Buyout Group Slashes Offer For 51Job, Others To Follow?

Key Takeaways:

• A buyout group attempting to privatize 51Job has slashed its offer by 28% in light of economic and regulatory challenges
• Other companies in the process of similar privatizations, such as So-Young, iClick and Fanhua, could follow with similar reduced offers

By Doug Young

Brother, can you spare $22?

That variation to the famous line from the Great Depression-era song could well be the latest mantra from online human resources stalwart 51Job Inc. JOBS, which has just announced a group trying to privatize the company is getting slightly cold feet. More precisely, the group led by company co-founder and CEO Rick Yan has lowered its buyout offer price by $21.80 from an original offer made back in June last year.

Put differently, the group has lowered its buyout price to $57.25 for each of 51Job’s American depositary shares (ADSs) from a previous offer of $79.05. The group said it was making the 28% downward revision in light of deteriorating macroeconomic conditions in China, a tightening regulatory environment and ongoing challenges created by the global pandemic.

While the big revision has obvious implications for 51Job and its U.S.-traded stock, it could also foreshadow similar moves by the roughly half-dozen privatizations now in progress by other U.S.-listed Chinese stocks. Like 51Job, all of those companies’ shares have fallen sharply since they originally announced their privatization bids at various times in the second half of last year.

“(The group made its decision) in light of the widely-publicized recent legislative and regulatory developments in the PRC surrounding national security, cybersecurity, and data security, and in order to increase the certainty of closing the transaction on a timely basis in compliance with all applicable PRC laws,” 51Job quoted the group saying in a statement.

While much of the world has been hammering out long-term strategies for living with the new coronavirus, China remains stuck in a “zero Covid” strategy that has resulted in costly and disruptive lockdowns, with no end in sight. Two of those now in force have seen the major cities of Xi’an and Tianjin enter various states of citywide lockdowns, including closure of offices, home confinement and severing of transport links with other parts of China.

In addition to China’s sputtering economy, a wave of new regulation also took its toll on offshore-listed Chinese stocks last year, leading to declines of as much as 90% or more for some shares from the hardest hit sectors such as after-school tutoring. That factor briefly cast doubt on 51Job’s own privatization bid in November, when the company said it was “in consultation with Chinese regulators on recent regulatory changes in China that may be applicable to the company and the proposed transaction.”

The latest announcement says those doubts are now largely settled and the company believes the deal will be able to move forward.

Investors cheered the latest announcement, which shows the deal will move forward despite all the challenges. 51Job’s stock rose 9% on Wednesday after the announcement, and is up 15% over the last two trading days on heavy trading volume. The stock had been holding up relatively well through August last year, supported by the earlier buyout offer. But then it crashed more than 40% from an August high of about $77, before this week’s rebound. At its latest close of $50, the stock is now about 13% below the buyout price, which is a relatively typical gap for this kind of deal.

Others to follow?

The macroeconomic and regulatory issues dogging 51Job are hardly exclusive to the company, and are affecting everyone else to some degree. Accordingly, it’s quite possible we could see other buyout groups lower their offer prices for some of the other similar deals now happening.

Companies with such deals now in progress include Hailiang Education HLG and online insurer Fanhua Inc.FANH, which both announced deals in late December, as well as marketing services provider iClick ICLK and cosmetic surgery specialist So-Young International SY, which announced offers in October and November, respectively.

Within that group, the gap between the offer and latest trading prices is smallest for Hailiang and Fanhua at 12% and 27%, respectively, most likely because those deals were announced just a few weeks ago. The gaps are much larger, at around 38%, for iClick and So-Young. The new $57.25 offer price for 51Job is also about 38% lower than the earlier $79.05 buyout offer.

Not surprisingly, 51Job shares are valued relatively weakly compared with their overseas peers after all the recent selling, which contrasts sharply with big stock gains for many U.S.-based companies last year.

51Job’s shares trade at a trailing price-to-earnings ratio (P/E) of 29, which is higher than the 19 for U.S. giant Korn Ferry KFY but lower than the 37 for Insperity NSP. But perhaps more revealing, 51Job now trades at a relatively modest price-to-book (P/B) ratio of just 1.7, about half the P/B ratio of 3 for Korn Ferry and the lofty 45 for Insperity.

It’s also worth noting that 51Job’s P/B is significantly below the ratio of 10 for domestic rival Kanzhun BZ, which made a New York listing last year and whose recent rise has challenged 51Job and other much older players in the Chinese human resources services market.      

That challenge, as well as China’s broader economic slowdown, is quite apparent in 51Job’s latest quarterly reports, which the company has continued to diligently publish even as its delisting nears.

The company’s revenue is still growing, up 19.3% year-on-year to 1.1 billion yuan ($173 million) in last year’s third quarter. But that growth rate was down sharply from the 32.6% year-on-year growth in the previous quarter. At the same time, the company’s margins and profits have been falling sharply. Its net income plunged by nearly three-quarters in the third quarter to 46.6 million yuan, while even its adjusted net income was down by 44% to 134.9 million yuan.

At the end of the day, 51Job’s departure from Wall Street is probably coming at a good time for the company, since things will only get tougher for it in the future. That’s probably also true for the other privatizing companies, many of which could submit similarly lowered buyout prices in the next few months to reflect recent declines in their share prices.