PAG commits $250m to NASDAQ-listed Funtalk China

The private equity firm will subscribe to $150 million in convertible preferred securities and $100 million in convertible bonds. It also has the option to invest an additional $80 million in convertible bonds on the same terms over the next five years.

PAG's investment comes just over a week after Funtalk's board voted to approve a management buyout offer led by CEO Dongping Fei, Hengyang Zhou, executive president of the company's mainland subsidiary, and Francis Kwok Cheong Wan, senior vice president of corporate investor relations. They are part of a consortium backed by PAG subsidiary ARCH Digital Holdings, Capital Ally Investments, GM Investment and Sinowill Holdings.

The consortium - which has created an acquisition entity called Fortress Group - made a cash offer of $7.10 per share on March 25, a 15% premium to the previous day's closing price. About a month later it increased the offer to $7.20 per share. According to media reports, the deal values Funtalk at around $430 million.

As part of the transaction, Weijian Shan, chairman and CEO of PAG, will join the Chinese company's board. Funtalk has announced its intention to de-list from NASDAQ.

This is the fourth privatization and de-listing of a Chinese firm from US exchanges in the last 18 months. Seven more are understood to be considering offers from management, often with private equity backing. Of those seven, four have received board approval pending a shareholder vote, with Harbin Electric the most recent.

All of these companies went public in the US through reverse mergers, whereby a dormant listed vehicle is purchased and new assets are injected into it. This kind of transaction has proved popular with Chinese companies as it is quicker and cheaper and involves less regulatory oversight than an IPO, although it is not a capital-raising event.

However, a number of reverse merger firms have since exposed for overstating revenues, exaggerating market positions, and shifting cash off the books through related-party transactions. This has led hedge funds and short sellers to probe for weaknesses in countless Chinese reverse merger stocks, causing a decline in share prices across the board.

Believing their stock to be undervalued, the likes of Funtalk are pursuing management buyouts with the ultimate goal of listing in Asia. In other cases, Chinese firms languishing on US exchanges have been targeted by private equity firms seeking PIPE investments. In recent months, Morgan Stanley Private Equity Asia has taken positions in NASDAQ-listed China XD Plastics and Yongye International.

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• Topics
• Greater China
• PIPEs
• Consumer
• PAG
• Morgan Stanley Private Equity Asia