Fortress, Bain and Abax set trend for China ‘go-private’ deals

There are hundreds of Chinese companies listed in the US. Had they listed themselves in their home market, the act of listing would have taken a lot longer, so many simply performed reverse mergers in the US and hey presto, they became publicly quoted.

However, many US-listed Chinese firms have not been enjoying the experience, because the current market environment for US-listed Chinese companies has changed this year. Short-seller attacks, fraud, negative media coverage and poor corporate governance and transparency have led investors to throw in the towel, leading to falls in their share prices. 

As a reaction to this, a number of companies have had enough of participating in the ‘American Dream’ and no longer want to remain publicly listed. It means no investor relations, fewer lawyers, less worrying about meeting forecasts for the next quarter’s earnings and less SEC lawsuits for rule-bends. By way of replacement, there arrives a lovely fat cheque for growth capital from a China-focused private equity firm.

Go-private deals that are poised to close later this year are Harbin Electric, to be acquired by Abax Global and management for $750 million; China Fire and Security, to be acquired by Bain Capital and management for $212 million; and Funtalk China Holdings, to be acquired by Fortress, management and Hong Kong private equity firm PAG Asia Capital for $443 million.

With similar deals concluded in 2010, third-party lending was not a significant feature of the transactions. With the 2011 crop, gearing up with bank debt is more prevalent. China Development Bank is understood to be lending $400 million for the Harbin Electric deal, as well as up to $500 million on a management buy-out of China Security and Surveillance (another go-private deal slated to close in the third quarter this year). The China Fire and Security deal is likely to be part-financed by a $170 million syndicate including HSBC, Citi and Bank of America.

The premiums the buyers are paying over market price range between 18% and 44%.

Given that stock market valuations are currently low, many management teams do not want to go private or take in investment at low valuations and they want private equity investors to pay a big premium to the current stock price. 

“I think the biggest reason for Chinese PE firms to pursue US-listed Chinese companies is that they are very cheap to buy and they can be listed elsewhere at far higher valuations. There is a tremendous arbitrage opportunity,” says Kevin Pollack, a fund manager at New York-based Paragon Capital LP who invests in Chinese companies.

“Only a relatively small percentage of Chinese private equity firms have explored these opportunities. Few Chinese PE firms have experience dealing with the US markets. But it makes sense to buy into the US-listed company at a lower valuation than a similar private company in China, especially if the exit plan is exactly the same – to list elsewhere at the highest multiple possible,” says Pollack.