By Nisha Gopalan
— U.S.-listed Chinese stocks hit by investor concerns about fraud at some of their peers
— Seven deals to take U.S.-listed Chinese companies private this year alone
— Chinese company owners and private equity firms working together to take firms private
HONG KONG (MarketWatch) — Tarred by allegations of fraud at often-unrelated U.S.-listed peers and trading below their once-buoyant initial public offering prices, a series of U.S.-listed Chinese companies have opted to take themselves private, using private equity firms to finance the deals.
Such moves are becoming a major source of business for Asia MA bankers, said a senior Citigroup Inc. banker.
“We have several take-private deals in the pipeline,” said Colin Banfield, Citigroup’s head of mergers acquisitions, Asia Pacific, and joint head of global cross-border mergers acquisitions, global investment banking. “In cases where the owner brings in a private equity firm, we can provide the bridge financing to the private equity firm. The PE firm conducts due diligence and offers additional management and re-structuring expertise, and the company, once private, emerges stronger, so it can eventually re-list in Hong Kong.”
Seven take-private transactions valued at more than US$1 billion in total have been announced so far this year, Banfield said.
“Many private equity firms are targeting China ‘orphan stock companies’–mainland firms listed in the U.S. and Singapore with undervalued stocks due to investors’ limited understanding of their business models, low trading liquidity and often relatively small market caps,” said Banfield. “The companies, meanwhile, are facing low valuations and tight credit in China, so they are interested in going private.”
The deals are usually small, ranging from tens of millions to a couple hundred million dollars, said Banfield, whose firm is ranked No. 4 for advising on mergers acquisitions in Asia outside Japan and Australia so far this year, according to Dealogic. On average, the premiums are 20%-40% to current share prices, and the owners usually finance the deals through a mix of debt and private equity funding.
“Clearly the issues in Europe are presenting challenges to some clients who are putting some deals on hold, but they are also presenting opportunities given the lower valuations. The take-private space will continue to grow in importance for regional MA,” said Banfield.
In August, shareholders of specialty chemical maker Chemspec International Ltd. agreed to accept an offer from the company’s chairman and a private-equity fund headed by Fred Hu, former Greater China chairman for Goldman Sachs, to take the company private. The price of $8.10 per American depository share was 10% below its IPO price two years ago, but still represented a 27% premium to recent share prices.
Earlier this month, U.S. private equity firm Bain Capital closed its US$266 million buyout of Nasdaq-listed fire safety products maker China Fire Security Group Inc., leaving Chairman Weigang Li, Chief Executive Brian Lin and other members of the management team to continue running the company.
Citigroup was one of the banks that financed that deal.
This week, Fushi Copperweld Inc.
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received a revised offer from Chairman Li Fu and private-equity firm Abax Global Capital (Hong Kong) Ltd. to take the Chinese company private in a deal valued at about $353.4 million. They had previously offered US$430 million, but it wasn’t immediately clear why they lowered the offer.
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