The number of Chinese companies going private after being publicly traded on U.S. exchanges has been rising in recent years, but buyers are facing headwinds from higher valuations and tighter credit.
Doubts about U.S.-listed Chinese companies’ bookkeeping and disclosures a few years ago caused their shares to tumble, paving the way for company executives and private-equity firms to take these companies private in the hope of profiting by relisting them elsewhere.
The value of deals this year is set to keep pace with last year’s $6 billion, data from Dealogic showed, although deals will likely come at a higher price. Valuations for U.S.-listed Chinese firms started soaring last year, and lenders are becoming increasingly cautious.
Buyers this year offered prices that were nearly 18 times a company’s earnings on average, almost double the average of 9.6 times in 2010, data from FactSet showed. The FactSet data, which excluded companies that weren’t profitable, were based on earnings in the 12 months leading up to a deal announcement.
In the biggest buyout of a U.S.-listed Chinese company this year, a consortium led by Citic Capital Partners agreed in May to buy AsiaInfo-Linkage Inc.
for $890 million, or 15.7 times the Nasdaq-listed software company’s earnings. Citic, which made an offer as far back as January 2012, declined to comment on why it took more than a year to secure the deal.
The highest valuation on record was a $528 million bid in March for Simcere Pharmaceutical Group
. The offer, from a consortium including the Chinese drug maker’s chairman, Jinsheng Ren, valued the company at 56.1 times earnings. Simcere, which is still considering the proposal, declined to comment.
U.S.-listed Chinese firms have gotten more expensive as investor appetite recovers. As of the close of trading Tuesday, stocks in the sector had risen by an average of 27.6% this year, outperforming the SP 500’s 17.5% gain, according to consultancy Tobin Tao Co., as investor skepticism stemming from accounting scandals at Chinese companies has eased.
Executives of U.S-listed Chinese companies are realizing “the U.S. is still the deepest capital pool in the world,” said Chien Lee, one of the founders of 7 Days Group Holdings Ltd., which was taken private this month.
The Chinese hotel chain’s co-chairmen and founders teamed up with private-equity firms including The Carlyle Group,
Actis Capital and Sequoia Capital to pay $696 million to delist the company from the New York Stock Exchange.
“It’s a case-by-case basis. We went private to have more flexibility to grow…[but] more chairmen are willing to have their firms stay public because they know the market will come back,” Mr. Lee said.
Plans for buyers to cash out by relisting Chinese firms at higher valuations in Hong Kong or mainland China are anything but certain. So far, none of the U.S.-listed Chinese firms that have been taken private have relisted.
“The opportunity for ‘exchange arbitrage’ has narrowed since late 2012, with U.S.-listed companies outperforming those listed in Hong Kong and Shanghai,” said Mark Tobin, managing partner at Tobin Tao.
Joseph Chan, a Shanghai-based partner at law firm Sidley Austin LLP, said deals in the pipeline are stalling because of challenges in securing financing.
Chinese companies listed in the U.S. have complex corporate structures that allow them to open themselves up to foreign investors without flouting Beijing’s restrictions on foreign ownership. But these structures raise the risks for lenders, preventing them from claiming a U.S.-listed firm’s mainland Chinese assets as collateral should the borrower default on a loan.
“A number of banks have become more selective and want to get comfortable with the collateral package,” Mr. Chan said.
Fred Hu, founder of Primavera Capital Group, said the availability or lack of debt financing would have a big impact on deals to take companies private.
In 2011, the fund and Chemspec International Ltd. Chairman Jianhua Yang secured a $70 million loan from Standard Chartered
PLC to take the specialty chemicals company private for $139 million.
“Banks still have appetite to work with reputable private-equity firms on quality deal opportunities,” said Mr. Hu.
Blackstone Group
.
“We entered 2013 with 20 deals in process, so we’ll see a lot of take-private deals closing this year,” Mr. Tobin said.
Last October, Abax Global Capital Ltd. and the chief executive of Nasdaq-listed Yongye International Inc. offered to take the Chinese fertilizer company private for $326 million, but the offering expired in May. Yongye said that month that the bidders remained interested; it said Thursday it was evaluating the proposal.
In June, Nasdaq-listed Chinese firm Pactera Technology International Ltd.
said it was evaluating an offer received in May. A group led by Blackstone Group and management at the information technology outsourcing firm offered $680 million to take the company private.
Write to Chao Deng at Chao.Deng@dowjones.com