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Posts Tagged ‘China PE’

This post was written in collaboration with Jens Ørding Hansen from University of Agder with whom I’m writing an academic paper on Chinese companies going private from the US exchanges.

Last week saw the announcement of the largest ever going private (GP) proposal for a Chinese company on the US exchanges. Focus Media had a market cap over 3 billion USD, pushing the record for largest market cap for a Chinese GP from a previous high of 1.8 billion.

This deal can be seen either as a continuation or a new beginning, depending on your perspective. On the one hand the deal fits the trend of Chinese companies going private from the US that many people expect to continue; on the other hand the deal sticks out from the recent trend in some respects.

The sheer size of the deal is the first, and most eye-catching, way that it sticks out. 75% of GP proposals for Chinese firms fall within a range of USD 50-390 million for market cap, with an average of 288 million. So with a deal over 10 times the average historical value we really are talking about an anomaly.

It could be argued that what we’re seeing here is the start of an exodus trend for the larger Chinese companies that are listed in the US. However, the other big GPs we have seen have not resulted in a discernible trend of large companies heading back to China. What we have seen is that one or two larger deals seem to come before more GP proposals among the smaller firms.

Another interesting aspect of this deal is that it does not include China Development Bank (CDB) funding, something that many thought was going to be the driving force behind the next wave of GP transactions. This was especially true after the CDB agreed to provide funding to help close the Fushi Copperweld deal.

This is not entirely out of character for the CDB as a policy bank, however, as they may be allowing market forces to play out before they decide on stepping in to help close deals. Because there was enough financial backing for the Focus Media deal the bank didn’t actually need to step in, at least not yet.

It might be that the bank is more likely to step in and help conclude some of the old GP deals that have been languishing, seemingly unable to close. There are still 6-8 older GP proposals that are seemingly stuck and not going anywhere. If these proposals are genuine then this might be the best use of the bank’s funds, rather than stepping in and helping deals that would likely close anyway.

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With last years going private boom among the US-listed Chinese companies in a lull we have some time to reflect on the potential aftermath.

There was quite a bit written about the going private opportunity at the time, mostly implying that the current valuations were far too low and that a de-list re-list deal taking the company from the US to Asia could yield quick returns. A promise that appears to have intrigued any number of PE firms to take a closer look at this type of deal.

The problem with this type of investment, which was also pointed out at the time, is that it usually requires another IPO exit, which at the moment is a lot easier said than done. This is creating issues for foreign PE firms currently finding out just how hard-accomplished exits are in China these days.

As was pointed out in an excellent piece on the China Private Equity blog, the domestic IPO market is tightly controlled, backed up and dominated by a few domestic firms who appear to hold the keys to the door. Also, Hong Kong is getting stricter on who they allow in, especially on VIE listings that need to provide a lot more these days, and the M&A market is still so small that it cannot be counted on to pick up much of the slack.

There are of course measures the companies can still take to increase the value of their investment, rebuilding the investment structure is one such example, but in such a stale market it will still be hard to find viable exit options.

In fact, it appears the industry has now taken some measures to try to remedy the situation itself. One such instance is the new occurrence of PE firms exiting deals to other PE firms, which begs the question of where these new owners are expecting to find an exit that their colleagues missed. We also have an interesting addition of buy-back clauses in the investment contracts that would potentially require the company to buy back the shares the PE firm took for a set yearly ROI rate.

This last measure appears particularly strange, as it does not detail where the money to buy back the shares should come from, or what enforcement mechanisms the company has at its disposal. It would seem ill advised for the PE firm to try to enforce its’ claim and make the company sell off assets etc. to pay back the investment potentially crippling a well-functioning company. The PE industry isn’t popular to begin with and such a move would certainly hurt the industry as a whole.

Overall the industry seems to be in some state of collective hibernation, with a reported $50 billion invested, and another $50 billion waiting in the wings there needs to be viable exit options available. At present you’d be hard pressed to find even one reliable exit for the industry, and even when the market starts moving in the right direction PE firms are likely to find tougher demands on what will be let through this time around.

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