Why Are Chinese Companies Going Private?

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This morning we have had two more "go private" offers for Chinese companies, continuing the trend from several weeks ago where management teams up with venture capitalists or other sources of funds to take their companies private.

First up is YY Inc. (YY), which received a non-binding proposal from Jun Lei, chairman of the board, and CEO David Xueling to take the company private at $68.50/share, a premium of 17% to yesterday's close. These two own 35.7% of the shares, which represent 75.1% of the voting power of the company.

The second offer was for E-Commerce China Dangdang (DANG), which received a proposal from Peggy Yu, chairwoman of the board, and CEO Guoqing Li to take the company private at $7.812 per share, a premium of 20% to the close yesterday. These two own 35.9% of the shares, representing 83.5% of the voting power in the company.

So why the sudden rush in this group to delist off our exchanges and go private? The reasons are as follows:

These companies have been seriously undervalued on our exchanges, especially given the rout in the Chinese markets since the middle of June. Taking them private now gives the buyer consortium the opportunity to buy these companies at a fraction of their sum-of-the-parts valuation.

Secondly, they don't have to wait long to turn around and make some very serious cash. The returns are almost immediate. Even considering the recent turmoil in Chinese markets and the "no IPO" mandate, they can still list in Hong Kong and receive valuations several times higher than what they are getting stateside. Instant payoff and putting the saying "Rome wasn't built in a day" to shame in these cases.

Thirdly, by making the offers now, they are buying these companies at absolutely throwaway prices. Investors stateside have not been able to see that, but these insiders know what they are getting better than the investors on our exchanges do; the opportunity to cash in big with a second IPO. Great gig if one can get it, no?

I think the trend picks up even more steam given the fact that these Chinese ADRs have been ripped apart recently here on stateside exchanges.

Which names come next? Stay tuned, although I have named names plenty of times on the site and even written an article or two on the subject.

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