Bidding War Breaks Out For Chindex

Apr.24.14 | About: Chindex International, (CHDX)

Many smaller Chinese companies may be getting little or no respect from Wall Street these days, but private equity seems a bit more interested in these undervalued firms. That's my latest assessment following word that a bidding war has broken out for Chindex (Nasdaq: CHDX), an operator of clinics in China. Chindex said it received a sweetened buyout offer from a managed-led group that first bid for the company in February, after a rival bidder stepped in. This kind of bidding war has been relatively rare in the recent flurry of privatizations by Chinese firms, though this particular case hints that we could see 1 or 2 more similar wars occur as the trend plays out.

Chindex's buy-out story began 2 months ago when a management-led group that included Fosun Pharmaceutical (Shanghai: 600196) and private equity giant TPG, offered to buy the company for $19.50 per share (previous post). That figure represented a 14 percent premium to Chindex's share price before the offer, and prompted a wave of shareholder lawsuits that claimed the price was too low.

Now Chindex has disclosed that another unnamed bidder stepped in with a higher offer of $23 per share. That prompted the original management-led group to hike its offer price by another 23 percent to $24 (company announcement; English article). The new price would value Chindex at $469 million, versus a previous valuation of $369 million. Chindex adds that its board agreed to the new terms and the company has signed a deal, indicating that it believes the bidding war is finished and it can complete the privatization under the latest terms.

Chindex joins a long queue of U.S.-listed Chinese companies that have recently privatized, after their New York-listed shares languished for years due to slow growth and lack of investor interest. Most of those companies faced little or no opposition to their buy-out offers because their founders and other top managers held major stakes that allowed the deals to easily win shareholder approval. The currently privatizing Shanda Games (Nasdaq: GAME) is a good case in point, with the deal assured of approval due to the majority share held by its parent.

But a handful of cases where no single shareholder was in control have forced buyers to raise their prices like this case with Chindex. One of the earliest cases to encounter such resistance was AsiaInfo-Linkage, which met with a flood of shareholder lawsuits and indications of interest from other buyers after it received an original buy-out offer at $12 per share. It ultimately ended up privatizing at the original offer price, though the deal took nearly 2 years to complete due to all the tussling. A group that bought out cellphone chipmaker Spreadtrum was also forced to raise its bid 9 percent to $31 from an original $28.50, though it was never clear if any rival bids ever emerged.

So, what does all of this mean for shareholders of listed companies that look like privatization targets? The bigger picture is that many of these companies still hold some attractiveness for private equity and as acquisition targets, even if they no longer look attractive to average stock traders. Accordingly, we're likely to see a few more privatization bids through the duration of the year for other laggards, with names like social networking site Renren (NYSE: RENN) standing out as potential targets.

As to whether we'll see any bidding wars like the one for Chindex, that probably depends mostly on the shareholder situation. When a company is dominated by a single shareholder like Shanda, investors can probably expect that any offer will be the first and final one. But in other cases like we saw with AsiaInfo, Spreadtrum and now Chindex, we could see a few mini-bidding wars break out as private equity and strategic buyers jostle to pick up some of these neglected companies at relatively bargain prices.

Bottom line: One or two bidding wars could break out in some of the privatization bids for U.S.-listed Chinese firms, as the current wave of buy-outs looks set to wind up this year.

Disclosure: No positions.