E-House To Privatize?
Today’s headlines include a couple of new developments in the recent privatization wave for US-listed China firms, underscoring the difficulty of doing such deals that often require big fund raising. The most interesting of the 2 latest news bits has online real estate services firm E-House (NYSE: EJ) making a new management-led move that looks like a potential prelude to a buyout offer. Meantime, a much smaller education services firm called Ambow (NYSE: AMBO) has seen its own privatization plan implode amid a sudden series of high-level resignations that cast doubts on the company’s credibility.Both of these deals come against a broader landscape that has seen a growing number of US-listed Chinese firms try to privatize as investors have abandoned the stocks over the last 2 years due to concerns about their accounting. Let’s take a look first at E-House, whose shares have plunged by two-thirds over the last 2 years after a series of accounting scandals at other US-listed Chinese firms sparked the current loss of investor confidence.
E-House said it has completed a previously announced new issue of shares that boosts its top managers’ stake in the company to 30 percent. (company announcement) The announcement doesn’t say what percent of the company the management group previously owned; but based on the $63 million purchase price for the new shares and the company’s market cap of about $560 million, it looks like the management team boosted its previous stake by about 50 percent.
E-House said it will use proceeds from the sale to buy back its shares. But the more interesting element in this story is that E-House management now owns about a third of the company’s stock, which would theoretically make it easier to get shareholder approval for a privatization. I’ve previously said that E-House looks like a good long-term bet, as it makes its money from transactions and other services in China’s fast-growing real estate market. That means it can operate profitably in most environments regardless of whether prices are rising or falling.
Despite its positive long-term outlook and the potential of a privatization and share buyback, shareholders greeted E-House’s latest announcement with indifference, with the company’s stock largely unchanged in New York trading on Monday. That kind of indifference is what’s driving this latest privatization wave that has seen Camelot Information Systems (NYSE: CIS) and Simcere Pharmaceutical (NYSE: SCR) become the latest companies to announce de-listing plans in the last few weeks. (previous post)
Meantime, the case involving Ambrow shows that even the smallest de-listing plans can fail and also highlights the depth of the credibility problem plaguing many US-listed Chinese companies. In this particular case, Ambow had arranged financing for its privatization that valued the company at a relatively modest $74 million based on an offer it received on March 15. But the deal collapsed after the sudden resignation of Ambow’s auditor and 3 of its directors amid a probe on potential financial impropriety sparked by allegations from several former company employees. (English article)
This kind of probe is what sparked the confidence crisis 2 years ago, and more similar probes certainly won’t help to restore investor enthusiasm for Chinese stocks anytime soon. If the allegations prove groundless, we could see Ambow relaunch its privatization plan in the next few months. If the allegations are true, however, the company could see its shares plunge and later be forcefully de-listed by the securities regulator. Either way, Ambow’s days as a US-listed company are probably numbered.
Bottom line: A boost in the holdings of E-House shares by a management group could auger a privatization bid, while Ambow looks set for a similar privatization of forced de-listing.
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This article was first published in the online edition of the South China Morning Post at www.scmp.com.
