BUYOUTS: Mindray Buyout Moves Ahead at Lower Price

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Bottom line: Mindray is likely to finally privatize following its announcement of a new, lowered offer price, kicking off a new round of revised bids for some of the other Chinese companies that received similar offers earlier this year.

Mindray lowers buyout offer price

In a move that didn’t get investors too excited, medical device maker Mindray (NYSE: MR) announced that a group aiming to privatize the company has lowered its earlier offer price to reflect recent declines in the company stock. Shareholders greeted the news by dumping Mindray stock, which ended the latest session at $23.60, or 13 percent below the revised offer price of $27 per American Depositary Share (ADS).

Frankly speaking, I’m quite impressed that this deal is moving forward at all, since I fully expect most of the 3 dozen similar privatization bids announced earlier this year to ultimately collapse. Mindray is the first of the huge field of buyout candidates to update investors on the status of its bid since shares of US-listed Chinese companies began to tank in sync with a much louder sell-off on China’s domestic stock markets in June.

Accordingly, I see quite a good buying opportunity here for anyone who wants to make some quick money, since this new announcement indicates Mindray still has access to the necessary financing to complete its privatization. The same may not be true for many of the other US-listed Chinese companies that announced similar bids, many of which could soon collapse.

That’s because much of the funding behind many of the deals may have been tied to highly speculative investors, who were banking on continuation of a rally that saw China’s stock markets more than double in the 12 months through June. Of course anyone who isn’t living in a cave knows that rally ended in spectacular fashion 3 months ago, and the main Shanghai index is now nearly 40 percent below its peak at that time.

New Reality

All that said, let’s look more closely at Mindray’s latest announcement that includes the revised offer at $27 per ADS. (company announcement) The new price represents a 10 percent reduction from the earlier offer of $30 per ADS that Mindray announced in early June when China’s stock markets were near their peaks. (previous post) Since receiving the offer, Mindray’s shares have fallen about 20 percent, which is actually relatively mild compared to some other Chinese firms that received similar offers.

The logic behind the flood of buyout offers was simple. Most of these companies had seen their shares languish on Wall Street due to lack of investor interest. At the same time, they watched with envy as shares of their China-listed peers soared in the recent rally to valuations that were quite attractive, even if they were unsustainable. So the US-listed companies were hoping to privatize, then quickly re-list in China at much higher valuations.

Of course that logic has lost a lot of its validity with the recent plunge in China’s stock markets. What’s more, many of the buyout offers came at the height of the China rally, and appeared to be backed by murky funding sources that may have changed their mind following the recent sell-off.

The drop in Mindray’s shares after its latest announcement reflects a large degree of skepticism among US investors that this deal, or any of the others, will actually close. Shares of most other buyout candidates still trade well below their original offer prices, with shares of the biggest deal for software security specialist Qihoo (NYSE: QIHU) now a whopping 43 percent below their earlier buyout price.

In closing, I would suggest that anyone looking to make money off this phenomenon do some research on the funding sources for many of these buyout bids. I expect we’ll see more revised bids coming in soon for some of the stronger candidates with better funding sources, with premiums likely to average around 10 percent above the latest share prices. But I do expect about two-thirds of the previously announced deals will ultimately collapse, which could create further downward pressure on their shares.

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