BUYOUTS: Giant Eyes China Backdoor, Qihoo Still Trying

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Bottom line: Giant Interactive is likely to achieve a backdoor listing in China over the next 12 months, while Qihoo could receive a new, lowered privatization offer by the end of this year.

Giant eyes China backdoor listing

Early signs of stabilizing on China’s stock markets are breathing new life into the nascent migration by Chinese tech firms that are abandoning overseas listings to re-list back at home. The latest signals of new movement are coming from formerly New York-listed Giant Interactive, which is eyeing a backdoor listing in Shenzhen, and from Qihoo 360 (NYSE: QIHU), which is indicating its faltering plan to de-list from New York is still alive.

Both of these deals have a bit of history, and are part of a broader wave that saw 3 dozen US-listed Chinese firms announce plans to privatize in the first half of this year. Most of those plans came when China’s domestic stock markets were rallying sharply. Backers of the bids were betting that companies whose shares had languished in New York could get much higher valuations from investors in their home China market.

A few of the buyouts have been completed, with names like online game operators Perfect World and China Mobile Games at or near completion of their de-listings. But the big majority of the deals remain in limbo, following the massive sell-off that saw China’s stock markets plummet more than 40 percent at one point from their June peaks.

Qihoo was the largest company to announce a privatization plan during the earlier wave, but almost immediately ran into trouble because of the deal’s huge size. The uncertainty grew when one of the company’s major joint venture partners started creating mischief, prompting Qihoo to say it might need to focus its financial resources on sorting out that clash.

Backers of Qihoo’s original bid had offered to buy the company’s American Depositary Shares (ADSs) at $77 apiece, and were also reportedly balking at a widening gap between that price and Qihoo’s actual price as Chinese stocks tumbled. (previous post) At the latest price of $53.42, Qihoo’s shares now trade 30 percent below the earlier offer price.

But Qihoo has recently settled the dispute with its joint venture partner, and now its CEO Zhou Hongyi has said at a recent event that he is determined to complete the privatization process and bring his company home to re-list. (Chinese article) That’s the clearest signal we’ve seen that Qihoo is still aiming to complete the process, and I expect we’ll see the buyout group submit a new, lower bid before the end of this year.

Backdoor Listing for Giant

Next there’s Giant Interactive, which was actually one of the first Chinese companies to leave New York when it de-listed at the end of 2013. Now media are reporting the company has identified Shenzhen-listed Century Cruises (Shenzhen: 002258) as a backdoor listing vehicle, and indeed Century Cruises has made its own initial filing about such a reorganization. (company announcement; Chinese article)

Giant has talked about such a plan for a while now, after its stock languished for years in New York. It would be following a similar trail blazed by Focus Media, which also de-listed from New York around the same time and is now making its second attempt at a backdoor listing using another Shenzhen-listed company called Hedy Holdings (Shenzhen: 002027). (previous post) Focus had earlier tried a backdoor listing with another company, but aborted that plan after the listing vehicle came under investigation for securities violations.

At the end of the day, this wave of companies returning to China seems inevitable due Beijing’s desire to bring home some of its most promising tech names for local investors. But such a process will be slow due to many complex issues involved and ongoing volatility in China’s economy. Accordingly, I stand by my earlier assertion that half or more of the earlier privatization bids will ultimately fall apart. But more determined companies like Focus Media and Giant Interactive should ultimately be able to achieve their goals and list on domestic markets in the next year or two.

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