Bottom line: Many privatization bids by Chinese firms hoping to re-list in China could collapse if the CSRC cracks down on backdoor listings, though de-listing plans backed by big private equity names could still succeed.
Rumors that they might get a chilly reception from China’s securities regulator has sparked a major sell-off for shares of US-traded companies trying to privatize and re-list at home in search of higher valuations. The dive is one of the largest I’ve seen for any single group in quite a while, and could present a great buying opportunity for anyone who believes these companies can still successfully privatize and re-list in China.
But in this case I might be more inclined to agree with the pessimists, since China’s securities regulator is quite conservative, even though I’ve said it should continue to allow these re-listings. (previous post) In this case the China Securities Regulatory Commission (CSRC) may also be acting under direct orders from Beijing, which is already worried about another major sell-off on domestic stock exchanges like one early this year.
Before we look more closely at what’s happening behind the scenes, let’s first review the dramatic carnage on Monday that wiped out billions of dollars in shareholder value for many of these US-listed Chinese companies now in the process of privatizing. Two cases drawing the most attention are security software specialist Qihoo 360 (NYSE: QIHU) and social networking app Momo (Nasdaq: MOMO), whose shares fell 11 percent and 16 percent, respectively. (English article)
Another big victim was e-commerce company Dangdang (NYSE: DANG), whose shares fell 13 percent. But the most dramatic case was data center operator 21Vianet (Nasdaq: VNET), whose shares lost nearly a quarter of their value in the latest session. At their current levels, Qihoo and Momo now trade 16 percent and 35 percent below their buyout prices, respectively, representing an attractive buying opportunity for anyone who thinks the deals will get completed.
But skepticism is rapidly growing that many of these deals may ultimately collapse, following the rumors late last week that the CSRC was considering slowing or even halting the preferred re-listing route for many returning companies. That route was seeing many such privatizing companies aiming to make backdoor listings in Shanghai and Shenzhen through reverse mergers using publicly-traded shell companies.
Several companies are near completion of such deals, including Focus Media and Giant Interactive, and are being rewarded with sharply higher valuations than what they had on Wall Street. These returning companies probably would have preferred to make traditional IPOs in China, but were deterred by a huge backlog of other companies waiting to list.
The CSRC is in quite a powerful position here, since it has to approve many of the steps involved in the backdoor listing process. After the initial rumors emerged that it might shut down the process completely, an official said the regulator was simply studying the phenomenon to figure out its implications for the market.
The reality is that even if all these companies were to re-list at home, most are relatively small and their combined market value would probably be less than $30 billion, a relatively small amount for markets of China’s size. But the regulator also needs to worry about the perception of fairness, since many other companies have been waiting for years to list and would probably complain if the CSRC let others jump the queue through backdoor offerings.
In order to figure out what might happen next, you probably need to look at the backers of each privatization bid and figure out their motivations. Private equity backers looking to make some fast profits through backdoor listings at higher valuations are likely to get cold feet and abandon their plans. But others bids backed by global private equity firms that are willing to wait for several years to recoup their investment might still have a stronger chance of completion.
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