FUND RAISING: KongZhong Stumbles Into Buyout Queue, Legend Limps Up
Bottom line: The current fund-raising frenzy reflected in a recent round of buyouts for US-listed Chinese companies and large IPOs like the one for Legend Holdings is likely to quickly fizzle if China’s stock market sell-off continues.
The China fund-raising machine has continued to rumble ahead despite the recent stock market sell-off in Shanghai, with yet another privatization offer coming for a New York-listed firm and a lethargic but respectable debut for newly listed Legend Holdings (HKEx: 3396). The former item saw shares of game operator KongZhong (Nasdaq: KZ) jump after receiving a buyout offer, even as most New York-listed Chinese shares slumped in line with the big sell-off in Shanghai. The latter item saw Legend shares finish down slightly in their Hong Kong trading debut, which doesn’t sound too exciting but was still far better than the 3.3 percent decline of the Shanghai benchmark index.
Of course we need to point out that both of these deals were in the works well before the sell-off that has seen the Shanghai benchmark index shed more than 20 percent from its June high a few weeks ago, officially pushing the market into bear territory. In the case of Legend, parent of PC giant Lenovo (HKEx: 992), the deal has actually been in the works for 3 years, and thus was unlikely to get halted due to volatility in the Chinese stock markets.
Let’s start with the KongZhong deal, which is the 21st buyout offer of the second quarter that officially ends today. KongZhong said a management-led group has offered to buy all the company’s American Depositary Shares (ADSs) for $8.56 apiece, representing a 20 percent premium to its average closing price over the last 30 trading days. (company announcement; Chinese article)
KongZhong shares rose 5 percent after the announcement, though at a closing price of $7.39 they were still 14 percent below the buyout price. That’s roughly in line with many of the other recent buyout candidates, whose shares now trade anywhere from 6 percent below their buyout price, to as much as 25 percent in the case of lesser known names like China Information Technology (Nasdaq: CNIT).
Solid Funding Source
Unlike many of the earlier announcements, whose funding sources were unstated or murky, KongZhong has announced that well-respected venture and private equity fund manager IDG is one of the main backers of its offer. That means this offer could stand a better chance of succeeding than some of the others. But if China’s markets continue to slide, many backers of these buyout deals could ultimately get cold feet and abandon their bids, since most were ultimately hoping to re-list the companies in China.
Next let’s look at Legend, whose biggest asset is its Lenovo stake but which is also quite a diversified company with holdings that also include real estate and interest in 2 private equity funds. The company priced its shares at HK$42.98, and they managed to eke out a small gain in early trade before running out of steam and finally closing down a tiny bit at HK$42.95. (English article; Chinese article)
The deal failed to generate much enthusiasm among big foreign investors, but the retail portion was quite popular due to the company’s familiar name and the boom in China’s stock market. Legend lowered its original fund-raising target from $3 billion to about $2 billion, reflecting the early lack of interest in the offering. But the fact that it was able to reach that reduced target looks respectable, and so does the fact that the shares maintained their value despite the big sell-off across the border in China.
I’ll close out by saying that KongZhong could well be the last buyout offer we see for a New York-listed Chinese company in this current wave, as financiers wait to see how China’s stock markets will fare. Legend could also be one of the last major IPOs we see in this current wave if China’s sell-off continues, meaning the recent fund-raising frenzy could quickly peter out with the corresponding cooling of mainland stock markets.
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