China take-private wave continues despite A-share crash

This article originally appeared in International Financial Law Review


Companies such as so-called flirting app owner Momo – which only listed in December 2014 – have received management buyout offers. Other companies that have received offers include Qihoo 360, which, with a $10.06 billion offer, would be the largest Chinese take-private so far.

The recent A-share crash is unlikely to halt all these deals. While they are based on the high valuations that these companies would receive in the domestic markets, some of these companies are also seeking regulatory certainty.

And while the A-share valuations helped, lengthy deal timelines meant that founders would struggle to take advantage of record highs immediately. "If you're doing a take-private now, it is unlikely that you can finish it in two weeks and immediately relist in the A-share market," said Stephanie Tang, partner at Shearman & Sterling in Hong Kong who is advising both Momo and Mindray's special committees on their take-private offers.

"It takes time," she said. "The take-private itself normally takes a minimum of four to six months to finish."

What's changed

This wave of take-privates have different reasons to those that delisted from 2011 to 2014. That group were taken private due to low valuations following short-seller attacks and concerns around accounting standards and corporate governance.

Those deals included Focus Media, 7 Days and Giant Interactive. They tended to be management buyouts with significant private equity sponsor support, and it was believed that most companies planned to relist in Hong Kong; 3SBio completed its initial public offering (IPO) last month.

These deals, on the other hand, were driven by the A-share market reaching record highs. "The price to earnings multiples were substantially higher in China, and companies looked at those multiples and wondered why they dealt with regulatory hassles and a lack of investors and liquidity when they could be getting substantially higher multiples at home," said Doug Freeman, partner at Paul Hastings in Hong Kong, who acted for the sponsors in Focus Media's 2013 take-private.