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Qihoo 360 Buyer Group Fully Funded And Ready To Go, Investor Says SAFE Approval Not Needed To Close

|Includes: DATE, QIHOO 360 Technology Co. Ltd. (QIHU)

Summary:

  • Several local Chinese articles have just confirmed not only that investors in the buyer group have sent in their money for the deal, but the money has been moved to the SPVs that will be used to close the deal.
  • QIHU buyer group investors interviewed by journalists said they are not backing out. They can't even if they wanted to because the GP in the GP/LP buyout structure controls the money. Furthermore, they would face large withdrawal penalties if they backed out.
  • Journalists interviewed Qihoo 360 insiders who said that even if it takes some time to get SAFE approval to convert the currency to USD, they could close the deal before that by getting a bridge loan.
  • Several of the investors in the buyout were required to agree to provide a bridge loan, indicating that this could happen imminently.
  • Separately, the buyer group confirmed to the company that the privatization is progressing as expected. The company also denied the rumors that caused its stock price to plunge in both a press release.
  • Bloomberg reported (in a misleadingly titled article) that Qihoo spokesman said it is "completely untrue" that there is disagreement between Qihoo and SAFE on how to move money abroad. In the same article, Qihoo Chairman Zhou Hongyi who is leading the buyout said "the privatization process is on track."
  • Another Chinese article reported that several legal experts interviewed by Chinese journalists said that SAFE would not be an obstacle to the privatization.
  • Further indication that SAFE is not blocking currency conversion for these deals comes from the news that another US-listed Chinese company, Jiayuan.com, just completed its merger after SAFE approval.
  • With the stock closing a shade above $71 today versus the buyout price of $77 and shareholder approval already in place for the deal to close, it looks like there is a nice opportunity here for a quick gain with limited risk.

Background:

My article here provides a detailed history of the Qihoo 360 privatization: seekingalpha.com/instablog/6797361-vie-b...

In short, an investment opportunity appears to have opened up as a result of a few articles which were misinterpreted and misleading.

The latest concern was raised by a badly titled Bloomberg article . The title said there was an 'impasse' at China's currency regulatory SAFE. However the content of the article was extremely positive: the so-called impasse was just a statement by an unnamed source saying that SAFE might require the money for the deal to be converted from RMB to USD in batches. The article quoted Qihoo's spokesman as saying that it was completely untrue that there was disagreement between Qihoo and SAFE on how to move money abroad. It also quoted Qihoo Chairman Zhou Hongyi as saying the privatization process is on track. I think the reason the stock continues to be depressed is that this headline was parroted by several other news agencies without any further fact-checking.

What just happened:

Several Chinese media sources just reported that the vehicles which will be used in the buyout are now fully funded and ready to go. The most comprehensive article is here. You can use Google Translate for a rough translation, here are the most interesting parts in my opinion:

  • The investment vehicles that are funding the Qihoo deal are called Qixin Zhicheng and Qixin Tongda. These were funded by May 6th with enough money to cover the full amount of the Qihoo buyout.
  • The funding came from multiple other investment vehicles set up by the various buying parties (CITIC Guoan, Huatai Ruilian, etc). Note that separately, various buying parties had disclosed their investment in the deal like CITIC's disclosure of its $400 million investment here; Aier's investment reported here; the investment of several insurance companies noted here. There are several more similar articles in Chinese news where the other buyers reported their investment.
  • Private equity which was involved in the buyout set up sub-funds to invest in the deal via a GP/LP structure where the private equity firms get a 20% incentive fee on investor returns above 6 to 8% plus annual management fees despite taking limited risk. Management and insiders invested directly rather than through these vehicles.
  • The journalist interviewed several investors who said quote "No matter what happens, we would not withdraw the capital because the withdrawal decision would be made by the GP. In addition, if we withdraw, we would have to pay a withdrawal penalty." Note that the GPs have no incentive to withdraw because as noted above, they have little capital at risk but stand to benefit from a 20% performance fee if the deal works out.
  • Zhou Hongwei who is leading the deal would have to pay a large withdrawal penalty if they withdraw capital now (we knew this from the definitive merger agreement posted on Edgar)
  • One of the largest investors said the privatization is going smoothly and the buyout plans had not changed.
  • A representative from one of the institutional investors in the deal who was interviewed by the journalist said that even if SAFE require the currency for the deal to be converted in installments, the buyer group can raise a bridge loan to quickly complete the privatization delisting. The bridge loan would be completed after the currency has been exchanged in batches.
  • Several of the investors were required to provide bridge loans in addition to their equity investment.

Conclusions:

As noted in my previous article, I think a huge opportunity has been created by a cascade of misinterpreted and misleading headlines about the Qihoo privatization. All of the hard evidence indicates that this deal will close within weeks. As mentioned above, an institutional investor in the buying party said SAFE approval is not needed for closing - it can be closed with a bridge loan which would be repaid after the currency is converted in batches. Even the Bloomberg article with the negative headline said the journalist's source confirmed the money could be converted in batches. In light of that, the stock looks severely undervalued.

Disclosure: I am/we are long QIHU.