American depository regrets

Buyouts of US-listed Chinese firms look doubtful

Buyouts of US-listed Chinese companies look doubtful. A merger wave this year has seen at least 20 bosses propose to buy back their firms, eyeing higher valuations at home. But with mainland shares slumping, most of these stocks - worth nearly $28 billion in total - now trade way below the potential bids. These deals looked tricky to start with. The scepticism is merited.

The dramatic fall in China's benchmark Shanghai Composite Index, down 30 per cent in less than a month despite increasingly frantic official measures, has thrown into question the viability of these management buyouts.

Of the 10 biggest deals, two have already announced definitive merger agreements, so their stocks have held up comparatively well. But the other eight, of which the biggest is Qihoo 360, a mobile-search firm, are really suffering. As of Monday, they traded at an average 16 per cent discount to the proposed takeover price, Breakingviews calculations show. Several are actually trading below their pre-bid price. Clearly, the market harbours serious doubts.

For founders, cashing in on Chinese valuations was never straightforward. Going private involves cobbling together debt and equity funding, making an offer that passes muster with a special committee of independent directors, and winning a two-thirds majority at a shareholder vote.

The next steps look even harder: dismantling offshore structures and securing a mainland listing. The hope was that bullish stock markets and a better understanding of the business back home would yield higher valuations for companies like Renren. Once touted as the Facebook of China, its shares have fallen over 80 per cent since listing in New York in 2011.

If stocks in Shanghai and Shenzhen keep falling, that only adds more uncertainty. Measures to calm the market - such as freezing new share offerings - make a relisting even harder. Some might not opt for a homecoming after all.