Chindex Joins Privatization Queue With Fosun Buyout
I’ll start this post with a major disclaimer, since one of my main reasons is simple sentimentality for writing about the newly announced buyout of New York-listed hospital operator Chindex (Nasdaq: CHDX) by a unit of the aggressive Fosun Group. When I first arrived in Beijing in 1987 as recent college graduate, I worked briefly in Chindex’s Beijing offices, which at the time were in the old Xiyuan hotel near the Beijing zoo. Since then, the company has transformed from its early days as an importer of medical and industrial equipment to its current focus on building and operating hospitals and clinics. Along the way it also made an IPO, and has quietly grown into a company with a market value of nearly $300 million.
Under the buyout deal, Chindex stockholders will receive $19.50 in cash for each of their shares from a group led by Fosun Pharmaceutical (Shanghai: 600196). (company announcement; English article) The offer represented a 14 percent premium to Chindex’s closing price on February 14. Other members of the buyout group include US private equity giant TPG, which has helped to finance a number of other recent similar buyouts and privatizations of US-listed Chinese firms. Shares for many of those companies had stagnated in recent years as investors lost interest in the group, leaving the stocks undervalued.
Chindex shares began rising on February 13 as rumors about a deal began to circulate, gaining 6 percent since then. Still, they now trade at just $17.15, or 12 percent below the offer price, indicating investors have some doubts about whether a deal will close. Others also seemed less enthusiastic about the offer, with several law firms saying the deal may not be in the best interest of shareholders. That indicates many may see the offer price as too low, and that perhaps we could see a higher price before a deal closes.
The fact that Chindex’s stock remains so far below the offer price, even with the prospect of a potentially higher bid, underscores just how much smaller Chinese companies have fallen out of favor with US investors. While big firms can still attract attention, especially from the Internet space, smaller names from more traditional sectors have found much more difficulty. Money-losing firms and companies without strongly growing revenues have also fallen out of favor, leading to a steady stream of buyouts and privatizations for companies like Shanda Games (Nasdaq: GAME), Focus Media and Simcere Pharmaceutical, just to name a few.
Shanghai-based Fosun is quickly emerging as one of China’s companies to watch, as reflected by a number of recent major acquisitions by its investment arm Fosun International (HKEx: 656) and now this move by its pharmaceutical unit. In the last year alone, Fosun has made major investments in French resort operator Club Med (Paris: CU) and leading Portuguese insurer Caixa Geral de Depositos, and last month was reportedly a finalist bidding for US publishing giant Forbes Media. (previous post)
It’s been quite a long time since I’ve followed Chindex, but I do have a lot of respect for its co-founders Roberta Lipson and Elyse Silverberg, who were way ahead of the crowd when they opened their company in Beijing around 3 decades ago. Revenue from the company’s core health care services grew at a respectable 16 percent in its latest reporting quarter, though it also slipped into the loss column, which is never a good sign. It was on track to post less than $200 million in health service revenue for the year, reflecting how tough the highly-regulated hospital services market is for foreign-controlled companies. Still, I have to offer my kudos to Chindex for growing and evolving all these years, even as the end of its life as an independent company could be fast approaching.
Bottom line: Fosun Pharmaceutical could be forced to raise its buyout offer price for Chindex, but is likely to ultimately succeed in its plans to privatize the company.
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