New Oriental comments fuel privatisation talk
More than a month after I predicted that education services provider New Oriental (NYSE: EDU) could become the next US-listed Chinese company to privatise, media are buzzing with comments and other rumours that indicate such a bid could indeed be in progress. I made my remarks in late April after New Oriental reported relatively solid quarterly results that failed to impress US investors who have become wary of many Chinese companies after a series of accounting scandals. (previous post) That lack of investor appreciation has led a growing number of US-listed Chinese companies to launch privatisation bids, and I predicted that New Oriental could become one of the next to join that list.
Now Chinese media are quoting New Oriental founder and CEO Michael Yu saying: "To this day, I regret taking New Oriental public." The reports point out that Yu may have made similar remarks in the past, but this time they seem to carry more weight due to concurrent rumours that New Oriental is in talks with private equity funds to launch a privatisation bid.
Such a bid would follow similar recent privatisation plans by IT services firms Camelot Information Systems (NYSE: CIS) and Pactera (Nasdaq: PACT), and by drugmaker Simcere Pharmaceutical (NYSE: SCR). All of these companies have one thing in common: their stocks now trade at a fraction of their levels from two years ago when the confidence crisis against US-listed Chinese stocks began. Many of the companies complain that they are being unfairly punished for the misdeeds of other Chinese firms, and that their shares remain undervalued despite their relatively strong earnings and good growth prospects.
New Oriental certainly fits that description. The company's stock moved as low as US$15 earlier this year, compared with highs above the US$30 level as recently as 2011. Its shares have risen a bit in the last two months and now trade at about US$22, perhaps at least partly on speculation that the company may soon announce a privatisation bid.
New Oriental's shares took a major beating last summer after it announced it was being investigated by the US securities regulator for unspecified accounting irregularities. A short seller issued a report attacking the company right around the same time, causing New Oriental shares to plunge to below US$10 briefly. The securities regulator later cleared New Oriental of any wrongdoing, but I have no doubt that Yu and many of the company's other top executives lost quite a bit of sleep for a few weeks during the crisis.
Since then, the company's shares have rebounded somewhat but are still well below their previous highs. At the same time, New Oriental is starting to post some solid results again after a period of retrenchment to close underperforming schools. Still, the attacks last year and broader investor skepticism towards Chinese companies clearly continue to haunt Yu, which is probably what led him to make his remarks about regretting taking his company public.
In this case we do know that there are some cash-rich private equity companies looking to help finance these kinds of privatisations, with the names Sequoia Capital and Carlyle coming up frequently in such discussions. Accordingly, I wouldn't be surprised if New Oriental is indeed in discussions to help fund such a privatisation, which would be relatively pricey since New Oriental now has a high market value of US$3.4 billion. Carlyle helped to fund a similar-sized buy-out recently for outdoor advertising specialist Focus Media (Nasdaq: FMCN), and I would be surprised to see a privatisation plan announced for New Oriental before the end of this year.
Bottom line: Recent remarks by New Oriental's CEO and rumours of buyout talks mean the company could launch a privatisation bid by the end of this year.
To read more commentaries from Doug Young, visit youngchinabiz.com