There is currently some debate building about Chinese companies going private from the US exchanges. We saw a wave of these deals a while back but it has been relatively quiet as of late. This could all change, however, with the increased involvement of the CDB to help secure financing for the deals.
While the motivation for taking a company private from the US exchanges is relatively easy to understand, mostly low valuations coupled with the cost of complying with listing requirements. It is more difficult to see where the alternative exit is for the people who go into these deals, something discussed in this article.
Couple that with reports of sharply diminishing returns from domestic IPOs and it seems that a lot of PE funds that were involved are likely to sit on some bad assets. It is certainly fair to say that anyone hoping for a quick delist-relist deal will have been very disappointed with the current situation.
But this does not mean that these deals do not make sense.
One of the major factors why is valuation. The sheer amount of PE money in China at present is pushing up the price of acquisitions, but distrust on the US markets has pushed even the prices of solid profitable companies down. Way down.
Looking at the data we find that the average market-to-book of Chinese companies that have received going private proposals 3 days prior to the proposal is just under 1. This means that the stocks were trading below book value on average, and there are plenty of companies that were well under 1.
With these types of valuations it is possible to offer a good premium and still get a company with a good track record of profitability at fire-sale valuations. The average implied market-to-book of the offers was 1.31. Again these are averages so we even see companies where the implied market-to-book of the offers are under 1.
Now say what you will about the issues of exiting these investments in the future, but with lots of money hanging about in search of a deal in China you would be hard pressed to find more alluring valuations.