Qihoo’s $9.3 Billion Buyout Said to Hit FX Regulator Impasse

  • Chinese consortium told it can’t move money offshore in one go
  • Biggest Chinese buyout at $9.3 billion pending since December

The Qihoo 360 Technology Co. buyout consortium seeking to take the Chinese company private in a $9.3 billion deal has hit an impasse with the nation’s foreign-exchange supervisor as the regulator scrutinizes the deal, people with knowledge of the matter said.

China’s State Administration of Foreign Exchange, whose approval is needed to convert large sums of yuan into U.S. dollars, told the investor group it can’t move the acquisition funds offshore in a single batch, according to the people. The consortium, led by Qihoo Chairman Zhou Hongyi, is still negotiating with officials from SAFE, the people said, asking not to be identified as the information is private.

The government has been seeking to control fund outflows amid a $42.6 billion wave of privatization offers for U.S.-listed Chinese companies since the start of last year. China wants to avoid encouraging too many buyouts of overseas-traded companies that could increase depreciation pressure on the yuan, people with knowledge of the matter said earlier this week. 

“China is at an inflection point where it has to balance its objectives of growing via outbound M&A as well as capital outflows,” Justin Tang, director of global special situations at Religare Capital Markets in Singapore, said Thursday. “A loose approach to FX control could cause a stampede to do outbound acquisitions and deplete foreign reserves, which will result in undesirable consequences.”

Higher Valuations

Qihoo, which announced a definitive agreement with the investor group in December last year, would be the biggest buyout of a U.S.-listed Chinese company. At least 47 such take-private offers have been announced since the beginning of 2015, as companies were lured by the prospect of relisting at higher valuations in Shanghai or Shenzhen, data compiled by Bloomberg show. 

Qihoo’s shares slipped 3.8 percent to $67.75 at 1:21 p.m. in New York on Thursday. That compared with $77 per share the consortium offered to buy. Shares of Qihoo have been volatile this week as investors reacted to potential measures China’s stock regulator is considering to curb the flow of domestic backdoor listings. The stock jumped 8.9 percent Tuesday, after falling 11 percent the day before.

The foreign-exchange regulator has told the Qihoo investor group, which also includes Ping An Insurance (Group) Co., Sequoia Capital China and Citic Guoan Information Industry, that it should move the acquisition funds overseas in several batches, according to the people. SAFE is also requesting additional documentation on the transfers to ensure they comply with regulations designed to prevent capital flight, the people said.

Liu Li, a spokesman for Qihoo, said the privatization process is still on track and it’s “completely untrue” that there is disagreement between Qihoo and SAFE on how to move money abroad. Qihoo’s Zhou said in a mobile-phone text message that the privatization process is on track, declining to comment further. SAFE didn’t immediately reply to a faxed request for comment.

Qihoo, which has said it aims to complete the transaction during the first half of 2016, won shareholder approval March 30 and got the green light from China’s state planning agency, the National Development and Reform Commission, the next month. The parties have the right to terminate the merger agreement if it hasn’t been completed by Sept. 18, according to a regulatory filing in December last year.

“I do believe the transaction will go through,” Jason Page, a London-based merger and acquisition analyst at Religare Capital Markets (Europe) Ltd., said by e-mail. “We think SAFE concerns are overblown, as it has never blocked a transaction.”

— With assistance by Heng Xie, Jonathan Browning, and Steven Yang

Before it's here, it's on the Bloomberg Terminal.