PE-backed buyouts of US-listed Chinese firms set to continue
Private equity-backed management buyouts of US-listed Chinese companies are expected to continue in 2012 despite recent pullbacks in the Hong Kong and mainland markets eroding the potential valuation arbitrage. With the announcement of dedicated privatization funds and a growing number of microcap companies facing delisting due to non-compliance with regulatory requirements, Roth Capital says the MBO market will remain active.
During 2011, 10 privatizations of Chinese firms listed on US bourses were completed, two were terminated and a further 10 are still in process. Of the completed transactions, eight were management buyouts and four involved private equity firms. In August, Primavera and PAG participated in the privatization of Chemspec International and Funtalk China, respectively. Three months later, Abax Global Capital took Harbin Electric private and Bain Capital did the same with China Fire & Security.
Private equity firms have also closed PIPE deals in US-listed Chinese firms, with Morgan Stanley Private Equity Asia investing in Yongye International and China XD Plastics.
Of the transactions still in process, an undisclosed global private equity firm is working on a strategic buyout of ChinaCast Education Corp. and Abax and TPG Capital are supporting the MBO of Fushi Copperweld.
In late December, Fushi Copperweld's chairman and co-CEO, Li Fu, submitted a bid to take the company private for $9.50 per share in cash, subject to certain conditions, Dow Jones Newswires reported. The offer is lower than the $11.50 initially tabled by Fu and Abax, but higher than the revised proposal of $9.25 submitted in November. Both offers were made prior to TPG's involvement.
The $9.50 bid represents a premium of 27.3% on Wednesday's closing price and values the company at $363 million. The valuation gap is not unusual in such transactions and is seen to reflect a lack of confidence in the deals getting done.
The Chinese companies being targeted listed in the US via reverse mergers. After financial inconsistencies were uncovered in filings made by several of these companies, short-sellers and hedge funds have begun to scrutinize many more, searching for weaknesses. Stocks have fallen across the board, prompting management teams to consider privatizations with a view to relisting in Asia.
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