Hot But Undervalued Chindata Attracts Owner-Led Buyout Bid

Key Takeaways:

• Bain has offered to pay $8 per ADS for the remaining shares it doesn’t already own in Chindata, about 27% higher than the stock’s closing price the day before the announcement
• The offer comes after Chindata reportedly attracted takeover interest from a number of other potential suitors last year

By Warren Yang

Last year, data center operator Chindata Group Holdings Ltd. CD appeared to become a red-hot takeover target, amid numerous unverified reports of outside interest in buying the company. But nothing ever came of those reports, and the company saw its American depositary shares (ADS) continue to trade in New York at a depressed valuation under controlling ownership by U.S. private equity giant Bain Capital.

Now, Bain seems to have decided enough is enough, hoping it can get more money from this undervalued asset by taking it over completely, most likely before an ultimate resale of the company to another outsider. But that kind of rosy outcome is far from certain, as such a path would face a number of obstacles.

Chindata announced receiving a preliminary buyout offer last week from Bain, which already owns 42% of the company, to take it private. Bain is willing to fork out $8 per ADS for the remainder of Chindata that it doesn’t already own.

The mooted price puts the company’s market valuation at about $2.9 billion and represents a premium of about 27% over Chindata’s closing price the day before the announcement. Chindata said it has formed a special committee comprising its independent directors to consider the proposal. 

While Bain’s offer includes a markup, some may still see it as a bargain for the U.S. private equity giant. Before Bain made its offer, Chindata shares had lost more than 50% of their value from their IPO price in 2020. Bain’s offer is still well below the IPO price, and translates to a trailing price-to-earnings (P/E) ratio of about 30 – far below the 85 for Equinix EQIX and 93 for Digital RealtyDLR, among the company’s global peers.

Also, at Bain’s offer price, Chindata’s market capitalization would be about 4.4 times its revenue for 2022, also lower than a price-to-sales (P/S) ratio of 9 for Equinix based on its revenue for the trailing 12 months and 6.5 for Digital Reality.

So, Chindata looks undervalued no matter how you slice it, particularly considering its growth prospects as demand for data storage and computing power soars with the rise of cloud services and new technologies like artificial intelligence (AI). The company’s revenue surged 60% last year and jumped nearly as much on a year-on-year basis in this year’s first quarter.

Chindata has forecast relatively conservative revenue growth for all 2023, expecting an increase of a little more than a third at most. But even if growth does slow to that level, Chindata would still be a great value for Bain at its proposed buyout price, which gives the company an even lower forward P/S ratio of about 3.4.

By taking Chindata private, Bain could focus on further nurturing the company – which already looks quite well run compared with its local peers – without worrying about shareholder demands or listed company requirements. That could lead to even faster revenue growth, helping Bain to sell the company at a much higher valuation closer to its global peers.

Bain bought Chindata in 2019 from Wangsu Science & Technology Co. and merged it with one of its own portfolio firms called Bridge Data Centres, creating one of China’s three major independent data center operators with presences in Malaysia and India as well. The company currently runs its Chinese facilities under the Chindata brand, while Bridge Data Centres oversees its international operations.

Potential Obstacles

A successful buyout would extend Bain’s marriage with Chindata by a least a few years as the former works to boost the latter’s valuation. But finding a buyer down the road, which is almost certainly Bain’s ultimate goal, may prove tricky.

GDS GDS, one of Chindata’s two main domestic rivals, along with VNET VNET, could be one potential suitor if and when Bain is ready to sell. GDS was reportedly one potential suitor considering a bid for Chindata last year, and could further solidify its status as China’s largest independent data center operator with such a merger. Such a deal would also help GDS accelerate its own expansion in Southeast Asia, where it’s been taking steps to boost its operations.

But GDS is unprofitable, with losses forcing it to constantly raise new funds. That raises questions about its ability to finance an acquisition of Chindata, especially since Bain would want to sell it at a significant premium to what GDS may be willing to pay.

VNET could similarly benefit from its own combination with Chindata. But its finances are messy due to its large debt and a small cash pool, which means the company isn’t really in a position to pursue an acquisition.

Another name that has appeared in media reports as a possible suitor is EdgeConneX. But selling a Chinese telecoms infrastructure operator to an American rival could get vetoed by Chinese regulators, who have increasingly focused on tightening measures to protect data. International transfers of Chinese data have become a particularly sensitive topic.

And tensions between Beijing and Washington, which have recently dampened U.S. private equity investing in China, wouldn’t help such a deal either.

One solution for Bain may be selling Chindata’s domestic business separately to a Chinese company like GDS, which would reduce the financial burden for the buyer and minimize regulatory risks. Then Bain could try to separately sell Chindata’s less sensitive international assets to a foreign buyer.

But none of this would matter if Bain’s buyout attempt doesn’t succeed. While shareholder approval looks almost certain due to Bain’s possession of more than 87% of Chindata’s voting rights, getting regulatory approval in both China and the U.S. could be problematic due to the sensitivities we’ve previously mentioned.

Chindata’s shares have yet to reach the offer price since the bid’s disclosure, trading about 9% below that level. That’s close to the offer price compared to the cases of recent management-led buyout bids for U.S.-listed Chinese companies that have left shareholders less impressed. Still, the gap suggests a degree of skepticism remains about whether Bain can close the deal.