BUYOUTS: Qihoo, Mindray Buyouts Move Ahead, Boost Sentiment

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Bottom line: The looming completion of buyouts for Qihoo 360 and Mindray Medical points to growing momentum for successful privatizations of other Chinese firms waiting to de-list from New York.

Qihoo, Mindray head back to China

Two of the largest in a wave of privatizations by US-listed Chinese firms have just taken big steps forward, with major new announcements from software security specialist Qihoo 360 (NYSE: QIHU) and medical device maker Mindray (NYSE: MR). One case has Qihoo announcing a formal date for a meeting where shareholders will vote on its plan to privatize the company. The other has Mindray announcing it has formally completed its own buyout plan, and has filed to have its shares de-listed from New York.

It’s quite significant that both of these plans are moving forward now, since China’s own stock markets where both Qihoo and Mindray hope to eventually re-list have been in a state of turmoil these days. That turmoil has seen the main Shanghai index tumble around 20 percent this year, and it’s quite possible that more turbulence lies ahead.

Thus this moving ahead of two of the largest privatization deals to date means that the companies, and also their private equity backers, are determined to complete their de-listing plans. I had previously predicted that volatility in China’s financial markets would trigger the collapse of up to half of the buyout deals, which now number around 40. Most of the companies believe their shares are undervalued in New York, and are hoping to get better valuations by re-listing in China.

A look at stock prices for many companies with pending privatization offers shows the gap is narrowing between the buyout bids and actual trading prices. That would indicate that investors are increasingly confident that many of these privatizations will get completed after all. Based on these latest developments at Qihoo and Mindray, I would agree with that assessment and revise my previous forecast to say that a majority of the buyouts could get completed by the end of this year at or near the original offer price.

Let’s begin with Qihoo, which is easily the largest of the companies that have received privatization offers, with a market value of $9.5 billion based on its offer price of $77 per American Depositary Share (ADS). The company said it has formally scheduled a meeting for March 30, at which time shareholders will vote on the company’s privatization offer. (company announcement)

Shareholder approval of the buyout is almost certain, which would mark one of the last major steps before Qihoo could actually de-list. I previously had serious doubts about Qihoo’s ability to execute the plan, partly due to its large size and also because of the volatility in China’s domestic markets. Thus my kudos go out to Qihoo and its strong-willed chief Zhou Hongyi, who appears to be on the cusp of realizing his dream.

De-listing Application

Mindray was another relatively large buyout, since the company was valued at about $3.3 billion based on its offer price of $28 per ADS. But that deal has now formally been completed, following earlier shareholder approval, and now Mindray is saying it has filed to have its shares de-listed from the New York Stock Exchange. (company announcement)

A random look at some of the other companies with pending privatization plans shows the gaps are generally narrowing between their trading prices and the buyout offers. Such gaps were previously quite large, reflecting investor skepticism that the deals would be complete due to the market turmoil in China.

Shares of AirMedia (Nasdaq: AMCN) are now just 8.5 percent away from their offer price, while Dangdang (NYSE: DANG) and E-House (NYSE: EJ) are off 14 percent and 18 percent, respectively. While the gaps are still significant, they are far smaller than they were just a month ago before many of these companies’ shares began a recent rally. The gap is a bit wider for social networking app maker Momo (Nasdaq: MOMO), whose current share price is 33 percent below its earlier buyout offer. But even in that case, the gap has narrowed quite a bit following a 70 percent rally in Momo shares since mid-February.

At the end of the day, it’s still the responsibility of investors to look at and understand the funding sources for each individual buyout before trying to guess if the deal will get completed. But current trends certainly seem to point to a high success rate for many of the deals involving higher quality companies, and my latest forecast would be that perhaps three-quarters of previously announced deals will ultimately get completed.

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