How China's Crash Affects Stocks Trying To Go Private

In light of the recent market panic in China, MCM Partners analyst Hank Terrebrood released a report focusing on potential deals to take U.S.-listed Chinese companies private. The growing spreads between share prices and potential buyout prices seem to indicate that the market has become skeptical that the deals will go through as planned.

The numbers
As of this week, nearly all of the going-private deals that have been announced for U.S.-listed Chinese stocks are demonstrating double-digit spreads between share prices and buyout prices.

With many of the announced deals still in the early stages of completion, the recent turmoil in Chinese A-shares markets has increased the market uncertainty surrounding completion of the deals.

Two possible exceptions
In the report, Terrebrood notes two deals that seem likely to stay the course: buyouts of China Mobile Games and Entertainment Group Ltd CMGE and Sungy Mobile Ltd GOMO. Both buyout consortiums have entered into definitive agreements, and the deals are in the later stages of completion.

“In both CMGE and GOMO, the buyout consortium included shareholders who own or control a majority of the company’s stock, suggesting that a protracted battle for the company is unlikely,” Terrebrood adds.

Market not convinced
Despite the relative certainty of the two buyouts, the buyout spreads for China Mobile Games and Sungy Mobile remain above 15 percent, indicating that the market is not completely convinced that the deals will go through.

According to the spreads, the market is even more skeptical of the completion of other announced deals to take Chinese companies private, including deals for China Information Technology Inc CNIT (69.5 percent spread), Vimicro International Corp VIMC (50.2 percent spread), iDreamSky Technology Ltd DSKY (41.7 percent spread) and 21Vianet Group Inc VNET (40.3 percent spread).

Terrebrood believes that any stabilization in the Chinese A-shares markets would likely lead to a reduction in these large spreads.