Rising valuations discourage take-private trend

Despite Alibaba’s recent bid for AutoNavi, M&A specialists expect fewer Chinese companies to leave the US after share prices surged in 2013.

Enthusiasm for take-private transactions could be on the wane in 2014 as the list of potential candidates dries up due to tougher financing conditions and rising US share prices.

“We aren't seeing as many announcements compared to 18 months ago,” said Gregory Puff, a Hong Kong-based partner at US law firm Akin Gump who has worked on more than a dozen going-private transactions.

Some deals are still happening. Alibaba bid this week to buy AutoNavi, a Chinese online map company, and the take-private of AsiaInfo-Linkage finally closed in January.

However, these deals do not fit the trend of earlier transactions. “Typically you see a chairman who wants to privatise — he’s the one who's going to own a significant percentage of the shares,” said Puff.

Neither AutoNavi nor AsiaInfo is being taken private by a founder or chairman.

The original motivation for take-privates came after Chinese companies realised that the prestige of ringing the opening bell in New York came at a high cost— aggressive short sellers, litigious investors and nosy regulators, not to mention the day-to-day administration and compliance costs of being a US public company.

This shift away from the US culminated in Focus Media’s record $3.4 billion take-private deal last year, the biggest-ever leveraged buyout and privatisation of a US-listed Chinese company.

Chinese stocks in the US took a battering in 2011 and 2012 as the perception grew of widespread accounting problems, fuelled by short sellers such as Muddy Waters, LLC (which claimed that Focus Media had overstated the size of its outdoor advertising business, among other things).

Falling valuations in the US encouraged many Chinese firms to go private. Some of the biggest included transactions for pig producer Zhongpin ($800 million), hotel chain 7 Days ($650 million), technology outsourcer Pactera ($500 million) and semiconductor firm Spreadtrum ($1.4 billion).

But last year's jump in US share prices has eliminated valuation as a concern for most companies. Soufun shares rose 217% in 2013, YY was up 250% and Qihoo 360 was up 175%. Across the board, Chinese stocks in the US were up more than 100%.

It is not just rising stock prices holding deals back, according to Puff.

“The ability to get financing may have got more challenging for some of the companies,” he said. “You could also say that a number of the companies that were really keen to get out of the US system did [so]. I'm sure there are a few still thinking about it but some of the backlog has now gotten out of the system. You can point to a lot of different things.”

Take-privates have provided a steady flow of fees for lawyers and other advisers in the past two years but Puff is confident that clients will continue to keep him busy during 2014. He is particularly optimistic about opportunities in the region’s healthcare sector.

“Healthcare is a tremendously interesting space,” he said. “The intellectual property values embedded in those companies make them very interesting and allow for significant multiples to be paid or received. That's a place where we are seeing significant activity.”

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