Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Commodities trading isn't the only speculative frenzy unraveling in China. The rush to finance takeovers of overseas-traded Chinese companies so they can go public back home is fast losing favor.

First, China scrapped plans for a startup board that would have provided a venue for the returnees, as well as shelving a more market-oriented IPO mechanism that would have facilitated share sales. Now the securities regulator is considering measures to curb backdoor listings by companies that previously traded offshore, people with knowledge of the matter told Bloomberg News.

The rapidly closing door will be a painful reality check. About 50 U.S.- and Hong Kong-listed companies have announced plans to go private with the aim of relisting in China. Already, share prices of many of these debt-fueled buyout candidates have begun tanking. 

Losing Faith
Shares of many U.S.-traded Chinese companies that are going through buyouts have slumped
Source: Bloomberg

In the U.S., at least 47 Chinese companies have announced plans to go private since January last year, through offers valued at a combined $43 billion. Many have been spurred by one thought alone -- relisting in China, where valuations are almost three times as high.

So far, 14 buyouts have been completed. The biggest, the $9.3 billion takeover of Qihoo 360 Technology by management and Sequoia Capital's China arm, is still pending. Sequoia Capital China has been the biggest funder of such deals, followed by Huatai Ruilian Fund Management (an arm of brokerage Huatai Securities), according to data compiled by Bloomberg.

Many of these companies face being left in limbo. China has plenty of reasons for cracking down on the returnee brigade. Citing one, CSRC spokesman Zhang Xiaojun said the surging prices of shell companies used by backdoor listing candidates ``deserve serious attention." Companies going public through reverse mergers have seen their valuations double or more in some cases.

Profitable Return
Chinese companies have found higher valuations at home after withdrawing from U.S. markets
Source: Bloomberg, Heng Ren Partners

Another reason relates to Beijing's anxiety over capital outflows. Many buyouts -- including last month's offer by China's richest man, Wang Jianlin, for a Hong Kong unit -- are being funded by mainland-based wealth management funds. That means yuan flowing out of China at a time when the currency has been under pressure and foreign-exchange reserves have been falling. 

There's also concern that many companies are being bought out at low valuations. Wang's Dalian Wanda is set to sweeten a $4 billion offer to take the billionaire's Hong Kong-listed real estate arm private at its original IPO price, the Wall Street Journal reported.

Institutional investor activists such as Boston-based Heng Ren Partners argue that U.S. shareholders are being disadvantaged because premiums for Chinese buyouts are less than three-quarters the U.S. average. More than half the companies going private do so at less than their IPO price, according to Peter Halesworth, managing partner at Heng Ren. Many are cash-rich, having hoarded proceeds from their U.S. IPOs: By the time they announce plans to go private, the average cash balance has surged to $280 million from about $46 million.

With irate shareholders on one side and an unwelcome homecoming on the other, China's offshore prodigal sons would be better off staying put -- and just getting used to less exuberant valuations.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. These figures exclude Autohome, the car website that recently became the subject of a takeover battle between its management and Ping An Insurance.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net