A year and a few months ago when the Chinese markets were in full-blown panic, management teams of Chinese companies were quick to take advantage of the beat-down in their companies trading on our exchanges and make go-private offers. Basically a go-private private offer is one where the founder/member (s) of the management team decide that their company is valued to cheaply by investors and thus make an offer to take the company private.
Well, it seems the go-private trend is back.
Early yesterday, Charles Zhang, Chairman of Changyou.com, made an offer to but the company at a price of $42.10 per ADS. That is not a huge premium offered compared to the closing price of $38 and change per share on Friday bit it is more than a 50% premium compared to the average price of Changyou in the last 90 days.
"Changyou.com Limited, a leading online game developer and operator in China, today announced that its board of directors (the "Board") has received a preliminary nonbinding proposal letter, dated May 22, 2017, from Mr. Charles Zhang, chairman of the Board of the Company, to acquire all of the outstanding Class A and Class B ordinary shares of the Company, including Class A ordinary shares represented by American depositary shares of the Company (the "ADSs", each representing two Class A ordinary shares), for $21.05 in cash per Class A or Class B ordinary share, or $42.10 in cash per ADS, which represents a premium of 50% to the average closing price of the Company's ADSs during the last 90 trading days, and a premium of 9% to the closing price of the Company's ADSs on May 19, 2017."
Shares of Changyou closed at $40.18 yesterday on almost 5x the normal trading volume, a 6-year high,
So why is Zhang offering to buy the company out from the existing investors?
The answer is ridiculously simple. Zhang see value where most current investors in the West that own the ADRs are having trouble doing so. Most Western investors are too mired in the same old, tired story about Chinese companies books and practices, often looking at those investments askance. However, the truth is that the greatest frauds have been committed by our very own companies. Think Enron, MCI-Worldcom and countless others.
So while Western investors sit around bemoaning Chinese company investments and wringing their hand, Chinese management teams see the value and are taking these companies private at throwaway prices. Yes, even after the premium offered.
Changyou has almost $840 million or just under $16 per share in cash on its books and Wall Street analysts expect the company to earn $3.50 per share next year. The company's market cap even after the rise yesterday is roughly $2 billion. In essence, Zhang is buying the company for roughly $24 per share or so or less than 7x estimated earnings for 2018.
At the offer price of $42.10 per share, Zhang is literally buying the company dirt cheap and kudos to him if he is able to pull the deal off.
So, the question is, which other Chinese companies are still cheap despite the recent rise in the Chinese basket of stocks?
Words to the wise.
(No position in cyou,)