BUYOUTS: Jiayuan Committed to Buyout, As Investor Doubts Persist
Bottom line: Earlier announcers of privatization plans like Jiayuan are likely to succeed due to their more reliable funding sources, but many of the deals announced by Chinese firms in the second half of June could ultimately collapse.
China’s sudden stock market rally isn’t reassuring US investors who believe that many of the most recent buy-out offers for New York-listed Chinese firms may collapse due to questionable funding. That has prompted at least 1 firm, online dating site Jiayuan (Nasdaq: DATE), to come out and openly say it is still committed to the privatization process that could ultimately end with its departure from New York and re-listing of its shares in its home China market.
The rationale for this kind of a move hasn’t changed throughout China’s massive stock market gyrations, which saw the main Shanghai index more than double over the past year at its early June peak, before crashing in a major sell-off. The crash has subsided in the last few days thanks to major intervention by Beijing, though it’s far from clear whether the selling binge is over.
But at the end of the day, the rationale for leaving New York and coming home to China remains the same regardless of the latest market sentiment. That logic says that investors are far more likely to get excited about a stock when they’re familiar with its name and business model, giving it a better valuation than it would get from less familiar buyers in overseas markets.
That logic is certainly sound, and is the main reason that most companies choose to make their primary listings in their home stock markets, though some bigger names also host secondary listings in other places like New York. Jiayuan CEO Wu Linguang outlined that logic in an internal employee memo, which was strategically leaked to the media in an attempt to prop up Jiayuan’s flagging shares.
In the memo, Wu points out that Jiayuan is a Chinese company, and that 99 percent of its users are in China. (Chinese article) Wu adds that the process of privatizing and re-listing in China isn’t a short-term one, and thus shouldn’t be affected by short-term gyrations in China’s stock markets. Wu also acknowledges that China’s young stock markets still have room for better performance, but that improvements are likely over the long term.
Measured Response
Such logic looks reasonable, and I like Wu’s overall measured response to the volatile situation. Jiayan’s stock is typical of the broader group of US-listed Chinese companies that have announced similar privatization bids since the start of the year. The company’s shares mostly languished after its 2011 IPO, but rose after the initial bid in March, and then again after the buyer raised the bid sharply in response to shareholder protests. (previous post)
Then the shares collapsed in tandem with China’s sell-off that saw the main Shanghai index lose more than 30 percent of its value over just 3 weeks in June. But then the markets rallied after major intervention by Beijing, igniting a rally for Jiayuan and other US-listed Chinese companies. At the end of the last week, Jiayuan’s American Depositary Shares (ADSs) were at $6.34, still 12 percent below the latest buy-out offer of $7.20 but about 10 percent higher than their low during the sell-off just days earlier.
At this point, 2 main camps are shaping up in terms of the gap between company stock prices and their buyout offers. In one camp are companies like Jiayuan, which received their offers relatively early and thus probably secured reliable funding commitments. In the other camp are companies that received their offers during a frenzy of new announcements in the second half of June.
Shares of many firms from this latter camp, such as China Information Technology (Nasdaq: CNIT), Vimicro (Nasdaq: VIMC) and Qihoo 360 (NYSE: QIHU), are mostly still trading at 20 percent or lower than their offer prices. That reflects investor belief that bids for many of these companies were assembled hastily with shaky funding sources at the height of the buyout frenzy. Thus many of those funding sources may now evaporate due to the volatility in China’s markets.
I would tend to agree with that sentiment, and thus would argue that Jiayuan’s deal probably has a good chance of success since it was one of the earlier ones announced in this current buyout wave. As to some of the later deals, there’s still a chance that some may succeed, since the rationale for the move is still valid. But others may have to wait if their funding sources disappear, and I would still predict we’ll see at least 4 or 5 deals from the tail end of the buyout wave ultimately collapse.
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