Harbin Electric: the spark of a Chinese LBO spree?
James Altucher thinks so, I tend to disagree.
A) HRBN, like every other Chinese stock, has fallen off in recent months because of worries that every Chinese company is a fraud. These worries are valid (some Chinese companies ARE frauds, just like some American companies are).B) The fact that the deal size was so much higher than its market cap shows how irrational the sell-off is on some of these Chinese companies.
C) I’ve never seen a Chinese company taken private after being publicly traded in the United States. But maybe now they are so cheap this can result in a big trend.
Don’t get me wrong here, I like Altucher (no homo) and I quite enjoy reading whatever he has to say, but dude, I think you may have jumped the gun here. Especially when the LBO you mention screams fraud.
How can you even fake an LBO anyway? I mean really, that has got to be one of the most bizarre things I’ve ever came across. Apparently though, these reverse merger guys are more creative than what we give them credit for.
For those who don’t know, Harbin Electric is a Chinese electric motor manufacturer that listed in the US through a reverse merger back in ’05. It’s also one of the original short seller darlings, accused of fraud and rampant douchebaggery way before the whole Carson Block - Sino Forest debacle. Needless to say their shares took a tumble, and in October last year, the CEO announced that he’s taking the company private along with Baring Private Equity for $24 a share.
And they’ve been waving red flags ever since.
Baring walked away from the agreement just a few weeks after, but the company kept issuing releases that the deal would push through (desperate much?), the CEO took a $50 million personal loan using his shares as collateral, and the whole thing, from entry to exit, simply doesn’t make any sense.
And the market sees that, with HRBN closing at $13.35 despite a $24 bid.
"Unless the stock gaps to 19 or 20, then what are we arguing about here? I would venture to say, if they are able to pull this off, in the history of M&A there's never been a stock that's traded so far below the takeover value when a deal has gone through."
If it pushes through, then that's awesome. That would restore some credibility to Chinese companies listed here and maybe even fuel an LBO spree.
Personally though I think this’ll just lead to more short selling.
How about you monkeys?
Any of you bullish on reverse mergers?
Take-private transactions for U.S.-listed Chinese companies are definitely on the rise this year (keeping us Hong Kong bankers busy). The chairman/CEO of all these U.S.-listed Chinese companies are probably laughing all the way to the bank as they take their companies private at rock bottom prices and then re-list 12 months later in Shenzhen or Shanghai for 2-3x the current valuation.
Who are the net losers? The initial U.S. investors who bought in at the U.S. IPO.
Here's another perspective from a guy who focuses on Chinese PE/growth equity and IPOs: http://www.chinafirstcapital.com/blog/archives/3174
He's a big opponent of the typical shell-company/reverse merger but he's skeptical of this as well.
I'll be curious to hear more about how this will be structured/financed as it progresses.
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