Qihoo $9.1b buyout leads privatisation wave

Qihoo 360's $9.1 billion buyout could become the biggest yet as more US-listed Chinese companies are taken private amid a surge in Chinese stock markets.

The surge in Chinese stock markets has sparked a wave of privatisations of US-listed Chinese e-commerce companies. Qihoo 360 Technology is the latest.

On Wednesday the Chinese internet company said it received a $9.1 billion buyout offer from chairman and chief executive officer Hongyi Zhou, Citic Securities, Golden Brick Capital Private Equity, China Renaissance Holdings, and Sequoia Capital China. If successful, the buyout will be the largest privatisation yet of a US-listed Chinese company.

Bankers expect more Chinese companies to be bought out and potentially seek listings back home due to the current bull frenzy in mainland Chinese shares as retail investors plough into the market.

"The privatisation trend of US-listed Chinese companies continues," Winston Cheng, head of technology, media and telecommunications Asia, at Bank of America Merrill Lynch, told FinanceAsia. "Quite a lot of companies are hopping onto the train to take advantage of the potential valuation arbitrage especially on the back of heightened liquidity in the local markets."

According to data provider Dealogic, the total volume of privatisations of US-listed Chinese companies so far this year is $22.6 billion with 14 deals compared with $660 million from just one deal in all of 2014. Just last week, internet data centre services provider 21 Vianet, social networking internet platform Renren Inc, and online real estate services company E-House announced privatisations worth a total of $3.7 billion.

A Credit Suisse report on June 10 highlighted other potential US-listed Chinese companies that could be privatised including New Oriental, KongZhong, Pheonix New Media, Leju, Zhaopin, 51 Jobs and Mecox Lane. [see chart at the bottom of story for more details]

Private capital


Qihoo, which provides internet and mobile security products in China, has received a buyout offer at a time when private capital is pouring into the e-commerce sector. According to S&P Capital IQ, Chinese technology companies have raised a whopping $17.7 billion in private capital so far this year, far overshadowing last year’s $6.7 billion.

Sequoia Capital China, one of the backers of Qihoo 360’s buyout, has been among the most active buyers this year, participating in a total of 14 private deals, according to S&P Capital IQ data.

Private capital offers internet companies an alternative source of funding as they face margin pressure amid a grab for market share. Investors typically like smooth rises in earnings and many Chinese e-commerce companies have not been able to deliver that due to keen competition.

"In the past, Chinese internet companies seeking larger-sized investment capital had to look to the US market. Today with more private equity funds in China and the domestic stock markets performing well, many Chinese internet companies are finding plenty of sources of capital at home," said Philip Lee, director at S&P Capital IQ. 

"In addition, Chinese internet companies who have struggled in the US public markets have recently decided to go private in the short-term to potentially seek a China listing down the road," he said.

One example of a Chinese company that was taken private and is now seeking a mainland listing is Focus Media. The company, which is backed by Fosun, went private in 2013 amid attacks from short-seller Muddy Waters. It is now planning to list on the Shenzhen Stock Exchange through a reverse merger. That refers to a process where a private company merges with a publicly listed company to avoid having to seek a fresh listing.

Government hand

The Chinese government is also lending a helping hand to lure Chinese internet companies back home and looking to change its regulations.

"The Chinese government has recently discussed the possibility of allowing China ADRs in the US to re-list in the A-share market without removing their VIE structures, which need to be removed under the current law," said S&P Capital IQ's Lee. American Depositary Receipts trade on US markets but represent a specified number of overseas company shares, while a Variable Interest Entity is a Chinese structure that gives outside investors control and access to a company's profits but not actual corporate ownership.

Since last year the government has also taken steps to boost domestic markets, launching the Shanghai-Hong Kong Stock Connect which enables international investors to directly access mainland China's biggest stock market through the Hong Kong Exchange.

Since the start of this year, the Shanghai Stock Exchange and Shenzhen Stock Exchange have been on a tear, surging 48% and 105%, respectively.

Given the recent surges, mainland-listed Chinese internet stocks can fetch much higher valuations than their overseas-listed peers. For example, the overseas listed online games sector trades at 19 times estimated financial year earnings, while their A-share counterpart trades at 108 times, Credit Suisse said in the report.

Overseas listed e-commerce goods and services providers trade at 55 times and 37 times estimated financial year 2015 earnings, respectively, while their A-share peers trade at a whopping 320 times, the report added.

Given the recent froth, even bankers (generally a bullish bunch) are concerned about the sustainability of the mainland rally. China's stock markets are deemed to be driven by so-called “friends and family” or parties that are friendly with the founders rather than by the intrinsic fundamentals.

“If the business hasn't changed, why should the valuation change so much?" said a banker who declined to be named. "And is the pricing level sustainable over the long term and are mainland investors getting a fair price for such companies?"

Privatisation candidates

Privatisation candidates
Source: Credit Suisse, Wind


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