KongZhong Offer Shows Shanghai Slide Not Slowing ADR Buyout Rush

KongZhong Corp. became the 25th U.S.-traded Chinese company to receive a buyout offer as a selloff in mainland stocks failed to stem a wave of delisting deals that seek to take advantage of higher onshore valuations.

The digital entertainment firm’s American depositary receipts rose 5.1 percent to $7.39 in New York on Monday for the biggest gain in a Bloomberg index of the most-traded Chinese stocks in the U.S. Chief Executive Officer Leilei Wang and IDG-Accel China Fund II offered to acquire all outstanding ordinary shares for $8.56 in cash per ADR, representing a 20 percent premium to the average closing price over the last 30 trading days, according to a company statement.

Of the record 25 China-based firms with American listings that have received buyout offers this year, at least four others in addition to KongZhong are online or mobile game developers. They are attractive targets because they’re cheap compared with their A-share peers, according to Nick Ning, a Shanghai-based analyst at 86Research Ltd. Chinese stocks tumbled on Monday, sending the benchmark index into a bear market.

“It’s better for them to go back to China, where the valuation would be much better for small cap names like them,” Ning said in an email on Monday.

KongZhong, which has market capitalization of $335 million, trades at 18 times its reported earnings, compared with an industry average of 22, according to data compiled by Bloomberg. The median stock on mainland exchanges is valued at about 75 times earnings. The company sold shares at $10 each in an IPO on the Nasdaq Stock Exchange in July 2004.

Buyout Offers

Other online game developers that have received buyout offers include Perfect World Co., Shanda Games Ltd., China Mobile Games & Entertainment Group Ltd. and IDreamsky Technology Ltd.

This year’s go-private deals, with a total value of $25 billion, are offering investors a 23 percent premium over the companies’ average trading prices prior to their announcements, the lowest since 2010, according to data compiled by Bloomberg. Almost 60 percent of the bids were below the firms’ initial public offerings.

The Bloomberg U.S.-China Equity Index fell 2.8 percent on Monday to a two-month low following losses in mainland markets. The Shanghai Composite Index dropped 3.3 percent at close, swinging between a loss of 7.6 percent and a gain of 2.5 percent -- the biggest intraday point move since 1992. The index has declined more than 20 percent from its June 12 peak amid signs that the nation’s longest ever bull market is coming to an end.

A major A-share market sell-off would negatively affect U.S.-listed Chinese companies planning to exit American exchanges to relist in the onshore market, Junheng Li, head of research at JL Warren Capital LLC, said in an email.

“Panic has been dominating the market sentiment” as monetary stimulus by the People’s Bank of China may not be enough to reverse selling from retail investors, private equity funds and mutual funds, Li said.

“We expect to see the ADR buyout wave to slowdown as A share market sentiment deteriorates,” she said.

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