Take-private deals continue momentum

Almost half of the transactions announced in 2012 involving listed Chinese companies privatised by PE firms have closed.

About half of the 49 private equity-backed privatisation deals of Chinese companies announced since January 2012 have fully closed, according to data from Standard & Poor's Capital IQ, and 18 will be coming up on the ideal closing deadlines within the next few months.

Take-private transactions often take between six-to-nine months to officially close, according to Maurice Hoo, partner at law firm Orrick, Herrington & Sutcliffe. Most private equity firms wouldn’t want to have the transaction go beyond this timeframe because stock market conditions may change and have a significant impact on the initial valuation.

Given that time frame, at least five private equity-backed privatisations from US stock exchanges will be expecting to close within the next few months, according to data from Thomson Reuters. “We may start to hear more about people closing [take-private deals], as more and more have gone through the [regulatory and legal] processes,” Hoo told Private Equity International.

Some of the most recent take-private deals closed include Fushi Copperweld in December (with Abax Global Capital) and ShangPharma with TPG just last week – the first take-private closing this year.

TPG closed the ShangPharma deal out of its TPG Biotechnology Partners II, TPG Star Charisma and TPG Growth II funds, according to Sing Wang, partner and co-chairman of Greater China at the firm. 

TPG originally invested in ShangPharma in 2007 and listed it on the New York Stock Exchange in 2010, according to the firm. The 2010 IPO was priced at $15 per share, but by June 2012 the stock price was down to $7 per share. 

All Chinese companies listed on foreign exchanges have experienced plunging share prices because of

We may start to hear more about people closing [take-private deals], as more and more have gone through the [regulatory and legal] processes

Maurice Hoo, Orrick, Herrington & Sutcliffe

accounting scandals at several of them. 

However, TPG's Wang believes ShangPharma was unfairly tainted. “We know the company well, and we think they were all very clear and transparent with us,” he said.

The transaction was largely funded by ShangPharma’s founder, Michael Xin Hui, Wang said. TPG has increased its 11 percent stake in ShangPharma with this transaction, but still holds a minority stake. In total, the deal was valued at $173 million.

China take-private deals often keep the founder of the company as the majority shareholder, according to Hoo. The founders still have “emotional ties” to their companies, and thus private equity typically takes a minority stake.

Privatisations of Chinese companies don't always go smoothly. Of the deals announced since January 2012, six have been cancelled, the most recent one being Baring Private Equity Asia's bid for Ambow Education Holding, which fell through in March. According to media reports, the firm backed out of the deal when three of the company's directors and its auditor resigned at the same time, shortly after Baring put forth its offer.

Hoo adds that some private equity firms take companies private with the hope of relisting them closer to home, in Hong Kong for example, where local investors have a higher level of comfort with Chinese companies. However, there are specific challenges involved and to date, Hoo knows of no Chinese company that has been taken private and relisted on the Hong Kong stock exchange.