A consortium led by founder Ge Li is only a step away from taking Wuxi PharmaTech private in a $3.3 billion deal after two proxy advisory firms recommended shareholders of the New York-listed pharmaceutical company vote for the privatisation proposal.
Glass Lewis and Institutional Shareholder Services both advised shareholders to approve the deal, Wuxi PharmaTech said in a statement Wednesday.
In the proposal tabled on April 29 the consortium offered to take the company private for a cash consideration of $46 per American Depositary Share, equating to a 16.5% premium over the last closing price. It is the second attempt to de-list the company since US clinical services provider Charles River Laboratories's $1.6 billion cash and stock buyout in 2010 failed due to shareholder opposition.
Wuxi PharmaTech listed in 2007.
Given the narrow positive differential between the offer price and underlying share price, the market appears to think the deal will go through. The spread tightened to 2.2% by Wednesday close.
Despite having a scattered shareholder base, which often makes the privatisation process more difficult, Wuxi PharmaTech's shareholders have every reason to be happy with the shares trading at a historical high of $44.95.
"The purchase price falls within the stand-alone value range derived by the independent financial advisor and represents a moderate premium to the unaffected trading price of Wuxi shares prior to announcement of the initial offer," Glass Lewis said in the recommendation report to Wuxi PharmaTech shareholders.
For the proposal to pass, Cayman-registered Wuxi PharmaTech needs approval from two-thirds of shareholders at the extraordinary general meeting scheduled for November 25. The company is expecting to close the deal by the end of the year.
If successful, the deal will be the second largest take-private of a US-listed Chinese company after Focus Media's $3.7 billion deal in 2013.
Returning home?
Some analysts believe the privatisation is a prelude for Wuxi PharmaTech to return to China or Hong Kong’s stock market as the bidding consortium includes private-equity firms, which may well look to realise their return on investment through initial public offerings. Two of the consortium members in particular, Boyu Capital and Hillhouse Capital, are prominent pre-IPO investors.
Boyu Capital is well-known not just because it was co-founded by Alvin Jiang, the grandson of former Chinese president and Communist Party leader Jiang Zemin, but also because of its track record in identifying good pre-IPO candidates. The Chinese private equity firm was a pre-IPO investor in China Cinda Asset Management and Alibaba before they went public in 2013 and 2014, respectively.
Meanwhile, Hillhouse Capital has invested in large private companies such as Uber and Airbnb, which are likely candidates for future IPOs. It is also a frequent cornerstone investor in Asia, having invested in some of the recent Hong Kong IPOs including Huatai Securities and Car Inc.
Other members of the bidding consortium includes Singapore sovereign fund Temasek Holdings, Ping An Insurance, and Chinese private equity firm Ally Bridge Group Capital Partners.
US-listed Chinese companies are relisting in China or Hong Kong where they believe they can command a richer valuation because investors are more familiar with their business philosophy compared with US investors, a banker familiar with US take-privates told FinanceAsia.
Healthcare stocks listed in Shanghai or Shenzhen are trading at hefty valuations as investors continue to overweight a sector that could potentially benefit from China’s ageing population. Beijing’s decision to abolish the long-standing one-child policy has also sent the sector into a frenzy amid expectations of growing demand for healthcare services.
For example, Shijiazhuang Yiling Pharmaceutical, China's largest pharmaceutical company by market capitalisation, is trading at 59 times earnings on a trailing twelve-month basis. But even that is well below the valuation for some of the market's smaller players, which can trade at over 100 times price-to-earnings.
By comparison, the buyout offer of $46 per ADS values Wuxi PharmaTech at 41 times earnings on a trailing twelve-month basis.
Still, the relisting of US-listed Chinese companies is normally a prolonged process and is therefore prone to higher market risks, the banker said. A typical take-private in the US and a subsequent relisting will take at least two years, and can drag on for longer if the company’s operations or market sentiment turn bad.
Shenyang-based pharmaceutical company 3sBio was the first US-listed Chinese company to relist in Hong Kong, having completed a $712 million IPO in June. It was delisted from the Nasdaq in a $370 million transaction in 2013.
Other Chinese companies that are pending a delisting from US exchanges include shopping site operator Momo, social platform operator YY, and medical equipment manufacturer Mindray Medical International.
