Dealtalk: Private equity scouts for China take-private deals amid tension, volatile markets

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08/06/2020 18:00

(For more Reuters DEALTALKS, click on  DEALTALK/ )
    By Kane Wu and Julie Zhu
    HONG KONG, June 9 (Reuters) - Private equity investors are
seeking Chinese companies to take private in the hope they can
snap up bargains amid the coronavirus-related sell-off, but the
banks that help find such deals are proving less keen to finance
them.
    Interest in Chinese take-private deals is also rising along
with tension between China and the United States, as several
companies considering whether to keep a New York listing or move
instead to Shanghai, Shenzhen or Hong Kong.
    In April, private equity firm Ocean Link offered to buy
Nasdaq-listed online classifieds marketplace 58.Com Inc  WUBA.N 
for $8.3 billion in equity value, a premium of 17.8% to its
undisturbed price in the largest Chinese take-private deal so
far this year. 
    Bigger deals may also be in the offing. Internet giant Baidu
 BIDU.O , with a market cap of $39.4 billion, is considering
delisting from Nasdaq and moving to an exchange closer to home
to boost its valuation, Reuters reported in May.  urn:newsml:reuters.com:*:nL8N2D11TU
    Baidu shares have fallen 9.5% this year while the Nasdaq
Golden Dragon China Index  .HXC , which tracks U.S.-listed
Chinese firms, has gained 12%.
    "The best time to cut take-private deals would be after a
big crisis," said David Liu, founding partner of Asia-based
private equity firm DCP Capital.
    "It's easier to conduct privately negotiated transactions
with listed companies at more attractive valuations in this
environment."

    'FAR FROM STRAIGHTFORWARD'
    Funding however is the most challenging issue for any
take-private deal.
    "The banks are being extra careful these days," said Liu, 
adding that the caution was prompted by the risks posed to loan
books amid the global economic downturn.
    Samson Lo, head of Asia M&A at UBS, said financing was "far
from straightforward" in the current environment. 
    "Banks tend to lend to repeat customers with visible
long-term revenue streams, from financing a particular (deal),
through future refinancing, to ultimate exits," he added.
    Lenders are also valuing companies below what bidders want
to offer, with some going as much as 20% to 30% below the
acquisition price because of a more cautious outlook, said Effie
Vasilopoulos, a partner with law firm Sidley Austin. 
    "How do you catch a falling knife? A common response has
been to adopt very conservative valuations," she said. "We have
not seen this dynamic in terms of financing and valuations fully
play out yet. It is likely that the worst is yet to come in
terms of market impact."
    A Hong Kong-based loans banker with a Wall Street firm said
the bank would not underwrite, or guarantee loan sizes, in case
it proved unable to fully syndicate them to other banks.
    Buyers would have to put in more equity and tap alternative
sources of debt, said the banker, which could raise the cost of
a deal - and lower the expected returns.
    Chinese banks may offer a glimmer of hope, however. With big
balance sheets and strong domestic relationships, they are more
willing to lend to home clients.
   58.com's consortium of buyers, which includes private equity
firms Warburg Pincus  WP.UL  and General Atlantic, is in talks
with Chinese banks for about $3 billion in financing, said three
people with direct knowledge of the matter, adding that global
banks find the figure challenging. 
    Warburg Pincus declined to comment. 58.com, Ocean Link and
General Atlantic did not respond to requests for comments.
    Some shareholders of Hong Kong- and U.S.-listed companies
seeking outside funds to help them go private, have also turned
to local governments in China, said another person with direct
knowledge of the moves. 
    The people sought anonymity because of confidentiality
constraints.

 (Reporting by Kane Wu and Julie Zhu; Editing by Jennifer Hughes
and Clarence Fernandez)
 ((kane.wu@thomsonreuters.com; +85228436590; Reuters Messaging:
kane.wu.thomsonreuters.com@reuters.net))