BUYOUTS: Qihoo Buyout Unraveling, China Mobile Games Wraps

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Qihoo buyout in danger of sinking

Following last week’s wild ride for Chinese stocks, now seems like a good opportunity to revisit the flurry of privatization bids for US-listed China Internet companies and how they’re faring. The list of headlines is led by reports that the biggest of the buyout bids for software security maker Qihoo 360 (NYSE: QIHU) is showing signs of unraveling, as investors balk at the widening gap between their original buyout offer and the company’s latest share price following last week’s sharp declines.

Meantime, another much smaller deal first announced at the height of the buyout wave in June has been quietly completed, resulting in the delisting of shares for China Mobile Games. Completion of this second deal just a couple of months after it was originally announced shows that such buyouts can still be done despite the big sell-offs in both China and New York that are making it hard to value such deals.

Some 3 dozen US-listed Chinese companies have announced privatization bids this year, after their shares languished over the last few years due to lack of interest by Wall Street investors. What started as a slow stream of buyout offers at the start of the year turned into a torrent in May and June, as China’s soaring stock markets unleashed a flood of speculative money to finance such buyouts.

Much of the money behind those buyouts was believed to be coming from Chinese sources, which were looking to make some quick profits by privatizing these US-listed companies and then quickly re-listing them on China’s A-share markets. The thinking was that they would get much higher valuations at home, since Chinese investors are often momentum traders who buy familiar names without really understanding the companies.

All of that looked good when the market was booming. But now that things have turned in the opposite direction, many of these deals could collapse as their funding sources get cold feet. One of the deals that looks most vulnerable is Qihoo’s whose price tag of $9 billion made it the most expensive of the buyouts when it was announced in June.

Widening Gap

Now media are reporting that investors are balking at their earlier offer of $77 per American Depositary Share, following a sell-off that has seen Qihoo’s shares sink to $52.66 at the end of last week. (English article) That means the buy-out’s backers would be paying a rich premium of 32 percent if the proceeded at the $77 price. The reports add that the investors are considering lowering their offer, but that no agreement has been reached.

Rumors were already buzzing a couple of weeks ago that Qihoo might abandon the privatization bid and turn its attention to a takeover bid for smartphone maker and joint venture partner Coolpad (HKEx: 2369), which was also being pursued by online video firm LeTV (Shenzhen: 300104). (previous post) I suspect that development and this latest headline could be related, and wouldn’t be surprised if Qihoo announces in the next 2 weeks that it’s abandoning the buyout.

While Qihoo’s buyout may be falling apart, the same wasn’t true for China Mobile Games, which quietly completed its buyout nearly 3 weeks ago and whose shares have now formally been de-listed. (company announcement; Chinese article) China Mobile Games always looked like a suitable candidate for such a de-listing, and I’d previously said the buyout offer looked relatively strong because it was backed by the cash-rich Orient Securities (Shanghai: 600958), one of China’s leading brokerages.

A quick look at some of the other companies with pending privatizations shows a wide range in the gaps between the buyout prices and current prices, reflecting how confident investors are that deals will get completed. Many of the small- to mid-sized deals for names like Dangdang (NYSE: DANG) and AirMedia (Nasdaq: AMCN) now trade about 20 percent below their offer prices, indicating tepid confidence. But others like Momo (Nasdaq: MOMO) and China Information Technology (Nasdaq: CNIT) now trade at 30 percent or more below their offer prices, indicating these buyouts may ultimately fall apart due to lack of funding.

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