Left at the altar
Chinese management buyouts may fizzle on Wall Street. A regulatory probe, short-seller allegations, and a profit warning sliced 60 percent off New Oriental Education in the past two days. Though depressed stocks may make it cheaper for U.S.-listed Chinese companies to take themselves private, a spike in financial – and perhaps legal – costs may halt the buyout trend.
True, falling share prices may make founders keener than ever to go private. Not only is the takeover price lower, it’s getting pricier to maintain their U.S. listings. Law firms have launched class-action lawsuits against Chinese companies. Legal and compliance costs are surging after a spate of scandals. Litigation insurance premiums have gone up about four times in the past two years, according to one banker.
The slowdown had already started. ShangPharma’s $176 million management buyout on July 6, backed by U.S. private equity group TPG, was the only new deal announced since late May. In the first five months of the year 11 deals had been announced, according to Roth Capital Partners. The success rate hasn’t been very high. Since April 2010, only 14 of the 34 go-private deals announced by U.S.-listed Chinese companies ever closed.
Financing appears to be the biggest hurdle. Banks are now demanding high interest rates, up to 20 percent a year, for bridge loans, according to a person involved in those deals, to compensate for the heightened legal risks. The underlying businesses have also deteriorated. New Oriental’s revelation of a Securities and Exchange Commission probe came along with a profit warning.
Moreover, new accounting woes and a general global market retreat have dimmed hope for listing arbitrages. Private equity funds assisting founders with MBOs planned to delist undervalued companies from one market, say New York or Singapore, and relist them in Hong Kong or mainland China at better prices. That’s becoming harder to pull off. Hong Kong IPO volumes tanked nearly 90 percent in the first half compared to 2011, according to Thomson Reuters.
China-led MBOs had been a bright spot for bankers in Asia as big-ticket M&A deals dried up and the equity capital markets took a breather. Now even that corner of the market looks destined for hibernation.