In $39 Billion China Buyout Spree, Latest Offer Angers Investors

  • Jumei's going-private offer is less than 1/3 of IPO price
  • Investors say it damages confidence in Chinese stocks

When Leo Ou Chen took his Chinese online beauty products retailer public in the U.S., investors clamored to pay $22 a share. Less than two years later, he’s offering a third of that price to buy them back.

The going-private offer for Jumei International Holding Ltd., the latest in a string of Chinese companies seeking to exit the U.S. stock market, is angering minority shareholders who say the low price benefits management to the detriment of equity owners. Chen and his partners have made a non-binding offer of $7 per American depositary share in cash, the company said on Feb. 17. They own 54 percent of the shares and have 90 percent of the voting power.

If the management-led buyout group is able to buy Jumei at such a steep discount, it will expose loopholes in the rules that are supposed to protect small investors and at the same time undermine confidence in other overseas-listed mainland companies, the minority shareholders say.

‘Angry, Disappointed’

“I am angry, disappointed and disgusted,” said Ricky Zhong, an investment director at iMeigu Fund in Beijing. His firm specializes in investing in U.S.-traded Chinese companies and owns Jumei shares. “I’ve never seen so much backlash from investors for a go-private deal. Investors are hurt.”

While the offer from Chen, his co-Founder Yusen Dai and Sequoia funds is 27 percent above the average closing price over the previous 10 trading days, it is 68 percent below its initial public offering price of $22, which was above the high-end of the targeted range. Compared with its average trading during the past 90 days, the proposal is 11 percent cheaper, the second-lowest among 42 proposed going-private deals of U.S.-listed Chinese companies since January 2015, according to data compiled by Bloomberg. Only E-Commerce China Dangdang Inc. has a bigger discount of 16 percent.

Linda Bergkamp, a managing director at Christensen Investor Relations who represents Beijing-based Jumei in the U.S., declined to comment. A call to Chen’s office outside normal business hours was unanswered Friday.

Zhong said his firm may sue Jumei’s management team in the Cayman Islands, where the company is incorporated.

‘Disturbing Pattern’

Chinese companies have received a record $39 billion offers to delist from the U.S. since the beginning of 2015. Firms including Qihoo 360 Technology Co., China’s second-biggest search engine, intend to return to local exchanges to seek higher valuations as the government promotes home-grown technology firms.

Some of the deals offer investors the opportunity to profit or limit their losses from long-depressed share prices. Others, such as Dangdang, have been criticized for being based on lowball offers that don’t reflect the stocks’ real worth and prevent smaller investors from taking part in the companies’ longer-term growth.

“It’s another event in the disturbing pattern of sell high to U.S. investors and then buy back low,” Peter Halesworth, the founder of Heng Ren Investments, said by phone from Boston. He doesn’t hold Jumei.

Stock Decline

Jumei declined 33 percent in New York last year as its online platform lost ground to bigger e-commerce players such as Alibaba Group Holding Ltd. and JD.com Inc. In November, it reported an adjusted loss of 8 cents a share for the third quarter, compared with an average estimate for a profit of 10 cents.

The stock has extended its decline this year, slumping an additional 36 percent through Feb. 16 to $5.84, the last trading day before the buyout proposal was announced. It has increased 9.3 percent since then to end the week at $6.38. It’s market value has fallen to $913 million from a peak of $5.4 billion in August 2014. The shares rose 0.5 percent to $6.41 at 10:49 a.m. in New York on Monday.

Jumei’s management took advantage of the selloff as they “really believe they’re not fully appreciated by investors,” said Henry Guo, a San Francisco-based analyst at Summit Research Partners LLC. It’s a “reasonable offer” compared with where it was trading, but a “pretty low offer compared to its IPO price,” he said.

Guo had a buy rating with a target price of $15 as of December. The average price target among 13 analysts surveyed by Bloomberg is $11.20.

Jumei held $402 million in cash or equivalent as of September, according to the latest filing. That is almost equivalent to the $467 million needed for the buyout group to acquire the remaining outstanding shares, according to data compiled by Bloomberg.

While minority shareholders are treated unfairly, they have very little influence in the going-private process, iMeigu’s Zhong said. Under the current law governing companies incorporated in the Cayman Islands, management-led buyout groups are allowed to vote on the deals. Management tends to hold controlling stakes, putting minority shareholders at disadvantage, Zhong said.

“Some people are greedy,” he said. “But it’s the flaws in the regulations that set the ugly side of human desire lose.”

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