Podcast: Why Three Troubled Deals Reflect Wider Trends in APAC

In this week’s episode, we’re looking at three troubled deals that are going on in Asia that reflect wider trends in the market. Joining host Julie-Anna Needham is Ed Vinales, public markets editor for Asia, and Anette Jönsson, editor at Dealreporter - Asia Pacific. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this episode, you'll learn about:

  • Chinese private equity firm Wise Road Capital’s terminated USD 1.5 billion acquisition of South Korea-based Magnachip Semiconductor
  • Blackstone Group’s failed USD 3 billion takeover of Beijing-headquartered real estate developer SOHO China
  • Share price fluctuations at Hong Kong-listed Singaporean-American gaming peripheral manufacturer Razer

[MUSIC PLAYING] JULIE ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie Anna Needham, a business journalist who's been covering M&A for a decade. In this episode, we're looking at three major deals that are going on in Asia that reflect wider trends there. I'm joined by Ed Vinales, Public Markets Editor for Dealreporter and part in Asia Pacific, and Annette Jönsson, editor for Dealreporter in Asia Pacific.

Transcript

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JULIE ANNA NEEDHAM: Hi Annette, Hi Ed. Welcome.

ED VINALES: Hello.

JULIE ANNA NEEDHAM: Firstly, let's look at the take private as South Korean chip company Magnachip semiconductor. We know that semiconductors are seen as some of the most important strategic companies globally, particularly in the U.S.-China technology war, and there's also a global shortage of chips. Can you begin by giving a brief overview of this particular deal, please?

ED VINALES: So basically in late March, a Chinese private equity company, Wise Road Capital, agreed a $1.4 billion take private with Magnachip semiconductor, which is a South Korean-based chip maker. And that was fine and then everything went a bit pear-shaped.

JULIE ANNA NEEDHAM: And so can you go into a bit more detail what went wrong and what's been so surprising to the market about this deal?

ED VINALES: When the deal was announced, they did not have any regulatory conditions relating to Korean regulatory approvals or US regulatory approvals. And the reason that they might have had a U.S. regulatory approvals is because a lot of CFIUS, the US watchdog, is trying to basically stop any companies globally being bought by the Chinese in that sector. That's been talked about a lot.

Well then what happened in the months following the announcement of the deal is that there was a lot of political opposition in Korea. Even the deputy prime minister came out and said, yes, we're really concerned about this deal because Magnachips very important products. It specializes in chips that go in chips that create digital displays in TVs, computer monitors, smartphones, and it has some other power semiconductor-related stuff and we're all very sensitive and they're worried about this falling into the hands of the Chinese.

So there was a huge political outburst about the deal and subsequently, the US government under CFIUS, the security watchdog, got involved. And because the company is listed in America but it has no assets in America but because it's listed in America, the US watchdog thought it had oversight of the deal and basically said this deal can't go ahead and put an injunction unless you get our approval. And the Korean equivalent ministry which is under the Ministry of Trade and Industry and Energy basically did the same thing.

And that was in June, July, and ever since then, this deal has been undergoing reviews by those two regulators and the stock prices just collapsed right back to below where it was when the deal started. And it looks like it's going to get blocked.

JULIE ANNA NEEDHAM: And we'll come on to talking about the companies with the US listing in a bit. But can we first look at the takeover by a US private equity group Blackstone of the Beijing and Shanghai focused office developer Soho China? Can you just begin again by giving us a short introduction to this situation, please?

ANNETTE JOHNSON: This is a Hong Kong-listed Chinese real estate developer. The focus is on offices. It has a few office buildings in Beijing and Shanghai primarily. The deal was announced by the two companies jointly, the private equity firm and the listed company in June. And at the time, it seemed like it would be very straightforward to take private. The controlling shareholders, who are also the co-founders and married to each other, owned just over 60% or so and they had agreed to sell 55% into this offer and would retain just a 9% stake. So that meant that basically, there was no shareholder approval risk. They would immediately get to the over 50% level where the deal would become unconditional and there seemed to be very little risk around this deal. It was however, pre-conditional on Chinese antitrust regulatory approval and from SAMR. And we initially felt that there shouldn't be an issue. It was very--

ED VINALES: We said the deal was straightforward, initially.

ANNETTE JOHNSON: Straightforward. Most Chinese real estate companies being taken private out of Hong Kong go through a simple case SAMR review. It's a sort of tick the box thing almost. They had very little overlap. There just seemed to be no real reason.

JULIE-ANNA NEEDHAM: So it was looking reasonably straightforward, but then what went wrong? What complicated the situation?

ED VINALES: Well, we don't know initially. It was the shares that alarmed us. The share price started to slide. But it started to drift. And then we had a lot of calls from people in the market sort of speculating as to what might be wrong.

And we did a lot of analysis on it, trying to look for reasons how this deal might fall apart. And we got one tip-off from somebody saying that a few months before the deal was announced, one of the sons of-- one of the couple's kids basically had made a social media comment critical of Chinese soldiers in a border clash with India last year. And that caused a bit of commotion on sort of social media sphere.

And then it came out that there was concerns about this couple and they were going to cash out and take all their money to the US. And they were spending money on U.S. schools, universities, colleges and not putting that money into China. So this was kind of-- people would dismiss-- this can't be an issue behind the deal, can it?

ANNETTE JOHNSON: Yeah, but we kept pursuing this. And we were speaking to more people. And we got to the stage where we felt that this was a real-- there was a real issue even though we couldn't logically see why ourselves.

But we became aware that there was an issue and we wrote a story saying such, which was met with a lot of disbelief. And--

ED VINALES: Well, it tanked the stock.

ANNETTE JOHNSON: --it caused the share price to tumble, which made us really popular.

ED VINALES: And when we said that-- we had a source saying that the issue was not so much the deal itself, not so much the competition aspects of the deal, but related to the founders. That there was some concern amongst authorities in China that related to the founders. And we didn't necessarily go into that much detail about it, but it started to appear that the deal — in China at the moment there is a big common prosperity.

This has seen Xi Jinping launch a crackdown on technology giants, wealthy individuals, education service providers, celebrities and all the like. And basically, they're trying to encourage-- one of the things is encouraging high-income individuals and businesses to give back more to society, right? And this deal seems to have fallen foul of that.

ANNETTE JOHNSON: Yeah, and what eventually transpired was that while the deal parties, Blackstone and Soho China, both came out and said that the deal had been accepted for review by the antitrust regulator, they never really said whether it was going to be a simple case or a normal case review. Neither it wouldn't really matter which way. It can be approved or denied under both. However--

ED VINALES: It dragged.

ANNETTE JOHNSON: --a simple case would typically get done much, much quicker. But very shortly after, we had determined that it was being reviewed under a normal case scenario. All of a sudden, Blackstone came out and announced that it was withdrawing its offer.

ED VINALES: Yeah. We'd been advised we're not going to get approval and we're walking away from this deal, which was at stage preconditional, so they could do that. But very odd. And the stock is now right back to where it was before the deal.

So I mean it's a company that's trading at a massive discount. And people are still looking at who could come in. But it seems that yeah, the Chinese government was not happy that the founders were going to get a lump sum of cash.

And they're based overseas in the US and all that sort of stuff. So it's kind of an interesting company. It's a smallish company, but it's got amazing architecture. All their buildings were built by Zaha Hadid-- not all of them, but the famous architects and stuff like that. So it's kind of a colorful situation but quite telling.

ANNETTE JOHNSON: Yeah, I think it's alerted everyone to the fact that when China has a policy target of any kind, that can tend to trump anything else, right? In this case, the common prosperity and the sharing of wealth is a key focus. And it sort of overtakes everything else.

And it might not be detrimental to deals, but you can be sure that if it touches something that is as sensitive as a policy direction outlined by the president himself, it is worth paying attention to it. And to see what kind of implications it might have for a deal, even one that looked very straightforward from the start.

JULIE-ANNA NEEDHAM: OK, I'd like to talk about that general mood and some of those themes we've touched on in a minute. But firstly, can we look at the final situation, which is Razer, the Hong Kong-listed designer and maker of gaming peripherals. The company said previously, it was considering a secondary listing in the US, but has now indicated that a take private might be on the cards instead. And that's led to speculation about the offer price.

Again, can you just give a very brief overview of this situation, please?

ANNETTE JOHNSON: Yes, this is a little bit different. This was sort of what we call a pre-event situation. It started off by the share price falling 8.5% almost on a day in late October, 27th, 28th of October, which led to the company suspending the stock from trading the following day, which is a common thing here. They may have been asked by the regulator to do so.

And a day later, they announced that they had discovered that the co-founders, which control close to 60% of the company, were in fact, engaged with financial investors about a potential transaction that could lead to a general offer for the company. Now, that general offer has since been made. But in between those two events, the share price started moving because people started speculating that a deal would be done at the significant premium to the market price.

JULIE-ANNA NEEDHAM: But speculation about an offer price isn't unusual. Why does this deal stand out?

ANNETTE JOHNSON: Well, it stands out in a bid because the market got quite ahead of itself, right? The stock had been listed since November 2017, so just about four years. It's not a very long time.

And when it did its IPO in Hong Kong, it listed at $3.88. When the stock was suspended, it was trading-- just before that 8.5 percent gain in late October, it was trading at about $1.81, so well below its IPO price. But as soon as they got a whiff of a potential take private instigated by the co-founders, the market started believing that they would buy it out at the price that would basically make the people who bought in at the IPO whole.

This was helped to some extent by a media report that came out after a couple of weeks saying the deal was going to get done at up to USD 4 per share. So more than twice the price of where it was before it was suspended.

ED VINALES: And that drove the shares up, right? 15 percent, 20 percent.

ANNETTE JOHNSON: That drove the shares up an additional-- I mean, by the time they actually did announce the deal-- or actually, I should say, by the time we wrote a story outlining our analysis that we had done plus a tip we got that, in fact, this USD 4 price was out of the question among the parties involved in the deal-- by that time, the stock was already 70 percent above where it had been. And it was above USD 3. We got a tip that USD 4 was just not the case.

And that jigged with the valuation work that our analysts had done showing that the stock was already trading at much higher multiples than its peers in the US. And therefore, it seemed very unlikely that a deal that seemed to be including a private equity firm, in this case, CVC, would be paying that much.

ED VINALES: So we wrote a story saying that the market sold too high and the bid is going to come in a lot lower. And that sent the shares tanking, a lot of shares tanking today. And we were right. I mean, the bid came in at about USD 2.80 or USD 3 or or something.

ANNETTE JOHNSON: USD 2.82.

ED VINALES: USD 2.82.

ANNETTE JOHNSON: Yeah.

JULIE-ANNA NEEDHAM: So all of this is against a backdrop of a U.S.-China technology war and increasing crackdowns in China against a range of industries with different types of regulation. You've touched on a lot of this in your answers. Can you explain how this atmosphere or the mood in APAC, particularly relating to China, is going to affect deals going forward in 2022?

ED VINALES: Yeah, so the magnet chip and the Soho China situations are definitely being affected by regulation and by China or the reaction to China. So that's going to continue. So what we're seeing now is that Cepheus is speaking to-- the US security regulator, national security regulator is speaking to other counterparts around the world. And particularly, with an eye on China. And that's what's going on.

Cepheus is talking to Koreans, it's talking to the Japanese, talking to Australia, the UK, and so on, India. And to try and prevent Chinese acquisitions of high tech companies around the world because they're-- oh, they're going to take that back and supply it to the PLA, the army in China. And so that's going to continue.

And we're seeing that net titan-- and the [? Magnachip's ?] a good example of that. And the Soho China situation I think is just more a reflection of the wave of regulation that we're seeing this year. The big tech crackdown and the common prosperity drive-- these are all affecting M&A and investments, and that's going to continue.

ANNETTE JOHNSON: I would say with regard to Razer, I think that fits well in with what I heard an investment banker talked about at the AVCJ forum last week when it comes to looking ahead into 2022. He was saying that regulatory issues will continue to be at the forefront of investors' minds. They are going to be very cautious about moving too quickly.

They're going to have to look at deals on a selective basis and make sure they know the companies very well, which is getting slightly difficult, in some cases, given you can't do actual physical due diligence. In many cases, you have to do online due diligence et cetera. And he was also mentioning the fact that multiples have been getting a bit ahead of themselves.

And one thing that we would see going into the new year is that deals are going to come at a lower multiples or not at all. So when deals are getting flagged, I think investors are going to have to be prepared that they may not get quite as much money out of it as they initially thought.

JULIE-ANNA NEEDHAM: Annette and Ed, thanks very much.

ED VINALES: Thank you.

ANNETTE JOHNSON: Thank you.

JULIE-ANNA NEEDHAM: That was Ed Vinales and Annette Johnson. Thank you for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow or subscribe to the podcast.

You can find us on Apple podcasts, Spotify, or check out your Mergermarket news alerts. Join us next week for another episode.

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20 December 2021