Lei Jun, CEO withdraw take-private proposal for China's YY

Lei Jun, YY's chairman and also co-founder of mobile phone manufacturer Xiaomi and VC firm Shunwei Capital Partners, submitted a buyout offer last July in conjunction with David Li, the company's CEO. They offered to pay $68.50 apiece for all outstanding American Depository Shares (ADS), valuing the company at approximately $3.7 billion.

According to a regulatory filing, the buyer group said they were withdrawing the offer, "having given due consideration to recent unfavorable market conditions."

In addition to general market volatility, the China Securities Regulatory Commission (CSRC) announced last month that it would investigate re-listings, with a particular focus on reverse mergers, which involve injecting assets into listed shell companies. This represents a short-cut route as it avoids the long approval process for IPOs.

Over the past three years, five companies have de-listed from the US and re-listed in China via asset restructurings, including reverse mergers by PE-backed Focus Media and Giant Interactive. The CSRC noted, among other things, that the valuation gap between domestic and overseas markets - valuation arbitrage being a key motivating factor in these deals - and speculation on shell company prices warranted attention.

Numerous other companies are considering reverse mergers, and so the CSRC's intervention has bred uncertainty. Qihoo 360 Technoligy, which is involved in a $9.3 billion take-private deal, went as far as to deny rumors that it held discussions with the regulator over a reverse merger during which it was told there would be onerous lock-up and secondary market capital-raising restrictions.

YY was set up in 2005 and launched its core product, YY Client, three years later. It acts as a social platform that allows real-time group-based engagement between users through voice, text and video. The company went public in the US in 2012, having raised capital from a group of VC investors including GGV, Steamboat Ventures, Tiger Global and Morningside Ventures.

As of March 2016, Lei and Li between them owned 35.1% of YY - and held 83.6% of the voting power due to the dual class share structure - while GGV and Morningside had 3% and 3.7%, respectively.

YY generated revenue of RMB5.9 billion ($910.4 million) in 2015 - primarily from online music and entertaining, online games and advertising - compared to RMB3.7 billion the previous year. Net income fell marginally to RMB1.03 billion from RMB1.06 billion.

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• Topics
• Greater China
• Buyouts
• Technology
• TMT
• GGV Capital
• Morningside Technologies
• China