July 31 (Bloomberg) -- Even a buyout offer wasn’t enough to inspire confidence in NQ Mobile Inc., the mobile-security service provider that short-seller Carson Block has accused of overstating revenue.
The Beijing-based company’s American depositary receipts fell 7.9 percent to $6.85 as of 12:04 p.m. in New York, erasing a gain yesterday after Bison Capital Holding Co. offered to buy the company out at a 42 percent premium. The stock has slumped 70 percent since Muddy Waters LLC, the research firm founded by Block, said Oct. 24 that the company misrepresented cash balances.
Bison Capital, an investment firm in Beijing, proposed yesterday to buy NQ Mobile for $9.80 per ADR, compared with the closing price of $6.90 on July 29. While NQ Mobile said in early June that an internal investigation didn’t find any evidence of fraud in its efforts to refute Block’s allegations, investors are still waiting to see its audited 2013 annual report. The company has twice delayed the filing since the end of April.
The tepid market reaction to the buyout offer suggests investors are concerned about the risk of a deal not being completed, according to Sachin Shah, a special situations and merger-arbitrage strategist at Albert Fried & Co. “With a situation like the one NQ is in, the only way to get out of it is to take the company private,” Shah said by phone. “There’s lack of transparency of the offer. Who is Bison Capital? What are the conditions of financing?”
NQ Mobile said in a statement its board is reviewing the proposed transaction and there’s no guarantee a definitive offer will be made.
The bid price for NQ Mobile is too high and the real value should be “south of a dollar,” Block said in an interview with Bloomberg Television today. “So far, it’s not a bid in which management is participating, and there’s no discussion of the financing.”
Today’s price represents a 30 percent discount to Bison Capital’s offered price.
In May, NQ Mobile agreed to sell as much as 5.88 percent of FL Mobile, a unit that distributes mobile games, to Bison Mobile Ltd., a division of Bison Capital Co. and other investors that it didn’t name. The buyers have a right to sell the stake back if FL Mobile doesn’t complete a qualified initial public offering within 12 months after the sale, according to a May 30 statement.
Bison Capital’s founder, Xu Peixin, is an independent board director at Bona Film Group Ltd, a Chinese film producer listed in the U.S., and a partner of venture capital fund New Enterprise Associates, according to Bona’s website. Bison Capital has invested in Airmedia Group Inc., a Chinese digital media advertiser listed in the U.S., according to a filing with the Securities and Exchange Commission.
NQ Mobile hired Marcum Bernstein Pinchuk LLP as its new auditor earlier this month to review its 2013 financial results, replacing PricewaterhouseCoopers Zhong Tian LLP.
“It is probably the best outcome for all,” Paul Gillis, an accounting professor at China’s Peking University, wrote in an-emailed reply to questions yesterday. “The auditing problems would likely hold down the share price for a considerable time. Taking the company private may allow insiders to find ways to unlock value.”
Focus Media Holding Ltd., a Hong Kong-based digital advertising company, withdrew its listing from the Nasdaq Stock Market in May 2013 after a $3.8 billion takeover led by Carlyle Group LP. Muddy Waters first accused the company in 2011 of exaggerating its advertising network.
NQ Mobile submitted a late-filing notice to the SEC on April 30, and in a May 15 statement said it still needed more time to produce its annual report. The company needs to present the document in a time frame allowed by New York Stock Exchange regulations if it plans to keep its stock listed on the bourse.
The SEC filing suggests the company will be under a six-month monitoring period by the NYSE until it submits the document, according to rules confirmed by exchange spokesman Eric Ryan in a July 21 e-mail. He declined to comment on specific companies, including NQ Mobile.
NQ Mobile could be allowed to continue trading for as long as an additional six months if it fails to file the annual report within six months from its due date, rules cited by Ryan show. The due date was May 15, according to the NYSE’s definition.
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