China's Take-Private Tick Tock
China's second-biggest Internet browser is stuck. Qihoo 360's $9.3 billion take-private deal has reached an impasse with China's State Administration of Foreign Exchange, whose approval is needed to convert large sums of yuan into U.S. dollars.
It isn't the only one. A number of Chinese companies are waiting to delist from overseas stock markets. 1 Investors who stand to make, or lose, a fortune from how quickly the process concludes are starting to feel nervous, with good reason.
Beijing's efforts to stabilize the nation's volatile stock market and stanch the flow of money out of the country have also had the effect of limiting the amount of domestic funds available to back these take-private transactions.
Last month, Smartkarma strategist Arzish Baaquie highlighted the SAFE risk embedded in such deals. At the time, Qihoo's shares were trading at $76, a fraction below the $77 buyout offer price. ``The market seems to be pricing the deal as certain to close, whereas one might be a bit apprehensive,'' Baaquie wrote. Good call, because Qihoo's stock closed on Monday at $71.05, having touched $63.90 last week, the least since November.
It's bad news also for Chinese savers, who are grappling for returns amid low domestic deposit rates. Many had latched on to wealth-management products whose proceeds funded take-private deals. With stocks on the mainland trading at about three times the valuation of their offshore-listed peers, the craze made sense.
Combing through Chinese take-private deals on U.S. targets going back to 2010 shows that from announcement to completion, the process stretched to a record 271 days for transactions announced last year -- and this is only if all the pending deals from 2015 close today. Multiply the time taken by the value of the pending deals, and 2015's transactions average works out to more than $260 billion, by far the highest.
Think of this as a measure of uncertainty, which, unless it proves to be a just a temporary holdup, could cause a premium to get baked into the price that Chinese buyers pay for offshore assets they want to bring home. The steeper the premium, the less lucrative it's going to be to delist and relist in China.
Take-private transactions used to be a much faster affair: Deals announced in 2014 took just 142 days to close, on average. It's become clear, however, that authorities aren't hesitant to crack down on money heading for the exits. As such, Chinese companies are starting to source more of their funding offshore, either through foreign banks, or the overseas branches of state-owned lenders. 2
Whether SAFE will continue to tighten the screws ultimately boils down to the outlook for the yuan, and China's foreign reserves. Outflows have moderated, but Goldman Sachs warns they could accelerate again if the recent strength in the dollar continues. The longer transaction times stretch, the more jittery investors are going to get.
Since early 2015, as many as 46 Chinese companies listed in the U.S. have received take-private offers, usually by their founders, worth more than $42 billion. Just 15, among them Homeinns' merger with BTG Hotels, and online video operator Youku Tudou's purchase by Alibaba, have closed.
China National Chemical Corp's $43 billion offer for Swiss firm Syngenta has SAFE's blessing but it's still borrowing a large chunk of money from outside of China. And Anbang's ultimately aborted $14 billion bid for Starwood used funding from China Construction Bank's U.S. branch, according to people familiar with the matter.
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