E-House looking to privatise?

A boost in the holdings of E-House shares by a management group could auger a privatisation bid, while Ambow looks set for a similar privatisation of forced de-listing

PUBLISHED : Tuesday, 26 March, 2013, 12:27pm
UPDATED : Tuesday, 26 March, 2013, 12:27pm

Today's headlines include a couple of new developments in the recent privatisation wave for US-listed China firms, underscoring the difficulty of doing such deals that often require big fund raising. The most interesting of the two latest news bits has online real estate services firm E-House (NYSE: EJ) making a new management-led move that looks like a potential prelude to a buyout offer. Meantime, a much smaller education services firm called Ambow (NYSE: AMBO) has seen its own privatisation plan implode amid a sudden series of high-level resignations that cast doubts on the company's credibility.

Both of these deals come against a broader landscape that has seen a growing number of US-listed Chinese firms try to privatise as investors have abandoned the stocks over the last two years due to concerns about their accounting. Let's take a look first at E-House, whose shares have plunged by two-thirds over the last two years after a series of accounting scandals at other US-listed Chinese firms sparked the current loss of investor confidence.

E-House said it has completed a previously announced new issue of shares that boosts its top managers' stake in the company to 30 per cent.  The announcement doesn't say what per cent of the company the management group previously owned; but based on the US$63 million purchase price for the new shares and the company's market cap of about US$560 million, it looks like the management team boosted its previous stake by about 50 per cent.

E-House said it will use proceeds from the sale to buy back its shares. But the more interesting element in this story is that E-House management now owns about a third of the company's stock, which would theoretically make it easier to get shareholder approval for a privatisation. I've previously said that E-House looks like a good long-term bet, as it makes its money from transactions and other services in China's fast-growing real estate market. That means it can operate profitably in most environments regardless of whether prices are rising or falling.

Despite its positive long-term outlook and the potential of a privatisation and share buyback, shareholders greeted E-House's latest announcement with indifference, with the company's stock largely unchanged in New York trading on Monday. That kind of indifference is what's driving this latest privatisation wave that has seen Camelot Information Systems (NYSE: CIS) and Simcere Pharmaceutical (NYSE: SCR) become the latest companies to announce de-listing plans in the last few weeks. 

Meantime, the case involving Ambrow shows that even the smallest de-listing plans can fail and also highlights the depth of the credibility problem plaguing many US-listed Chinese companies. In this particular case, Ambow had arranged financing for its privatisation that valued the company at a relatively modest US$74 million based on an offer it received on March 15. But the deal collapsed after the sudden resignation of Ambow's auditor and three of its directors amid a probe on potential financial impropriety sparked by allegations from several former company employees. 

This kind of probe is what sparked the confidence crisis two years ago, and more similar probes certainly won't help to restore investor enthusiasm for Chinese stocks anytime soon. If the allegations prove groundless, we could see Ambow relaunch its privatisation plan in the next few months. If the allegations are true, however, the company could see its shares plunge and later be forcefully de-listed by the securities regulator. Either way, Ambow's days as a US-listed company are probably numbered.

Bottom line: A boost in the holdings of E-House shares by a management group could auger a privatisation bid, while Ambow looks set for a similar privatisation of forced de-listing.

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