BUYOUTS: Chaos in NY De-Listing Queue Shakes Up China Stocks

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US China stocks losing balance

The headlines last week were littered with signs of growing unrest and chaos among the dozens of US-listed Chinese companies trying to privatize from New York and return to China in search of higher valuations. One of the biggest items saw signs of a new bidding war break out for private clinic operator iKang (Nasdaq: KANG), while another saw data center operator 21Vianet (Nasdaq: VNET) mount what increasingly looks like a stealth privatization campaign. A third saw social media website operator YY (Nasdaq: YY) become the first to abandon its privatization bid altogether, casting doubt on many of the other similar pending offers that have gone for months without any progress.
The growing turmoil was largely fueled by China, which has slammed the door on potential re-listings for many of these companies by sharply reducing new domestic IPOs and casting doubts on an alternate backdoor listing path to market. The resulting chaos has dampened already weakening US sentiment towards Chinese companies, also hurting the prospects for future high-growth listing candidates that have few other options for fund raising.

Having helped to create the chaos that could easily become a new confidence crisis for US-listed Chinese stocks, China should take more aggressive steps to ease the situation. Such a crisis would not only undermine existing US-listed Chinese stocks, but could also create a funding crunch for start-ups whose current and future backers rely heavily on overseas listings to recoup their investments.

Around 40 US-listed Chinese companies have launched privatization bids since the start of last year, mostly on belief that their stocks are undervalued by Wall Street investors. Many of those bids were backed by highly speculative, China-based private equity, which was hoping to make some quick profits by re-listing the companies back in China at much higher valuations.

But China’s stock market regulator has put a sudden damper on such plans, first by sharply curtailing new IPOs due to market volatility at the start of the year. It heightened the chilling effect last month, when it sharply increased its scrutiny of an alternate listing route that was seeing returning companies make backdoor listings using currently traded shell companies.

Shares Sell-Off

The growing uncertainty has sparked a plunge in shares for many US-listed Chinese companies, as investors fear a new wave of chaos among the group. A major scandal last month involving search leader Baidu (Nasdaq: BIDU) and probe against e-commerce giant Alibaba (NYSE: BABA) by the US securities regulator haven’t helped the situation, adding to mounting concerns towards these companies.

The growing turmoil is showing up in the most recent headlines, including the situation with iKang. After receiving a typical management-led buy-out offer last year, a rival made a higher bid for the company a short time later. Both sides were trumped last month by Yunfeng Capital, a private equity fund backed by Alibaba founder Jack Ma. That turmoil continued in the headlines last week, with reports that insurance giant China Life (HKEx: 2628; Shanghai: 601628; NYSE: LFC) was planning a new bid, possibly with backing from iKang’s founder. (previous post)

As chaos and confusion reigned in that privatization, a different kind of contest was breaking out for 21Vianet, one of China’s largest private data center operators. After launching a privatization bid last year, 21Vianet last month appeared to be abandoning that plan by making a major new convertible bond offering. Further signs that it might be attempting a stealth privatization at a much lower price came when it announced a major stake sale to a China-based investor tied to the prestigious Tsinghua University. (previous post)

Last but not least was YY, which last week abruptly announced it was abandoning its earlier privatization bid, in what could become a new flood of similar announcements among the many companies that have yet to complete their privatizations. (previous post) Of the 3 companies in the headlines, YY and 21Vianet have both lost about 40 percent of their value since early May, reflecting a broader trend that hints at a growing confidence crisis towards US-listed Chinese stocks.

China could help to stabilize the market through more aggressive steps, such as speeding financial reforms at home and making it easier for average Chinese investors who are more familiar with names like YY and 21Vianet to buy stock in overseas markets. It could achieve the latter by encouraging more companies to enter the cross-border brokerage business, following the lead of startup Tiger Brokers and a recent tie-up between Internet giant Baidu (Nasdaq: BIDU) and US startup Robinhood. (previous post) Failure to act more aggressively could cause the nascent chaos to mushroom into a full-blown confidence crisis, similar to one that wreaked havoc on Chinese stocks in 2011 after a series of accounting scandals.

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