Alibaba-backed deals rekindle US$39b China buyout debate

[NEW YORK] When it comes to the record US$39 billion buyout spree of US-traded Chinese companies, there has been a lot of talk without much action in the past 12 months.

The debate is heating up now after Alibaba Group Holdings-backed companies said last week they'll join a buyout for Momo Inc, raising the odds that the dating app maker will complete a go-private process that had stalled after it began in June. Online video operator Youku Tudou Inc, which was acquired by Alibaba, and budget hotel chain Homeinns Hotel Group were delisted from US last week.

While 40 Chinese companies have received offers to delist from American exchanges over the last year, only seven have completed the process. Opinions about where the trend is headed are split.

One school of thought is that the stock market rout in China and increasing policy uncertainty have made a local listing less attractive, causing the US go-private deals to fall apart. The other is that the revival of the bid to take Momo private is a sign of renewed interest among Chinese investors to push similar buyouts forward.

"Despite what may be perceived as headwinds in domestic markets, pending transactions are continuing to make progress," Ryan Roberts, a Hong Kong-based analyst at MCM Partners, said by e-mail.

"As long as there is a valuation arbitrage to exploit between the US and China markets, I expect the trade to remain attractive for the founders and owners who can force a deal through. "

The buyouts have primarily targeted US-traded Chinese companies because they're cheap compared with their mainland peers.

A Bloomberg index of American depositary receipts of Chinese companies trades at a median forward price-to-earnings ratio of 16, compared with a multiple of 68 for shares on the Shenzhen Composite Index.

Investors boosted bets in the US last week that the ADR deals will get done. Shares of the buyout targets last week sold on average for 7 per cent less than the offering prices, down from 15 per cent before the Alibaba news. That compares with an average discount of 2.6 per cent in the 31 completed deals in the past three years. Momo and Renren Inc. trade at about a 20 per cent discount to the offering prices, down from more than 50 per cent and 30 per cent the week before, the biggest spread in the group.

JUICY STOCKS

"It shows the improving expectations for some of these juicy go-private names," said Henry Guo, a San Francisco-based analyst at Investment Technology Group, who thinks the valuations for Momo and Renren are at a reasonable level.

"They are still considered as high quality companies compared to their counterparts in China. The main concerns are how long these deals will take and what investors will join the buyout."

Time may be running out for the analysts who forecast a mass sprint to wrap up all the unfinished buyout business as investor groups take inspiration from Alibaba's lead.

Takeover bids of Chinese ADRs have taken an average of 252 days to finish, according to data compiled by Bloomberg on completed deals since 2012. As for the 33 pending offers, they have already lingered 216 days since they were announced.

"I suspect that most of the proposed deals never happen or take so long to happen that they take place at much lower valuations," David Riedel, president of New York-based Riedel Research Group Inc, said by e-mail.

POLICY RISKS

Momo and Youku may just be outliers because both companies are backed by Alibaba, indicating that "there is not a deep pool of potential investors into these deals," he said.

Both sides of the buyout debate agree that the combination of lengthy re-listing processes and increasing policy uncertainty in China may eclipse the outlook for the migration from an American exchange to a domestic one.

Youku's Chairman and Chief Executive Officer Victor Koo said on Wednesday that he is eyeing a local stock sale within three years, according to a China Daily report, a long time in a volatile market where regulation changes frequently.

The Chinese government has recently gone silent on a plan to introduce a strategic emerging industries board. The much-anticipated exchange that was scheduled for a rollout this year had been expected to carry lower listing requirements and offer a fresh fund-raising venue for technology companies. If that signals the government's intention to suspend the plans for a tech-friendly bourse, then it would create more uncertainty about how US-listed Chinese companies find a way back to public markets at home.

"In China, the market and policies just change too fast," Jun Zhang, who oversees China research at Rosenblatt Securities, said by phone from San Francisco. "There are always ways to go home if you want to. But what you don't know is whether the long wait is worthwhile."

BLOOMBERG