China Reconsiders the Homecoming Party
Buyouts of Chinese companies listed in the U.S. lose their allure “Stability and control over the asset market is the priority”
Some Chinese companies list their stocks on U.S. exchanges, and to their executives, at least, those shares have been looking cheap. Managers have been leading bids to buy up U.S. shares and take the companies private again. One advantage of the move is the opportunity to eventually relist the stock in China, where investors might be willing to pay a higher valuation. The median company on the Shanghai and Shenzhen exchanges is valued at a lofty 52 times its trailing earnings.
Since 2015, more than 40 Chinese companies with overseas listings have received buyout offers, for a total of more than $40 billion. But as with many things in the country’s evolving market economy, things are getting complicated. Chinese authorities are signaling they are nervous about the transactions. First, they went silent on a plan to introduce a stock exchange for technology companies, where some of the buyout targets were expected to find their new Chinese home. Then, on May 6, the China Securities Regulatory Commission said it’s studying the market impact of such stock relistings.
That raised concerns that the regulator might curb some relistings, reducing some of the incentive for buyouts. Shares of several U.S.-listed Chinese companies that had been targets of buyout offers, including 21Vianet
Group, YY, and Momo, dropped sharply. Qihoo 360 Technology declined as well, even though the Internet security company’s $9 billion buyout has been approved by its shareholders. A company spokesman says the privatization remains on track.
Buyout groups “did the math to calculate the valuation, and the numbers worked,” says Jun Zhang, head of China research at Rosenblatt Securities in San Francisco. But they didn’t expect Chinese policies to change so quickly— and neither did investors who bought the stocks assuming a buyout was coming. “Nobody did,” says Zhang.
Regulators may have been concerned about a speculative frenzy that was building for shares in some small companies already traded in China. The companies are considered targets for so-called reverse mergers—a company that wants to go public can buy them to get a place on the Shanghai or Shenzhen exchange, as an alternative to the more cumbersome process of an initial public offering. There could also be concern that the market is too shaky to absorb an influx of companies. The Shanghai Composite Index has declined 21 percent this year.
“I don’t necessarily think it’s a bad
thing,” says Ryan Roberts, a Hong Kongbased analyst at MCM Partners, of the slowdown in buyouts and relistings. “Having a bunch of IPOs coming all together with less scrutiny will be more problematic than the current situation.”
Policymakers may also be concerned that the buyouts contribute to an outflow of capital when they are fighting to maintain a stable exchange rate between the yuan and the U.S. dollar.
The about-face underscores the lack of consistency in China’s market regulation. Only a year ago, Premier Li Keqiang publicly encouraged overseas-listed companies to return to local exchanges, a key part of the government’s strategy to transform the economy via technology and innovation. Now, for authorities, “stability and control over the asset market is the priority,” says Junheng Li, founder of JL Warren Capital, a New York-based research firm focused on Chinese equities.
Still, regulators may not block all the deals. Instead, they could cap valuation multiples for reverse mergers with companies that had traded abroad, according to people familiar with the situation. Or regulators could establish a quota limiting the number of such deals.
Liang Jian, chief executive officer of IMeigu Capital Management, says he thinks most of these deals will eventually go through. His hedge fund sometimes invests in buyout targets and in one case has put together a rival bid for a company management is trying to buy. Liang says executives have already invested time and money in their buyout plans, and they know that even after going private, it takes a while to relist on China’s exchanges. The politics could change again in the meantime.
But one thing is clear by now. “The impression that you can go and relist in China for a fortune was misleading,” says Patrick Chovanec, New Yorkbased chief strategist at Silvercrest Asset Management Group. “When you glance at the China market and say it’s more attractive than the U.S., the danger is, how long will it last?”