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Chinese Go Private Transactions


rukawa
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In line with the Trina Solar investment I found a few companies from China trying to go private and eliminate their ADR's.

 

Did a search here

 

Air Media - AMCN

Current price: 2.49, Merger price: 6, Premium: 140%

Situation: They amended the merger agreement multiple times but as far as I know they have not changed the terms for ordinary ADS holders. However its pretty clear based on the multiple amendments and article below that there are a lot of problems getting this deal done:

http://seekingalpha.com/article/4004170-airmedia-group-going-private-deal-hits-road-block

 

Zhaopin - ZPIN

Current price: 15.20, Merger price: 17.75, Premium: 16.7%

Situation: Their was a merger proposal by an outside group in Jan for 17.5 and then management followed up with another proposal at 17.75 in May. This one has the support of Sequoia China Investment Management LLP. Its still under consideration by the board.

 

KongZhong - KZ[

Current price: 6.95, Merger price: 7.55, Premium: 8%

 

 

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This year I participated in CCSC, DATE, DKSY, EFUT, GAI, MCOX, MOBI, MR, QIHU, RBM (Canadian one) and TAOM. All these deals worked out and were profitable (timing was important in a few ones as they took longer than expected). I didn't invest in any going-private deal that failed to close. That said, there are some risks with China deals - especially the larger ones.

 

I dabbled a little bit into FGL. Not really a going-private deal but it failed / was postponed nonetheless. My trading was still profitable as the stock made huge swings either way. I also made a handsome profit on CTCM and a bit on Pharmstandard (both Russian deals). UTSI was a deal in making but it failed because the chairman blew up. Roughly break-even on that. Aixtron was the only real disaster of the year - but due to Obama blocking the deal, not because of a supposed crisis in China.

 

Currently I am invested in SYUT (I like that deal) and TSL (which could be another blowup).

 

KZ looks moderately interesting. Spread is decent but insiders have been trying for years now to take it private, they adjusted the price downwards (big nono for me!)  there is no timeline yet and insiders own "only 25%".

AMCN has a hairy history - not touching that.

I haven't really looked at ZPIN yet.

 

Here are a couple of other interesting situations: http://seekingalpha.com/article/3964667-chinese-squeeze-outs-need-protect-u-s-investors .

 

For years people have been saying China is going to blow up, all Chinese businessmen are crooks and all Chinese companies listed in the US are frauds. I think this is a bias of US investors that distorts prices and that this is exploitable in a lot of cases. You do have to be careful though.

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  • 3 months later...

Kong Zhong private merger is completed. Zhaopin price currently is greater than its merger price because it entered into a merger agreement at an even higher price than in my original post. The IRR on the Zhaopin deal from my original post is about:

 

1.167^3 - 1 = 58%.

 

Unfortunately I lacked confidence so I invested in neither deal.  Air Media which I considered the worst of all the deals did the best with a 26% increase in price.

 

 

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  • 2 weeks later...

Did anyone ever take a position in Airmedia Group (AMCN)? I'm looking to take a small position in the stock as a Merger Risk Arbitrage play.

 

The most helpful articles I can find on the subject are as follows:

 

http://en.prnasia.com/story/166631-0.shtml

 

https://seekingalpha.com/article/4004170-airmedia-group-going-private-deal-hits-road-block

 

Stock is currently trading at $2.67 and the acquirer has offered a cash bid of $6.00 for each share. If the merger goes through, I could stand to make a profit of around 125% on my investment.

 

However, the merger has dragged on for a very long time, and there are no guarantees that it will go through... In looking at the downside, by my calculations, although the company is making a loss, it is only trading at 2 x NCAV. My thinking is that even if the shares take 100% loss, and the company goes into liquidation, I should only lose approx. 50% of my initial investment after the assets are sold during liquidation.

 

Are there any major points I've missed here? Does anyone else have a position in it? It seems like a very high upside to compensate for the risk it might break.

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If the merger doesn't go through it's probably because the whole company is a scam, and it is doubtful you will ever see any money in a liquidation. This one could work out, but you better assume something close to 100% downside.

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Chinese plastics looks pretty good:

http://www.dealstreetasia.com/stories/china-xd-plastics-ceo-confirms-delisting-from-nasdaq-65414/

 

So far only a non-binding proposal has been submitted and there is no timeline. But the consortium includes a Morgan Stanley Private equity fund and the companies chairman. Together the consortium already represents 75% of the companies shares. The company has a market cap of 235 million and so the merger requires the consortium to raise 235*0.25= 58 million USD

 

I think the merger has a pretty good probability of going through given the consortium's pre-existing share ownership and their resources even though its early stages. I would appreciate the opinion of anyone who has more experience.

 

The merger premium = merger price/stock price - 1 = 5.21/4.75 - 1 = 9.6% which is not bad.

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The discount is ~9% and there is only a preliminary proposal so far. If you look at other Chinese deals it looks unlikely to me this deal will be completed in 2017. Often there are multiple preliminary proposals, preliminary proposals are pulled back and/or it takes ages before an actual bid has been agreed upon. After that you need a couple of months to file a few preliminary proxies, then a few months to set up an meeting, then a few more weeks to actually complete the deal. I think a very optimistic scenario is a deal completion around year-end for a ~15% IRR. And a best case 15% IRR is just not enough for me to invest in a Chinese reverse merger (or in fact to invest in most things).

 

I think this situation is potentially interesting but I'm not investing at the current price given the uncertainty about the timeline to completion. In my (limited) experience it is better to wait for a definitive merger agreement.

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The discount is ~9% and there is only a preliminary proposal so far. If you look at other Chinese deals it looks unlikely to me this deal will be completed in 2017. Often there are multiple preliminary proposals, preliminary proposals are pulled back and/or it takes ages before an actual bid has been agreed upon. After that you need a couple of months to file a few preliminary proxies, then a few months to set up an meeting, then a few more weeks to actually complete the deal. I think a very optimistic scenario is a deal completion around year-end for a ~15% IRR. And a best case 15% IRR is just not enough for me to invest in a Chinese reverse merger (or in fact to invest in most things).

 

I think this situation is potentially interesting but I'm not investing at the current price given the uncertainty about the timeline to completion. In my (limited) experience it is better to wait for a definitive merger agreement.

 

Thanks for the great information...it was exactly what I was hoping someone could tell me.

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  • 3 years later...

At this point nothing. Well, I've been in and out of SKYS if you want to count that one. It's a bit more complicated though. But in general, at this point in time the market is so generous that even these somewhat sketchy Chinese deals are trading at levels where I don't think the risk-reward is attractive. YIN: 1.5% spread. FORK: ~3% spread despite the bid only being preliminary. DL: 2% spread for a preliminary bid. Even SKYS was at some point trading at a ~1% spread despite being a very risky deal - it imploded 50% when some bad news came out. Hard for me to get excited with such spreads.

 

In general I like to size these things small (1%-3%) and own as many different ones as I can find (ok, in practice that usually means 1 - 5 deals or something like that, I wouldn't be comfortable with >20% of my portfolio in such a very specific subset of deals). It's a pet peeve of mine but I think US investors are basically discriminating against Chinese deals for unfair reasons. What investors basically forget is that IF there is finally a lowball offer on the table it is usually a REALLY GOOD DEAL for the Chinese counterparty and they have no more reason at all to screw you over, nor do they even want to. That you are in a trade war with China, that Chinese people (according to some) can't be trusted, that minority shareholders have been neglected for decades and that US investors have been traumatized by Chinese reverse mergers a few years ago is mostly irrelevant at that point. But these seem to be sore issues for a lot of US investors. So I think it's a fertile hunting ground if you are not prejudiced.

 

Another subgroup of deals I like are small OTC US bank mergers. I also usually own a couple of them. Often, the fact that these deals are OTC-traded and illiquid means that, with some patience, you can buy at a very decent implied IRR. This year I have dabbled around in WEIN, BFFI, NWBB, DLMV and EMPK, amongst others.

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"It's a pet peeve of mine but I think US investors are basically discriminating against Chinese deals for unfair reasons."

 

I am watching Chinese US-listed companies reaction when mandated to open books to PCAOB.  https://tax.thomsonreuters.com/news/trump-administration-seeks-to-delist-u-s-listed-chinese-companies-for-blocking-audit-inspections/. then we will see if reasons are unfair.

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I think the above is a typical example of the sentiment I was talking about. I don't think it will influence current definitive Chinese going-private deals at all. Why would a ruthless Chinese businessman offer to buy back his own company when it's a fraud?! That makes no sense. The basic game plan of these situations the past few years has been A) sell shares in US at a high valuation. B) mistreat investors for a few years. C) if your company is actually worth something buy it back from disgruntled shareholders at a bargain price and relist in Hong Kong or Shanghai. Yes: if you buy at stage A or B you have to be very careful. But if you buy in stage C (from a disillusioned US investor) when there's a definitive Chinese going-private proposal on the table from the majority owner your incentives are basically aligned with the Chinese buyer.

 

The past few years only one definitive Chinese going-private deal was NOT completed successfully: SVA. And that was a case with a lot of red flags that was easily avoidable.

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I think the above is a typical example of the sentiment I was talking about. I don't think it will influence current definitive Chinese going-private deals at all. Why would a ruthless Chinese businessman offer to buy back his own company when it's a fraud?! That makes no sense. The basic game plan of these situations the past few years has been A) sell shares in US at a high valuation. B) mistreat investors for a few years. C) if your company is actually worth something buy it back from disgruntled shareholders at a bargain price and relist in Hong Kong or Shanghai. Yes: if you buy at stage A or B you have to be very careful. But if you buy in stage C (from a disillusioned US investor) when there's a definitive Chinese going-private proposal on the table from the majority owner your incentives are basically aligned with the Chinese buyer.

 

The past few years only one definitive Chinese going-private deal was NOT completed successfully: SVA. And that was a case with a lot of red flags that was easily avoidable.

 

Actually, I think forced delisting of chinese companies from US stock exchanges could create up some interesting opportunities.

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I think the above is a typical example of the sentiment I was talking about. I don't think it will influence current definitive Chinese going-private deals at all. Why would a ruthless Chinese businessman offer to buy back his own company when it's a fraud?! That makes no sense. The basic game plan of these situations the past few years has been A) sell shares in US at a high valuation. B) mistreat investors for a few years. C) if your company is actually worth something buy it back from disgruntled shareholders at a bargain price and relist in Hong Kong or Shanghai. Yes: if you buy at stage A or B you have to be very careful. But if you buy in stage C (from a disillusioned US investor) when there's a definitive Chinese going-private proposal on the table from the majority owner your incentives are basically aligned with the Chinese buyer.

 

The past few years only one definitive Chinese going-private deal was NOT completed successfully: SVA. And that was a case with a lot of red flags that was easily avoidable.

 

Actually, I think forced delisting of chinese companies from US stock exchanges could create up some interesting opportunities.

 

Like what?

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I think the above is a typical example of the sentiment I was talking about. I don't think it will influence current definitive Chinese going-private deals at all. Why would a ruthless Chinese businessman offer to buy back his own company when it's a fraud?! That makes no sense. The basic game plan of these situations the past few years has been A) sell shares in US at a high valuation. B) mistreat investors for a few years. C) if your company is actually worth something buy it back from disgruntled shareholders at a bargain price and relist in Hong Kong or Shanghai. Yes: if you buy at stage A or B you have to be very careful. But if you buy in stage C (from a disillusioned US investor) when there's a definitive Chinese going-private proposal on the table from the majority owner your incentives are basically aligned with the Chinese buyer.

 

The past few years only one definitive Chinese going-private deal was NOT completed successfully: SVA. And that was a case with a lot of red flags that was easily avoidable.

 

Actually, I think forced delisting of chinese companies from US stock exchanges could create up some interesting opportunities.

 

Like what?

 

Alibaba or Tencent. If they fall hard due to forced selling, I would be a buying in HK, if only for a swingtrade.

Of course, that wouldn’t be a good private transaction, that would be a go chinese transaction.

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