VNET Finally Gets Some Respect from Unsolicited Suitor

Key Takeaways:

• VNET has received an unsolicited buyout offer that is 50% higher than its previous stock price, sparking a 30% surge in its shares
• Company is the relative laggard among China’s three major independent data center operators despite its status as the oldest of the group

By Doug Young

VNET Group Inc. VNET, the least-appreciated of China’s three major independent data center operators, is finally getting some respect.

But VNET may be less-than-thrilled about the attention, which is coming from a private equity group that has launched an unsolicited bid for the company. The bid is from a company called Hina Group, which has financial backing from the Shanghai branch of Industrial Bank Co. Ltd., according to a Monday announcement from VNET, the company formerly known as 21Vianet.

The group is offering to buy all of VNET’s American depositary shares (ADSs) for $8 apiece, a nearly 50% premium to the stock’s close last Friday. Not surprisingly, VNET shares jumped 30% after the announcement came out and closed Monday at $7 – still 12.5% below the offer price.

There are a few stories going on in the background here, led by the big story that U.S.-listed Chinese stocks are extremely undervalued at the moment after a major selloff for much of the last year. The selloff was driven for most of last year by a wave of regulatory crackdowns in China. The nosedive culminated in March on concerns that all U.S.-listed Chinese companies could be kicked off Wall Street for failing to make their audit papers available to U.S. regulators.

The group of companies has bounced back somewhat over the last four weeks as both the regulatory crackdowns in China and delisting concerns in the U.S. show signs of easing. VNET shares have now roughly doubled from their mid-March low following the Monday rally, though they’re still down by about three-quarters from where they were a year ago.

The other story is that VNET is easily the most-undervalued of China’s three major independent data center operators, the other two being GDS GDS and Chindata CD. In revenue terms GDS is the largest with 7.8 billion yuan ($1.2 billion) in revenue last year, followed by VNET at 6.2 billion yuan and Chindata a distant third at 2.9 billion yuan. Yet despite that, Chindata’s market cap is twice the size of VNET’s, and GDS’ is seven times as large.

In terms of ratios, VNET also significantly underperforms its two peers with a lowly price-to-sales (P/S) ratio of just 1, compared with about 5 for both GDS and Chindata. Comparisons of price-to-book (P/B) ratios show a similar trend, with VNET at 0.83, compared with 1.23 for Chindata and 1.66 for GDS. All that pretty firmly shows that VNET isn’t too respected by Wall Street investors, which is probably a major factor that attracted the unsolicited bid.

The lack of respect is all the more surprising due to VNET’s longer history than the other two, which has given it plenty of time to build up a market-leading position. The company was founded in 1999, a couple of years earlier than GDS and well before Chindata, whose history only goes back to 2015. VNET also counts Microsoft MSFT as its cloud services partner in China, though here we should note that China’s cloud services market is currently mostly dominated by local names.

Unsolicited bids

From a bigger-picture perspective, the VNET offer seems to represent a growing trend of unsolicited bids by private equity buyers looking for bargains among U.S.-listed Chinese stocks. We’ve seen plenty of buyout offers for such undervalued companies over the years. But the big majority are usually led by the company’s founder who often controls a big voting stake and thus can block any unsolicited offers not to his liking.

In this case VNET’s founder and Chairman Chen Sheng, who also uses the English name Josh, controls 28.8% of VNET’s voting power, according to the company’s latest annual report. That means he couldn’t outright block the bid, though he could certainly create lots of delays if he wanted.

The reality for many U.S.-listed Chinese companies is that their founders treat them like their personal fiefdoms and have no desire to give up control. Accordingly, those owners could create major obstacles for any buyer group that wanted to come in and install a new management team.

The current environment has drawn unsolicited bids for at least two other U.S.-listed Chinese companies in the past year, both of which later turned into bidding wars. The first involves digital marketing tools supplier iClick Interactive ICLK, which received an unsolicited buyout offer last September, only to get another even higher offer a month later. The other involves Hollysys Automation HOLI, a maker of automation control system solutions, which received several unsolicited offers over the past year.

Hollysys rejected two offers it received last year, but received at least one more in late January. iClick said it would study the two proposals it received, but hasn’t commented further since then. Thus, this third unsolicited bid for VNET really does look like an emerging trend that could see more unsolicited offers for some of the most beaten-down Chinese stocks in the months ahead. Whether any of these offers will succeed is another matter for the reasons we’ve already given.

In VNET’s case, the company really does appear in need of an overhaul due to its relative laggard status. The company’s revenue grew 28% last year, and it forecast the figure would further slow to about 23% this year. By comparison, GDS’ revenue grew 36.2% last year, and Chindata was the star performer with 55.8% growth.

If we were betting, we would guess that the buyout group for VNET is indeed eying the company for its low valuation and plotting a management overhaul if its offer actually succeeds. Investors appear to believe there’s at least some chances for success, based on the big jump in VNET’s stock after the announcement. But we’re more inclined to believe that the bid will follow a similar path to what’s happening at iClick and Hollysys, where management appears to be stonewalling all unsolicited offers in hopes the bidders will eventually give up and go away.