Investors agree $9.3b take-private for China's Qihoo 360

The company said in a regulatory filing that it had entered into a definitive agreement with a consortium for an all-cash transaction that includes the redemption of around $1.6 billion in debt. The consortium, led by Hongyi Zhou, Qihoo's chairman and CEO, submitted a buyout offer of $77.00 per American Depository Share on June 17. This represents a 16.6% premium to the June 16 closing price.

The initial backers were CITIC Securities, China Renaissance Holdings, Sequoia Capital and Golden Brick Capital Private Equity Fund I. While China Renaissance is no longer cited as a consortium member, Taikang Life Insurance, Ping An Insurance, Sunshine Insurance, New China Capital, Huatai Ruilian and Huasheng Capital have been added to the roster.

China Merchants Bank has committed to provide a term loan facility of $3 billion and a bridge loan facility of $400 million in support of the transaction. The rest will be covered by new and rollover equity. Zhou and Xiangdong Qi, Qihoo's director and president, between them hold 61% of the voting rights in the company.

Founded in 2005, the company was the leading provider of PC internet security and mobile internet security products in China last year, with 479 million monthly active users and 744 million smart phone users. It was also the number one PC browser provider and Android mobile app store operator.

Qihoo generated revenues of $1.39 billion in 2014 - primarily from online advertising, value-added services and enterprise and IT systems services - compared to $671.1 million the previous year. Net income rose from $99.7 million to $222.8 million over the same period.

Sequoia was among the company's first backers in 2006. Qihoo also received capital from a host of other VC and PE investors before going public on the New York Stock Exchange in 2011.

The buyout is expected to close in the first half of 2016. It is set to become the largest PE-backed take-private by some distance, ahead of the $3.7 billion buyout of Focus Media in 2013. That company has since announced plans to go public in Shenzhen through a reverse merger that involves an asset swap, share issue and cash payment worth around $7.37 billion.

Games developer Giant Interactive, which currently sits third on the list of China take-privates, is also looking at a reverse merger. WuXi PharmaTech is expected to follow a similar path, with management and several private investors having completed a $3.3 billion deal last week.

When the Qihoo transaction was announced, the company's price-to-earnings (P/E) ratio was around 41. This compared to averages of 41, 82 and 137 for Shenzhen's main board, SME board and Chinext, respectively. Qihoo's stock fell from approximately $71.00 in mid-June to $42.00 in mid-September, but has since recovered to $73.00.

The decline in China equities since the middle of 2015 has hit valuations - the average P/E for Shenzhen main board-listed companies is down to 30 - but the Qihoo deal reflects the positivity attached to re-listing companies domestically. Aside from broader capital markets developments, the likes of Qihoo are expected to benefit because they are consumer-facing.

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• Topics
• Buyouts
• Technology
• Greater China
• buyout
• China
• Technology
• Sequoia Capital
• CITIC Securities
• Ping An
• Consumer
• TMT