YY Privatization: Lei Jun's timing is smart, but harming others may not necessarily benefit themselves

The corresponding market value for privatization in the Huanju era is RMB 24 billion, but the valuation Lei Jun and Li Xueling hope to obtain in A-shares is probably more than RMB 100 billion. Can they really get what they want?

On July 9, Huanju Times (YY) announced that it had received non-binding privatization offers from Chairman Lei Jun and CEO Li Xueling. The buyer (Buyer Group), which currently holds 35.7% of the equity, offered to buy the remaining 64.3% for US$68.50 per ADS (American Depositary Share).

On the trading day before the privatization offer was made (July 8), YY's closing price was US$58.35. As a result, the buyer claimed to have offered a premium rate of 17.4%.

The Juju era yearned for Nasdaq in those days, but is the privatization price proposed by Lei Jun and Li Xueling now fair? What are the prospects for returning to the A-share market? Here's the thing.

Li

Xueling's start-up started in April 2005, when Lei Jun gave US$1 million in angel investment. In November 2007, Li Xueling registered and established "Duowan Entertainment" in BVI (The British Virgin Islands). Duowan Entertainment's wholly-owned subsidiary in mainland China controls YY Voice's business through a series of agreements. In 2011, Cayman Company gathered with YY Inc. The VIE structure has been completed in stock exchange with Duowan Entertainment.

However, the era of happy gatherings has been slow to find a monetization model. In 2009, revenue was 32.71 million yuan, with a loss of 47.12 million yuan; in 2010, revenue was 128 million yuan, and the loss actually reached 239 million yuan, which is almost equivalent to using 2 yuan to "buy" 1 yuan of revenue. The annual loss is 239 million yuan, which is an appalling figure even today when "burning money" is advocated.

Financing in the Juju era is also very difficult, unlike today when a random Series A takes tens of millions of dollars. Over the past few years, Huanju Times received US$3 million from Chenxing and US$4 million from Chenxing's affiliated companies in a piecemeal manner. Together with an additional US$1 million from Chenxing and US$12 million from Jiyuan Capital, he received US$20 million like "collecting chicken feathers to make up a duster". Moreover, Lei Jun did not lend a helping hand at that stage. Fortunately, the happy gathering era has survived the most difficult period.

Since 2011, the situation has improved, and the full-year loss has narrowed to US$83.16 million. During the year's financing, Huanju Times received US$75 million from Tiger Fund. In 2012, YY Music suddenly emerged, achieving a net profit of US$55.95 million in the first three quarters. However, no one was sure how long YY Music would be popular at that time, and they had to take advantage of the opportunity of good performance to go public as soon as possible. It is said that Juju Times hopes to have an IPO valuation of US$3 billion.

However, 2012 coincided with the lowest wave of Chinese stocks in the United States: in March, Vipshop's "bloody listing" still fell below the issue price; in September, China Mobile Games Group did not raise funds and listed in the form of "introduction", and the first day ended with zero transactions. In early November, Li Xueling led his team to New York for a roadshow, just in time for Typhoon Sandy, and the U.S. presidential election will be held on November 6! At the celebration banquet held after returning to China, Li Xueling said that many investors lamented: How much they want to go public!

With such urgency, valuation doesn't matter. In the end, Huanju Times combined 20 shares into one ADS, which was valued at less than US$600 million at the time of its IPO. (Note: The trading price of ADS is generally between $10 and $30. It is not good to be too high or too low. The lower the valuation, the more stocks need to be combined into one ADS. Touch Technology Chen Haozhi once ridiculed Cheetah's 10 shares into one ADS."(Cheetah) employees can't tell for their hardships")

According to the IPO price, Lei Jun and the four venture capital companies hold the stock market values of US$113 million, US$88.6 million, US$58 million, US$41.8 million and US$40.3 million respectively. The Tiger Fund, which invested $75 million, lost 46.3%.

List of major shareholders at the IPO of Huanju Times:

In order to fulfill Huanju Times, old shareholders did not cash in at the IPO. Morningside Ventures, Synovate Capital and Jiyuan Capital also subscribed for a total price of US$30 million at the IPO price.

The shareholders "heart is higher than the sky"

because it is a bloody listing, the amount raised is only 81.9 million US dollars, and the old shareholders have not reduced their holdings. In this case, the company will raise additional financing again after the stock price rises to a certain level, and the old shareholders will also choose to withdraw. But Jubilee Times announced only $400 million in debt financing in 2014, and nothing has happened since.

On the second anniversary of its listing in November 2014, the market value of Jubilee Times soared to $4.7 billion. The market value of the stocks held by Tiger Fund reached US$290 million, with a floating profit of 287%. Morningside and Jiyuan earned more.

In fiscal year 2014, Huanju Times's revenue and net profit increased year-on-year by 102% and 123%, respectively.

It is precisely because of the impressive results that the old shareholders unanimously recognized the growth nature of the happy gathering era, so they still did not sell a single share when the market value was close to US$5 billion. It was really "heart-to-heart".

At that time, based on a net profit of 1.06 billion yuan in 2014, the P/E ratio of the highest market value of Huanju Era was less than 30 times, and the U.S. capital market could not give a higher valuation. 30 times, which is not the same as Stormwind's 880 times. Although the value of the Happy Gathering era has not been underestimated on Nasdaq, driven by greed, it is still embarking on the road back to A-shares.

The price is not high, but the timing is "high"

. The moment when Lei Jun and Li Xueling put forward the privatization offer is too subtle. A shares have just experienced a sharp fall, and their market value has evaporated by nearly US$4 trillion. Since investors and their funds are inextricably linked to the the mainland of China market, the collapse of A shares directly caused the Chinese shares to plunge.

Take Juju Times as an example: On June 15, A shares peaked, and the closing price of Juju Times that night was US$77.5, with the highest intraday price reaching US$79; on June 30, the closing price of Juju Times was US$69.52, which was 1.5% higher than the privatization price; On July 8, the closing price fell to US$58.35.

After the A-share slump drove China's stocks to plunge, the company's share price hit bottom, and it launched a privatization offer, ostensibly claiming that it was 17.4% higher than the closing price of the previous trading day. When it comes to timing, the choice of timing is really "high", and it is deeply rooted in Buffett's words,"I am greedy when others are afraid."

The average premium of the privatization price of Chinese stocks to the market price is between 20% and 30%. In the Juju era, Dangdang used the stock price after the collapse as the benchmark, and the premium range was far below 20%, which can be recorded in history.

Stock trading is risky. When Happy Gathering Day fell to $58 on July 8, investors who sold for $70 and $80 a week or two ago had nothing to complain about. But the $68.5 offer to go private made them "never stand up." There is no privatization in the A-share market. When a listed company issues additional new shares for financing or mergers and acquisitions, it will use the average stock price of 20 trading days, 60 trading days or 120 trading days before the announcement date as the market reference price.

The average closing price in the 20 trading days before Juju Times announced its privatization on July 9 was US$69.8. Using this as a reference, the offer price of $68.5 does not have a premium at all, but there is a 2% discount!

The premium rate is low and the low point after the plunge is used as the reference price. Such pricing is difficult to convince the public.

Low-cost privatization harms people, and privatizations are

rushing in without any benefits. Especially low-cost privatization that gathers the times and is "clever" will cause far-reaching harm to China Stock Exchange.

In the U.S. capital market, with a total market value of approximately US$17 trillion, the China Stock Market was once an insignificant small boat. At the end of the first quarter of 2014, the total value of the top 27 Chinese stock markets was only US$147.4 billion, less than 1% of the total market value of listed companies in the United States.

When it comes to funds, excluding other investment institutions and individuals in the United States and the funds poured in from countries around the world, the assets of U.S. pension funds alone exceed US$20 trillion. In the past, it was difficult for Chinese stocks to attract mainstream funds in the United States. Ma Yun's "interview" with investors at the Waldorf Astoria Hotel was to optimize Ali's shareholder structure and shut out speculative and short-term "hot money".

Suppose a long-term fund conducts in-depth research on a certain mid-term company, buys millions of shares, and prepares to hold them for a long time. Unexpectedly, a few days later, the target company announced its privatization, and the offer was still a cheating price. Will long-term funds still invest in mid-stock stocks in the future?

Qihoo 360, Happy Gathering Times, Dangdang people are gone, and the valuation of Zhongguo Company that has not left will be shrouded in dust.

But harming others does not necessarily benefit oneself.

First, the opportunity cost of abandoning a Nasdaq listing is too high. As a listed company in the United States, equity financing and debt financing are very convenient (new shares will be issued when the valuation is high, and bonds will be issued when the valuation is not ideal), and funds can be withdrawn almost at any time (in 2014, Baidu, Alibaba, and Qihoo 360 all conducted US$1 billion in debt financing). From privatization to listing on A-shares, even if everything goes well, it will take nearly two years. There is no certainty whether or how much capital will be raised after listing. LeEco submitted a plan to issue 4.5 billion yuan in private in August 2014, but it has not been approved. If another 7.5 billion yuan plan is proposed this year, the outcome is not certain. Jia Yueting tried to cash out at a high price and then lent the money to a listed company. Just a quarter of the plan was completed, the Securities and Futures Commission stopped the reduction of major shareholders... From the perspective of financing convenience, the opportunity cost of giving up the status of a listed company in the United States is quite high.

Secondly, it may not be possible to obtain an ideal valuation. The monster stocks in the A-share market are all small-cap stocks, with a total market value of no more than 50 billion yuan, and a circulating market value is even smaller: Stormwind Technology has a P/E ratio of more than 800 times, and a circulating market value of less than 9 billion yuan; Quantong Education has a P/E ratio of more than 500 times, and a circulating market value of 8 billion yuan; Le.com has a P/E ratio of 230 times and a circulating market value of 50 billion yuan (this has reached its limit). The valuation of large-cap stocks is a completely different picture: Ping An of China has a market value of 400 billion yuan and a price-to-earnings ratio of less than 15 times; Zhangjiang High-tech, known as a "technology investment bank," has a market value of 45 billion yuan and a price-to-earnings ratio of only 76 times. There are many large-cap stocks that break their net assets (fall below their net assets) in bear markets.

The corresponding market value for privatization in the Huanju era is RMB 24 billion, but the valuation Lei Jun and Li Xueling hope to obtain in A-shares is probably more than RMB 100 billion. Can they really get what they want?

Editor: yvonne