The uncertain market environment and concerns about corporate governance at Chinese firms took another toll yesterday when China-based consumer internet platform Xunlei decided to call off its initial public offering in the US.
The company was initially aiming to raise between $106.4 million and $121.6 million, but reduced the price range by $2 and extended the offering period by one day after failing to attract the kind of quality demand it was hoping for. At the new range of $12 to $14 per share, the minimum offering size dropped to $91.2 million and the valuation was reduced to 19.7 times 2012 earnings, but even that turned out not to be enough to lure investors to the deal.
In a brief statement issued yesterday Xunlei said it had decided to postpone its IPO “due to stock market conditions” but didn’t comment beyond that. After the one-day extension, the company had been scheduled to start trading on Nasdaq last night.
According to a source, the deal was fully covered, but the quality wasn’t there and that didn’t really change once the price was lowered. Hence, the company chose not to go ahead. About half of the demand came from US investors, with Asia-based accounts making up the most of the rest. Investors were supposedly not specifically mentioning corporate governance concerns as an issue, but bankers say it is on the minds of most investors these days. During Xunlei’s two-week roadshow, both Moody’s and Fitch issued reports highlighting potential risks that investors need to be aware of when putting money to work in Chinese companies.
In addition to obvious issues like transparency, reporting and control, Fitch also pointed to financial measures that can highlight or mask control and accounting issues, including high levels of revenue and capital expenditure growth, independent valuations of reserves and materials, low cash tax paid, high levels of cash relative to debt and significant profit margins. While many of these issues are to be expected at rapidly growing companies in developing markets, the reports have drawn attention to the risks inherent in investing in China and in combination with a volatile market environment, this has given investors an excuse to stay away from market newcomers.
For Xunlei it seemed to matter little that Google owns a small stake in the company or that Sohu.com, one of China’s biggest internet platforms, had agreed to invest $10 million at the IPO price with a six-month lockup. That investment was in addition to the money it was trying to raise from the market.
Xunlei’s platform enables internet users to access and manage digital media content. Among other things, it offers download and streaming services. According to Xunlei’s IPO prospectus it is the most popular downloading application in China with a 78.7% market share as of February this year and last year its Xunlei Downloader tool was used to make an average 138 million downloads per day.
Xunlei offered 12.5% of its enlarged share capital in the form of 7.6 million American depositary receipt, with each ADS corresponding to three common shares. Some 87.8% of the ADS were backed by new shares, while the rest was sold by pre-IPO shareholders, including Google which was set to trim its existing stake slightly.
The initial price range was $14 to $16, which valued the company at up to 26.2 times next year’s earnings.
The deal was arranged by Deutsche Bank and J.P. Morgan.
