INTERNET: Wowo Transforms Through Food Service Buy
Bottom line: Wowo’s merger with a major food service B2B platform looks broadly positive, giving it a new business with better growth potential than its core group buying service.
Just 2 months after its delayed and underwhelming New York IPO, group buying site Wowo (Nasdaq: WOWO) is undergoing a radical transformation by merging with a B2B site used by the food service industry. Wowo, which until recently was known as 55Tuan, is billing this particular merger as a purchase of Join Me Group, or JMU, in a deal that it says will create China’s largest food service Internet company. But the reality is that Wowo appears to be the one getting swallowed up by the larger JMU in this deal, which would end its very brief life as China’s first publicly listed group buying site.
Investors who bought into Wowo’s April IPO thinking they were getting a group buying site similar to US leader Groupon (Nasdaq: GRPN) weren’t impressed by this sudden transformation, bidding Wowo shares down by 8.3 percent and another 4.5 percent in regular and after hours trade after the deal was announced. Still, it’s noteworthy that after the sell-off the shares were still at $10.50, or just a tad above their IPO price of $10. Before rumors of this deal first appeared, the shares had been trading well below the IPO price.
The main part of the deal will see Wowo issue 741 million ordinary shares and pay $30 million in cash to acquire all of JMU’s stock. (company announcement) Those 741 million ordinary shares are the equivalent of about 41 million of Wowo’s American Depositary Shares (ADSs), which are worth about $430 million at Wowo’s latest price. Thus this main part of the deal is valued at $460 million, or more than double Wowo’s market value before the deal was announced.
At the same time, Wowo will also issue 72 million ordinary shares, or the equivalent of 4 million ADSs, to its chairman and CEO Xu Maodong at a purchase price of $10 per ADS. That would mean Xu will pay $40 million for those shares. The final deal will leave JMU’s current shareholders with 50 percent of the new company, with JMU’s 2 co-founders collectively holding nearly 25 percent. Xu will remain as the largest stakeholder with a slightly bigger stake of 25.3 percent of the company, whose name will become JM Wowo.
This particular deal looks good for Xu, as it will allow him to remain as a co-chairman of the new company while also giving him a new business with better growth potential than Wowo’s core group buying business. The big drop in Wowo’s share price could be due to the $10 per ADS paid by Xu for his new shares, which caused Wowo’s shares to drop to near that level.
Wowo’s prospects never looked that good when it finally made its IPO in April after several delays. The company was once a leader in China’s ultra-competitive group buying space, but later got overtaken by better-run rivals Meituan and Dianping. Its IPO was greeted with mostly indifference when it finally came, and the company’s shares have mostly traded below their offering price in the 2 months since their trading debut.
The shares actually spiked in the first week of June and rose to as high as $12 last week, as rumors of a deal entered the market. So this fall-back to $10 per ADS may actually be positive, since before the early June spike Wowo was trading at just over $8 apiece.
At the time of its trading debut I said that Wowo looked like a clear second-tier player whose best hope was to get purchased by a similar sized or larger rival. The company is now doing that with this latest deal, and the clever Xu has engineered a takeover that will give him a new business while letting him stay as company chief. Control of the new company is probably the biggest risk going forward, since it is now evenly split between Wowo and JMU shareholders. But on the whole this deal looks positive, and could provider some upside for the new Wowo JMU stock over the next 1-2 years.
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