IPOs: ChemChina Weighs IPO For Italy’s Pirelli
Bottom line: ChemChina might be advised to maintain Pirelli as an independent unit and limit the size of an IPO if succeeds in buying the Italian tire maker and decides to re-list the business.
The headlines are buzzing today with word that state-run behemoth ChemChina may try to re-list Pirelli (Milan: PC) after it purchases the Italian tire maker, which got me to thinking about how the China factor might affect such an IPO. In theory at least, investors might get quite excited about a company they once disdained after its purchase by a Chinese buyer, due to hopes for lower costs and greater profits. But a look at 2 recent cases of major US firms that were acquired by Chinese buyers, then re-listed, shows the reality can vary widely and that a Chinese owner isn’t necessarily a panacea for an ailing overseas company.
China company watchers may recognize that one of the 2 names I’m referring to is meat processor WH Group (HKEx: 0288), which purchased US pork giant Smithfield for $4.7 billion in 2013, and re-listed the entire company last year in Hong Kong. The other is real estate giant Wanda Group, which purchased US movie theater chain operator AMC Entertainment (NYSE: AMC) for $2.6 billion in 2012, and re-listed the company a year later in New York.
I’ll provide a more detailed progress report on these 2 earlier deals shortly. But the bottom line is that the Wanda-AMC deal has done quite well for its investors, while the WH Group-Smithfield deal has performed quite poorly. A number of reasons could underlie this big difference in performance, which could provide some guidance for ChemChina if it succeeds in its blockbuster bid for Pirelli.
All that said, let’s look at the latest news surrounding the ChemChina-Pirelli deal, which I haven’t written about to date because it looks relatively dull despite its large size. The companies announced their planned marriage last week, with ChemChina offering 7.3 billion euros ($8 billion) for the world’s fifth largest tire maker. The latest reports quote ChemChina Chairman Ren Jianxin saying he hopes to re-list Pirelli on the Italian stock exchange in Milan if the deal closes. (English article)
The 2 companies are dredging up the usual stable of reasons for why this deal makes sense. They say ChemChina’s China connections can offer low-cost manufacturing resources for Pirelli, and will also give Pirelli a stronger foundation to sell its higher-end tires in China and more broadly in Asia. ChemChina, whose official name is China National Chemical Corp, says it will benefit by gaining access to Pirelli’s technology for its own tire operations, Aeolus Tyre Co.
Now that we’ve looked at that deal and the latest IPO comments, let’s look at the 2 earlier deals I’ve mentioned. We’ll begin with WH Group, which was previously known as Shuanghui, whose IPO ran into problems early on due to lukewarm investor interest. As a result it ended up cutting its original plan by more than half to raise just $2.1 billion last year. The shares initially jumped after their debut, but moved steadily downward after that and now trade about 30 percent below their IPO price of HK$6.20.
AMC’s IPO also ran into lukewarm demand from US investors, and Wanda only ultimately raised a modest $330 million from the deal. But the shares have performed quite well since their trading debut, and have now nearly doubled from their IPO price of $18.
Looking at these 2 cases, there may be some important lessons that ChemChina can learn. One is that keeping the IPO small is probably important, as it limits supply and makes the stock seem more valuable. Keeping the acquired company as a separate entity might also be a better strategy, rather than combining it with a Chinese counterpart. At the end of the day, the individual performance of the newly listed companies is probably the most important factor in determining how their shares may perform, which is likely to be the case once again with this latest deal.
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