China take-private deals spike

Eight take private deals of foreign-listed Chinese companies have been announced since June, as low valuations create attractive targets for PE.

Eight private equity-backed take-private transactions involving overseas-listed Chinese companies have been announced since June, compared to four take-privates completed in 2011, according to data compiled by law firm O’Melveny & Myers.

The largest take-private deal announced this year is a $3.5 billion offer for Focus Media from the Carlyle Group, FountainVest Partners, China Everbright, and CITIC Capital, according to a China First Capital report. It is “the first big LBO ever attempted by a Chinese company,” according China First Capital CEO Peter Fuhrman.

Because it is unusually large, the deal has been drawing some scepticism. According to media reports, CDH recently pulled out of the deal, in which it had been planning to invest $200 million.

Only one take-private deal was completed in 2012: Nasdaq-listed China TransInfo Technology by SAIF Partners, which closed in November, according to a statement from China TransInfo.

Three years ago, virtually no take-private deals involved private equity, according to O’Melveny & Myers partner David Roberts.

The real lure for private equity firms, according to Roberts, is the low valuations for Chinese companies on foreign stock exchanges.

“The stock price of these companies has just been pounded into the ground,” Roberts said. Accounting scandals at a few Chinese companies in the past year, such as Sino Forest and Focus Media, have made other foreign-listed Chinese companies guilty by association.

US-listed 7 Days Inn, for example, had 300 hotels in China when it first listed in 2009. Now it has 1100 hotels and its share price is barely the same, said Meng Ann Lim, head of China and Southeast Asia at Actis, in a previous interview.

“So far, none of these companies have been suspected of any accounting irregularities, but [7 Days] is still bearing the brunt of these perception issues of Chinese companies,” he said.

Most private equity investors are taking minority stakes in these Chinese take-private deals, and the management of the company wants to buy the rest, added O’Melveny & Myers counsel Nima Amini.
The process of taking a Chinese company on a US stock exchange is inherently a long and drawn-out process, Amini said. It always begins with four months of negotiation over pricing and financing, and once the deal is signed it will take another three to four months to file with the Securities and Exchange Commission, not to mention the shareholder lawsuits that are nearly guaranteed to be filed against these companies.

However, this is a distinct opportunity for private equity to seize, Roberts added. If certain stock exchanges in Asia, such as Hong Kong, have a performance comeback in the next few years, then relisting a Chinese company on an Asian stock exchange would be a viable option after two to three years of investment.