US-listed companies go private via mergers

In the past two years, more and more US-listed Chinese companies have chosen to return to China’s capital market due to the significant valuation differences between China and the US. The first step they need to take to return is the completion of privatization, which can be done in three ways – merger, tender offer and reverse stock split. This article explores the merger. A merger is when the acquiring entity, controlled by the controlling shareholders of the listed company or its affiliated parties, merges with the listed company directly so that the listed company becomes a private one controlled by the purchaser, while other non-affiliated shareholders exit the company upon receiving financial consideration for privatization.

For example, Focus Media announced its privatization notice on 13 August 2012. The privatization team consisted of its actual controller, Jiang Nanchun, as well as Carlyle, FountainVest, CITIC, Everbright and other investors. They first set up an acquisition system of a four-tier structure in the Cayman Islands and held Giovanna Acquisition (the acquiring entity) indirectly through Giovanna Group Holdings (the holding company).

It cost about US$3.82 billion for Focus Media to go private. The acquisition was conducted in both cash-for-stock and stock-for-stock, and investors in the acquiring entity used US$1.18 billion of their own funds and US$1.52 billion of debt financing from external banks to buy a small part of shares and options of the listed company – held by Jiang Nanchun and the second-largest shareholder, Fosun International – as well as all the shares and options of the listed company held by other non-affiliated parties. The holding company issued additional stocks worth US$1.11 billion to Jiang Nanchun and Fosun International to acquire the majority shares and options of the listed company.

Michelle Jin is a partner and Ben Cai is an associate with PacGate Law Group