TRAVEL: Ctrip in $2.2 Bln Cash Raising, Offshore Buy in Sight?

Bottom line: Ctrip’s massive new bond and share offer could raise up to $2.2 billion, and portends a major offshore acquisition in the next 6 months.

Ctrip in $2.2 bln cash raising plan

Online travel agent Ctrip (Nasdaq: CTRP) has just announced a complex plan to raise up to $2.2 billion in cash, in one of the biggest fund-raising exercises I’ve seen by a Chinese Internet company. The huge sum, combined with Ctrip’s existing large cash reserves, raises the obvious question of what this fast-growing company might be planning to do with all that money. One obvious answer is that Ctrip is planning a major offshore acquisition, reflecting its new global aspirations after quietly eliminating most of its local competition to dominate the lucrative China market.

We’ll return shortly to the question of which companies Ctrip may be targeting for a global acquisition, if that’s really what it’s planning. But first let’s review this aggressive new fund-raising exercise, which was disclosed in two different announcements just days after the company released its latest quarterly earnings report that showed impressive growth.

The biggest single component of the exercise will see Ctrip issue up to 26 million new American Depostiary Shares (ADSs), which would have a total value of $1.2 billion, based on its latest price of about $46. (company announcement) The plan would see Ctrip initially issue 22.5 million ADSs, and then give underwriters the right to issue up to 3.38 million more if demand is strong.

The second biggest component of the deal would see Ctrip issue $750 million in convertible notes due in 2022. (company announcement) Buyers will receive the option to buy another $112.5 million worth of notes within the next 30 days. An unnamed strategic shareholder has also agreed to buy another $25 million worth of the notes, meaning that particular part of the new funding could raise nearly $900 million.

Last but not least, Ctrip said it will issue $100 million in ADSs to Baidu (Nasdaq: BIDU), China’s leading search engine, and another $25 million to an unnamed strategic shareholder. Baidu is already a Ctrip shareholder following their tie-up last year that saw the former sell a large stake of its Qunar (Nasdaq: QUNR) online travel subsidiary to the latter.

Tepid Reaction

Investors were a bit wary of the major new fund-raising, with Ctrip’s ADSs falling 4 percent in the latest trading session. The shares have risen more than 5-fold over the last 4 years, as Ctrip slowly eliminated most of its competition through a series of strategic investments and came to dominate the market. But trading has been more sideways over the last year, and the shares are actually now down around 20 percent from a peak last November.

All of that brings us to the next big question, namely where Ctrip might be looking to revive interest in its stock and growth prospects. The company specifically says that some of the new funds could be used for acquisitions, which is quite logical, especially since Ctrip already has another $2.7 billion in its existing cash reserves. So the question becomes: Who might be logical targets?

One of the most obvious would be US counterpart Priceline (Nasdaq: PCLN), since the pair already have an existing tie-up. That alliance was formed when Priceline bought Ctrip bonds that could be converted to 15 percent of the company’s shares. (previous post) Priceline’s current market value is about $70 billion, meaning a reciprocal purchase of 5-10 percent of its shares by Ctrip could cost around $3-$6 billion.

There are many other potential candidates that Ctrip could probably buy outright in smaller markets like Southeast Asia, India and other developing countries, though I’m unfamiliar with these more regional players. But I do expect that this new fund-raising probably foreshadows a major offshore acquisition or equity tie-up in Ctrip’s near future, and we’re likely to see such a deal announced within the next 6 months.

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