7 Days to Privatize, Who’s Next? 7天连锁酒店股东团提出私有化要约
In a theme that is rapidly gaining momentum, yet another US-listed Chinese firm has announced a new privatization bid to capitalize on valuations that have been pushed to rock-bottom levels amid a broader investor confidence crisis. The newest management-led buyout offer from 7 Days Group (NYSE: SVN), the smallest of China’s 3 publicly listed budget hotel operators, follows a string of similar moves that have seen other US-listed Chinese companies, including Shanda Interactive and Focus Media (Nasdaq: FMCN), make similar moves. So perhaps the more interesting question is: who are the most likely companies to launch similar privatization bids, as investors can clearly make some quick money if they can answer this question correctly.
I’ll give my own answer to that question shortly, but first let’s take a look at the latest news from 7 Days, which said it will offer $12.70 for each of the company’s American Depositary Shares (ADS). The bid is being led by 2 of the company’s co-founders as well as private equity firms Sequoia Capital and Carlyle. (company announcement) The offer price represents a premium of more than 20 percent from the levels where 7 Days has been trading recently, mirroring levels for similar management-led buyout offers.
The most recent of those, announced just last month, saw a management-led group from Focus Media offer investors a 15 percent premium to buy back its shares. (previous post) All of these buy-out offers come as US-listed Chinese firms see their valuations hover at a fraction of peak levels they previously traded at before a confidence crisis sparked by a series of accounting scandals began to ravage their shares in early 2011.
So let’s return now to the question of who are the most likely candidates for future privatization bids. First and foremost, I’m fairly certain that the private equity investors who typically back these kind of privatization bids will only look at companies that are profitable — a factor that rules out many of the Chinese Internet companies to recently list in the US, such as e-commerce firm Dangdang (Nasdaq: DANG) and video sharing site Youku Tudou (NYSE: YOKU).
After the profit factor, the next major factors will be cash flow, market cap and price to earnings ratios. Private equity investors and other financiers typically like companies that generate lots of cash, have market capitalization in the $500 million to $3 billion range, and have price to earnings ratios that are below their peers.
Companies that fit that description include older Internet firms that don’t rely on e-commerce like Sina (Nasdaq: SINA) and Sohu (Nasdaq: SOHU), hardware makers like chip maker Spreadtrum (Nasdaq: SPRD) and medical device maker Mindray (NYSE: MR), and other hotel operators like Home Inns (Nasdaq: HMIN) and China Lodging Group (Nasdaq: HTHT). At the end of the day, I expect we’ll see more management-led buyout bids from some of these and other companies before the current confidence crisis finally starts to ease.
Bottom line: 7 Days’ privatization bid is likely to be followed by others for US-listed Chinese firms, with profitable companies with strong cash flow as the most likely candidates.
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