BUYOUTS: Rival Trumps iKang Management Buyout Offer

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Bottom line: iKang’s managers may have to raise their earlier buyout offer to counter a new rival bid for the company, which could embolden investors to demand similar better prices for other US-listed Chinese companies being privatized.

Bidding war erupts for iKang

An interesting new wrinkle has entered the recent privatization wave sweeping US-listed Chinese companies, with word that a group backed by some major investors is making a rival buyout offer for medical clinic operator iKang (Nasdaq: KANG). So far as I know, this is the first case of a rival bid emerging to challenge any of the nearly 3 dozen privatization offers to emerge this year, mostly from management-led groups.

That’s not to say that this latest development is completely unexpected. Many minority stakeholders have complained loudly that most of the management-led buyout offers to be announced so far grossly undervalue the companies. Those complaints have worked once or twice, most notably in the case of online dating site Jiayuan (Nasdaq: DATE), whose non-management suitor sharply raised its buyout offer after investors complained that the original bid was too low. (previous post)

The big difference this time is that serious investors are finally coming to the game, after realizing there could indeed be many bargains out there. After all, many of the Chinese companies now leaving Wall Street are doing so after their shares became undervalued due to lack of investors interest. While most of the management-led groups launching buyout bids have offered premiums to their companies’ stock prices, most of those premiums are relatively modest at amounts in the 10-15 percent range.

Against that backdrop, let’s take a closer look at the new buyout offer for iKang, which itself only listed on the Nasdaq in April 2014 during a flood of New York offerings by Chinese companies. According to its announcement, the new buyout group is offering to buy all of iKang’s American Depositary Shares (ADSs) for $22 apiece, representing a generous 31 percent premium over their last close before the announcement. (company announcement; Chinese article)

The list of investors backing this latest bid contains some big names, including Cathay Capital Private Equity, and funds related to Sequoia Capital and financial services giant Ping An. That shows the group clearly has the necessary funding to support its offer, in contrast with many of the earlier deals whose funding sources were never really very clear and appeared to be coming from speculative, opportunistic sources. The new group also points out that its $22 bid is much higher than the August offer of $17.80 per ADS from a group led by iKang’s management.

iKang’s shares have gone through several peaks and troughs since their IPO more than a year ago, and were trading just below the earlier $17.80 buyout price before this latest bid was announced. They jumped another 17 percent after announcement of the new offer, though at their latest close of $19.50 they are still quite a bit below the new $22 price. That’s probably because investors are worried the new bid could fail, since it will have to compete with the earlier offer that is backed by iKang’s managers who are also major company stakeholders.

CEO Defiant

The difficult road ahead for this new offer was reflected in a defiant post on his microblog by iKang CEO Zhang Ligang, who said he won’t sell any of the shares he owns or controls to any third party. He also reportedly called the new bid a hostile one, and implied it was made in an attempt to derail his own group’s previous offer.

The situation certainly looks complicated, and it’s not at all clear if the rival bidder would be able to get enough support for its offer even though its bid is clearly much higher than the original one. This is a frequent issue with this kind of US-listed Chinese company, since many such firms are often controlled by their founders even after they go public.

At the end of the day it’s quite possible the counter bid will fail, but it’s also quite possible the original group may have to raise its bid to satisfy minority shareholders. That could embolden investors to demand higher prices for some of the other companies also trying to privatize, and we could also see some more rival bids emerge for more promising companies like iKang that are now being privatized at relatively low prices.

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