giant Blackstone (NYSE: BX). (previous post)

Now media are reporting that Blackstone has hired Morgan Stanley to help it shop around Pactera, after receiving unsolicited interest from unnamed third parties about buying the company. (English article; Chinese article) The reports add that Blackstone thinks it could get $800 million to $1 billion for Pactera.

No potential buyer names are included, but I feel fairly certain that most or all are China-based private equity that would like to try to list Pactera on one of China’s domestic stock markets, most likely the new strategic board in Shanghai. That kind of private equity has been funding most of the buyouts from the past year, and is searching hard for new targets to list in China for quick profits. Accordingly, I expect we could see a sale of Pactera by mid-year, and the final price could even exceed $1 billion.

Tencent Investment

Next there’s New Oriental, which has just announced a new investment and domestic IPO plan for its online education unit, Xun Cheng Network Technology, operator of the Koolearn.com platform. (company announcement; Chinese article) Internet giant Tencent (HKEx: 700) is the new investors in the deal, and will provide 320 million yuan ($50 million) for an unspecified minority stake in Xun Cheng.

Following the investment, New Oriental said Xun Cheng plans to make an IPO on one of China’s major stock markets when conditions permit. There’s no additional detail, but the most likely markets for Xun Cheng would be the new strategic industries board in Shanghai or possibly the ChiNext in Shenzhen. I would expect such an offer would be relatively large, perhaps worth around $100 million.

New Oriental’s announcement seems to indicate it plans to keep its own primary listing in New York, even though its chairman has hinted in the past he might consider his own privatization bid. This newer strategy of keeping a primary listing in New York while spinning off smaller units for China IPOs looks like a growing trend in the last few months.

Real estate services leader SouFun (NYSE: SFUN) and search giant Baidu (Nasdaq: BIDU) are both reportedly making moves in that direction. Such a strategy looks smart because it gives these larger companies exposure to both domestic and foreign capital markets, and I expect we could see other Internet giants Alibaba (NYSE: BABA) and Tencent joint the trend over the next year.

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