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Blackstone Leads Latest Chinese Privatization Bid — New York Times Article

|Includes: Pactera Technology International Ltd. (PACT)

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MAY 21, 2013, 7:07 AM

Blackstone Leads Latest Chinese Privatization Bid

By NEIL GOUGH

A fund run by the Blackstone Group is leading a $662.3 million bid for a technology outsourcing firm based in China, the latest example of a modest boom among buyout shops backing the privatization of Chinese companies listed in the United States.

A consortium backed by a private equity fund of Blackstone that includes the Chinese company's management said on Monday that it would offer $7.50 a share to acquire Pactera Technology International, which is based in Beijing and listed on Nasdaq.

The offer, described as preliminary, represents a hefty 43 percent premium to Pactera's most recent share price before the deal was announced. The news sent the company's stock up 30.6 percent on Monday, to $6.87 - still more than 8 percent below the offer price, in a sign that some investors remain wary that a deal will be completed.

A wave of accounting scandals and subsequent regulatory investigations has weighed on the shares of Chinese companies listed in the United States in recent years. In many cases, the controlling shareholders and management of such companies are responding by making bids to take the companies private - more often than not with financial backing from global buyout firms like Blackstone, the Carlyle Group or TPG Capital, or Chinese companies like Citic Capital Partners, the private equity arm of the state-backed Citic Capital.

Last week, the board of AsiaInfo-Linkage, a Beijing telecommunications software company, accepted an $890 million leveraged buyout bid from Citic Capital Partners that was priced at a 52 percent premium to the company's preoffer share price. Last month, shareholders of Focus Media, an advertising display company based in Shanghai, voted to approve a $3.7 billion buyout by a group of investors led by Carlyle, the biggest such Chinese privatization to date.

But although the deals have become increasingly common, the private equity investors bankrolling them face several risks.

The buyouts are often priced at large premiums to share prices that have collapsed because of the sense among United States investors - substantiated or not - that bad or fraudulent accounting is commonplace among companies based in China.

Such worries were reinforced in December, when the Securities and Exchange Commission accused the Chinese affiliates of five big accounting firms of violating securities laws, contending they had failed to produce documents from their audits of several China-based companies under investigation for fraud. The case is continuing.

Analysts are also questioning the exit strategies of private equity firms, given the generally weak environment for initial public offerings in most important markets for Chinese listings. Moreover, regulators in Beijing have not approved a new mainland I.P.O. in more than six months.

''There's a common problem with the underlying logic of these deals, including whether they will ever be able to relist given the weak market for new offerings and the enormous backlog of Chinese companies already lined up and waiting for I.P.O.'s in China and Hong Kong," said Peter Fuhrman, chairman of China First Capital, an investment bank and advisory firm based in the southern city of Shenzhen.

He pointed out that the bid for Pactera by Blackstone, which is intended to be partly financed with debt, appears especially pricey given the company's most recent financial statement. Pactera booked a net loss of $14.5 million for 2012.

Citigroup is the financial adviser to the Blackstone-led consortium bidding for Pactera, while Ropes & Gray is the international legal counsel.