BUYOUTS: Autohome, Qihoo Spotlight Tough Road for Buyouts

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Bottom line: Autohome’s attempt at a management-led buyout failed due to difficulties financing such a large deal, and Qihoo’s new attempt to finance its buyout with crowd funding-style tactics points to similar problems.

Ping An takes over Autohome boardroom

New developments in 2 of the biggest privatizations of US-listed Chinese companies are casting a spotlight on the difficulty many of these cases face, especially bigger deals that require billions of dollars in funding to succeed. The first case has the management team at online car specialist Autohome (NYSE: ATHM) losing its battle to take the company private, following a high-profile battle with its largest stakeholder. The second has software security specialist Qihoo 360 (NYSE: QIHU) reportedly turning to crowd funding-style tactics to try and raise money for its own buyout, hinting at financing difficulties for a privatization that values the company at more than $9 billion.

Let’s begin with Autohome, whose management-led buyout deal is officially dead following the latest developments. Autohome’s management was trying to put together a privatization bid in April, but was ultimately thwarted after its largest stakeholder declined to play along. Instead, that stakeholder, leading Australian telco Telstra (Sydney: TLS), negotiated a separate deal to sell its nearly 50 percent of the company to Chinese financial services giant Ping An.

Autohome’s management made some last-minute efforts to stop the sale in court last week, but was ultimately unsuccessful. As a result, the deal has closed and Autohome has just announced major changes that will see many of its previous board members and top executives leave and be replaced by Ping An appointees. (company announcement; Chinese article)

Investors weren’t too impressed by the sweeping changes, with Autohome shares losing 5 percent of their value after the announcement. At their current levels of around $22, the stock is still 28 percent ahead of its IPO price from around a year and a half ago. While that sounds ok, it’s less than half of the company’s all-time high of $55 reached last year.

In an interview, Autohome’s founder Li Xiang said the whole skirmish was apparently caused by Telstra’s need to sell its stake by a June 30 deadline, probably related to tax reasons. The Australian telco was concerned that Autohome’s management-led group couldn’t find financing for the deal so quickly, since its 47 percent stake was worth more than $1 billion. Thus Telstra turned to the more reliable Ping An, even though it ultimately sold its stake for less than the Autohome management team was willing to pay.

Qihoo Looks to Wealth Managers

Similar financing difficulties may also be confronting Qihoo, whose $9 billion buyout is easily the largest of the 40-odd US-listed Chinese companies to attempt privatizations since the start of last year. Qihoo already signed a final buyout offer and its shareholders overwhelmingly approved the deal in April. (previous post)

But since then a few things have changed. Most notable of those has been a clampdown by China’s securities regulator on backdoor listings by privatizing US-listed companies hoping to re-list in China, aiming to get higher valuations than they had in New York. Qihoo was already eyeing such a re-listing, and the clampdown may have caused some of the financial backers for its privatization to get cold feet.

That could be a primary reason why media are now reporting that Qihoo is turning to crowd funding-style tactics to raise money for its buyout. (English article) The reports say that Qihoo has enlisted Chinese wealth managers to sell shares to local investors who want to help take the company private. In return, it’s offering promises of ridiculously high returns, possibly as much as 500 percent, according to the reports.

The reports point out that Qihoo’s enlistment of this kind of mom-and-pop investor to finance its buyout is highly unusual, and reflects investor enthusiasm for such risky deals. But in my view, the move shows that Qihoo’s original funding for the deal may be collapsing due to the regulator’s crackdown on backdoor listings in China.

This kind of crowd-style funding raising looks like a move of desperation and is almost certain to fail due to the huge sums of money required and big promised rates of return that will be hard to pay. That raises big new doubts that Qihoo will succeed in its privatization, and I would now give the deal less than 50 percent chance of getting completed.

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