It’s a short one this week. This post follows my initial write-up about Zhaopin published on July 23: The Case of Zhaopin: retain, promote, or fire?
After being listed for over 3 years on the NYSE and several take-private offers, Zhaopin was finally taken private by SEEK (its major shareholder) and its affiliates Hillhouse Capital Management and FountainVest Partners, and delisted on September 29, 2017. As mentioned in my previous post, I had a position in Zhaopin, which I kept up to this take-private transaction. The total payout amounted to US$18.20/ADS, representing a special dividend of US$1.88/ADS plus US$16.32/ADS as the purchase consideration. Considering that I got into my position at approximately US$15/ADS, this represents a gain of above 21% in about 11 months – not amazing but still not bad.
There was a lot of doubts within the investment community whether such a take-private transaction would ever succeed. I can understand as several take-private transactions of US-listed Chinese companies have failed in the past including take private of firms such as Jumei International Holding (NYSE: JMEI), Momo Inc. (NASDAQ : MOMO), and Renren Inc. (NYSE: RENN). Similar to Zhaopin, many of these firms also have operations somewhat related to technology. On the other hand and as emphasized in The Case of Zhaopin: retain, promote, or fired?, I didn’t buy into the company solely based on this potential catalyst. I first saw a strong firm with great future prospects selling at a reasonable price – this is what attracted me to the firm. A potential take-private transaction was a plus.
So, why was this third attempt successful at the end? SEEK, the major shareholder of Zhaopin with about a 62% ownership and 75% of the voting rights, was clearly in the driver’s seat for this transaction. It is important to note that ASX-listed SEEK is a large online recruitment company and therefore has a thorough understanding of the industry and can be seen as a strategic investor. In my initial analysis, Zhaopin was reviewing a second take-private offer which was made in May 2016 by the management supported by Sequoia China and I reported that during the discussion I had with the Zhaopin’s IR, it was highlighted that the take-private offer made by the management was still in discussion. However, the discussions with Zhaopin’s main shareholder, SEEK, seemed to have taken more time than expected. I was told that the management was keen to keep SEEK as a minority shareholder while going ahead with a take-private transaction and hoped that SEEK would see the value in taking the company private, with a chance to relist on another exchange in a few years. Seems like SEEK had other plans…
Andrew Bassat, SEEK’s CEO also mentioned the following (Conference call transcript, 2Q 2016): “…Zhaopin: We’re continuing discussions with numerous parties. We’re taking our time to be thoughtful in assessing the right path and partners who will best support Zhaopin and its long term aspirations. A strong quarter four result is testament to the ongoing strength of business and the fact that the discussions are not distracting the business performance.”
With a majority of the ownership and voting rights in Zhaopin, a strong firm, with exceptional prospects and a very healthy balance sheet, SEEK decided that they, together with its partners, were the best party to support Zhaopin’s long-term aspirations. The buyers ended up paying only US$0.45/ADS more than the second take-private offer made (2.5% more), with a large chunk paid through a special dividend. They clearly knew what they were doing. SEEK benefited financially from day one from this transaction. It received proceeds of cUS$176m split between the special dividend (cUS$64m) and capital returns (cUS$112m). Looks like SEEK thought they could allocate this US$64m better than Zhaopin could (or SEEK needed to). Below is the pro-forma net debt/(cash) positions as announced by SEEK.
Mr. Bassat had the following to say about the transaction in early September 2017 during SEEK’s earnings call:
“[…] we think the privatizing and partnering with Hillhouse and FountainVest is a terrific opportunity for us, both in terms of privatization being the best spot to be for businesses that want to continue to invest and grow aggressively. And we think China’s partners can really help.”
What’s next for Zhaopin? Well, as I’m not a shareholder anymore, it doesn’t really matter. However, as they might relist at some point, it can be interesting to keep an eye on the company and see how it evolves. Don’t forget that there are now two private equity firms involved so they’ll have to exit at some point and a relisting certainly makes sense. I feel we might hear about it sooner rather than later. Through SEEK’s results and announcements, as a listed parent, we might be able to get some level of information on Zhaopin. As previously mentioned, an area of concern I have is whether Zhaopin will be able to sustain its margins and more importantly its ROIC given the competition and the industry structure. From my analysis, the company’s ROIC has been decreasing over the last few years and finding lucrative investment opportunities, whether it is organically or inorganically, seems to be quite a challenge for the firm.
Featured image: Nop, don’t even think about it! Source: perdixwildlifesupplies.com (incredible what you can find through Google Image!)
Embedded image: Andrew Bassat, CEO and Co-founder of SEEK, Source: ducere.edu.au
Next post: next week!
Keep growing your snowball!