The move by Alibaba Group Holding Ltd.-backed companies last week to join a buyout for dating app maker Momo Inc. just rekindled the debate on the $39-billion buyout spree of U.S.-traded Chinese firms, an issue that has been inactive in the past 12 months, according to Bloomberg.
The report said that last week, two more companies delisted from the U.S. include online video operator Youku Tudou Inc., which was acquired by Alibaba, and Homeinns Hotel Group, a budget hotel chain.
Only seven firms have completed the process, out of the 40 companies that received offers to delist from the U.S. stock exchanges last year.
Some observers believe the local listing became less attractive to some Chinese firms because of the market rout in China and uncertainty on its policy, while others think that renewed interest of Chinese investors to push for buyouts is indicated by the revival of the bid to take Momo private.
"Despite what may be perceived as headwinds in domestic markets, pending transactions are continuing to make progress," Ryan Roberts, a Hong Kong-based analyst at MCM Partners, said. "As long as there is a valuation arbitrage to exploit between the U.S. and China markets, I expect the trade to remain attractive for the founders and owners who can force a deal through."
U.S.-traded Chinese companies have become the primary targets of buyout because they are cheaper, compared to mainland companies. Depositary receipts of Chinese companies' trades at a median based on Bloomberg index showed a price-to-earnings ratio of 16, compared with a multiple of 68 for shares on the Shenzhen Composite Index.
Last week, investors in the U.S. increased their stakes, hoping that the ADR deals will get done. Compared to the average discount of 2.6 percent in the 31 completed deals in the past three years, the price of shares of the buyout targets dropped and were sold 7 percent less than the offering prices, down from 15 percent before the Alibaba news last week.
The week before, Momo and Renren Inc. traded at about a 20-percent discount to the offering prices, down from more than 50 percent and 30 percent, the biggest spread in the group.
"It shows the improving expectations for some of these juicy go-private names," Henry Guo, a San Francisco-based analyst at Investment Technology Group, said.
Gou also believes that the valuations for Momo and Renren are at a reasonable level. "They are still considered as high-quality companies compared to their counterparts in China. The main concerns are how long these deals will take and what investors will join the buyout, " he added.
Data compiled by Bloomberg on completed deals since 2012 showed that it takes an average of 252 days for takeover bids of Chinese ADRs to finish, while for the 33 pending offers, at least 216 days have lapsed since they were announced.
"I suspect that most of the proposed deals never happen or take so long to happen that they take place at much lower valuations," David Riedel, president of New York-based Riedel Research Group Inc., said.
Riedel added that "there is not a deep pool of potential investors into these deals" since Momo and Youku are both backed by Alibaba.
Youku's announcement that it is planning a local stock sale within three years is a long time, considering that the Chinese market is volatile and it changes regulation frequently.
"In China, the market and policies just change too fast," Jun Zhang, who manages China research at Rosenblatt Securities, said. "There are always ways to go home if you want to. But what you don't know is whether the long wait is worthwhile."