China Roundup: Dangdang's Competing Bid, Qihoo 360's Privatization And Why YY Is Still Attractive

| About: E-Commerce China (DANG)

Summary

Dandang receives competing bid in buyout process.

Dandang's competing bid is an example of management led buyouts that are exploiting current shareholders.

YY is not only attractive for its arbitrage opportunity, but because the company continues to click on all cylinders and why its undervalued.

This is why Qihoo 360 is well on its way to completing its $9.3 billion buyout.

Last year at this time, a wave of Chinese management buyouts began to hit the market. And because of the sheer volume of buyout proposals taking place, waking up to such announcements became the new normal for investors.

Dangdang (NYSE:DANG), one of the leading e-commerce companies in China, was one of nearly 40 companies that received a buyout proposal last year.

Dangdang's Chief Executive Officer Mr. Guoqing Li and Ms. Peggy Yu Yu proposed a going-private transaction ($630 million) to acquire all outstanding shares ("ADS") for $7.812.

This is where things get interesting.

Last month, iMeigu Capital Management offered to pay $8.80 per share to shareholders, which represents a 13% premium from the original offering of $7.812. Shares jumped more than 8% on the news in anticipation of a bidding war.

Then earlier this month, Jiangsu Huaxi Group announced that it has formed a consortium with iMeigu for the preliminary non-binding proposal. The two parties hired O'Melveny & Myers LLP as its international legal counsel and East & Concord Partners as its PRC legal counsel.

As of right now, shares are stuck in limbo because the $7.812 offering is hanging over the heads of shareholders at the moment. This is why shares of Dangdang are stuck in the $7.00-$7.50 range for the time being until new details emerge from the buyout talk.

And while Li and Yu Yu have talked about creating shareholder value over the years, their low-ball buyout proposal spoke louder than their words.

So what exactly are these two organizations taking on the management led buyout?

iMeigu is listed as a Cayman Islands asset management company focusing on Chinese internet investing. Huaxi Group owns more than 140 businesses with total assets totaling more than $7.5 billion. Safe to say, a bidding war won't likely scare or deter this consortium away.

While it makes sense that shareholders want the higher bid to be accepted, the only problem at the moment is that Li and Yu Yu own 36% of the company's shares, which represents roughly 83% of the total voting power.

But at the end of the day, it's my belief that Li and Yu Yu are going to have raise their bid if they want to succeed in their quest to take the company private. Seeing as how the company IPO'd at $16 a share back in 2010, management will more than likely (and should) face a number of shareholder lawsuits for the low-ball bid.

With shares closing at $7.18 on Monday, investors now have the opportunity to make at least 9% in a worst-case scenario situation and as much as 23% if the consortium deal goes through.

And if a bidding war takes place, shareholders will be the ultimate winners, which is why I believe the reward significantly outweighs the risks at this point in time.

Qihoo 360 inches closer to merger completion

Last month, Qihoo announced shareholder approval of its $77.00 per share going private transaction. The deal was expected to go through as shares jumped just 1% on the news.

The company noted that approximately 99.8% of the votes that were cast were in favor of the proposal.

With shareholder approval, Qihoo (NYSE:QIHU) looks well on its way to delisting from the New York Stock Exchange as its looks to relist in China before the end of the year - likely fetching a big premium too.

As the days roll on, expect shares of Qihoo to continue to narrow as it inches its way to $77. With the stock trading at $75.55, investors will see gains of approximately 2% from Monday's closing price.

Why I Like YY

Like Qihoo and Dangdang, YY (NASDAQ:YY) also was part of the group that was offered to be taken private. YY's Chairman Jun Lei and Chief Executive Officer David Xueling Li offered to buy the company for $3.7 billion, or $68.50 per share.

Because of the bubble in the Chinese stock market last year, YY - which was actually fairly valued at the time - lost nearly 30% of its value and ended up being one of the hardest hit. YY currently trades at just 14X 2016 estimates and 10X 2017 estimates, despite growing revenues by 60% in 2015.

At the close of Monday, YY sits at $63.49 and is sitting at a three-month high as it slowly inches its way to $68.50. I anticipate that shares won't climb higher than $65 until we get more details about the buyout and the progress, if any, that is taking place. This also goes right along with how a number of other Chinese companies have traded in the past.

Last month, YY posted impressive growth despite the slowdown in China. The online social platform grew revenues by 62.3% to $293.3 million and reported an impressive 0.96 cents on the bottom line. This represents a 24% and 16% increase quarter-over-quarter.

The increase was driven by the company's ability to grow its paying users by 30% year-over-year to 3.2 million.

Other highlights include an increase of 69.3% in revenues from online music and entertainment to $176.8 million. Revenues from online dating increased by 102.4% to $29.2 million.

Impressively, revenues from mobile grew 452% year-over-year and accounted for 45% of total revenues in the fourth quarter of 2015.

Getting back to the buyout talk which has squarely held shares in check, I believe YY has the best chance out of the three of not being taken private. I also feel that if times gets closer to a deal, a bidding war - just like Dangdang among others - will quickly follow as shares are currently way undervalued.

I expect shares to continue to trade in the $63-$64 range over the next month until earnings are released along with an update on the buyout talk.

Bottom line: Investors should now expect Qihoo to complete its merger agreement over the next two weeks. As for Dangdang, I fully expect a bidding war to continue to take place and that shares will go well above the initial $7.812 buyout range that management tried to steal the company at.

YY has the most potential and I believe that suitors will come calling just like they have for companies such as Dangdang, iKang (NASDAQ:KANG) and Starwood (NYSE:HOT), etc. I personally don't want YY's deal to go through because I believe shares should be worth $85-plus based on conservative estimates. There was a reason why shares traded as high as $96 over the past two years and at $68.50, investors are being shortchanged.

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Disclosure: I am/we are long DANG, YY, QIHU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.