BUYOUTS: Qihoo Nears Exit Door, LightInTheBox Gets New Partner
Bottom line: Qihoo’s privatization is likely to succeed after shareholder approval of its buyout offer, though many similar pending deals could collapse and might consider strategic stake sales like the new one by LightInTheBox.
The volume of noise coming from Chinese companies privatizing from New York has dropped sharply in the last month, reflecting volatility in their home market where many hope to one day re-list. But 2 major new stories from that wave are back in the headlines, led by shareholder approval for what would be the biggest privatization so far for security software specialist Qihoo 360 (NYSE: QIHU).
At the same time, the much smaller e-commerce firm LightInTheBox (NYSE: LITB) has just closed another deal that looks less radical than an outright privatization and could provide an alternative template for companies seeking to attract more investor attention. That deal has the company selling 30 percent of itself to Hong Kong-listed Zall Development (HKEx: 2098), which paid a large premium for the stake.
The privatization wave of US-listed Chinese companies has moved in fits and starts over the last year, cruising ahead when China’s stock markets rally and then suddenly losing momentum when those same markets correct. Right now Chinese stock markets seem to be in a holding pattern, which perhaps is why the privatization wave is also on hold while private equity backing most of the buyout bids waits to see how the markets will move.
But one company that seems unconcerned about the volatility is Qihoo, whose strong-willed founder Zhou Hongyi made up his mind a while ago that New York investors didn’t understand his company. Or perhaps it would be more accurate to say that New York understood his company too well, and was growing impatient with Qihoo’s inability to monetize its fast-growing online search business. By comparison, Chinese investors are far less concerned with such fundamental issues as profits, and are more easily swayed by the kind of hype that Zhou is so good at dispensing.
Qihoo announced its management-led buyout last year, and its shareholders have just approved the offer by an overwhelming majority of 99.8 percent of people who voted on the $9 billion deal. (company announcement; Chinese article) Under the deal Qihoo shareholders will get $77 for each of their American Depositary Shares (ADSs). The company’s ADSs rose slightly to $75.70 after the vote, indicating investors are fairly certain the deal will close. I would agree with that assessment, and would add that anyone looking to make some quick cash could do so by purchasing shares at their current price.
Shareholders Unimpressed
Next there’s LightInTheBox, which differs from other Chinese e-commerce companies in targeting foreign online shoppers for Chinese goods. Like many of its Chinese peers, LightInTheBox has failed to find much of an audience among US stock buyers.
The company announced its deal to sell 30 percent of itself to Zall Development earlier this month for $3.60 per ADS, and has just announced that the deal has formally closed. (company announcement; Chinese article) Zall’s price represented a premium of about 50 percent to LightInTheBox’s share price when the deal was first announced, quite a bit higher than the premiums offered for many of the outright buyouts offers.
But shareholders weren’t too impressed by the premium, and LightInTheBox’s ADSs rallied slightly after the announcement but have largely returned to previous levels since then. From a strategic standpoint, this particular deal looks promising for LightInTheBox, as it gives the company new cash and also an important partner with strong experience in the traditional and online retail sectors.
LightInTheBox was briefly popular after its New York IPO in 2013, but has struggled since then and has been losing money in recent quarters. This particular investment looks like a potential alternative to the privatization that many Chinese companies are trying, as it involves the sale of a major stake to a strategic partner rather than an outright buyout that is far more costly and complex. Other companies now looking to de-list might consider a similar alternative if China’s stock markets fail to stabilize, though it’s unclear if similar longer-term strategic buyers would be interested in many of those firms.
