A corner of the special situations market that has had my attention almost since starting this blog are going private transactions with Chinese companies. A decade ago investors got a strong reminder that investing in China isn’t without risks after a massive wave of fraud was discovered. And more recently, the for-profit education sector showed how businesses can be wiped out at the whim of the Chinese government. But where there is risk, there is also opportunity. And because of that I do think that Chinese going private transactions offer in general a fertile hunting ground for special situation investors. Spreads are usually a lot bigger than for similar transactions in the US or Europe, and since insiders are usually taking the company private at a cheap price they are plenty motivated to complete the transaction. Once a definitive agreement is signed almost all deals get completed.
New Frontier Health (NYSE:NFH), an operator of hospitals in China, became public at the end of 2019 through a combination with a SPAC. Now, less than two years later, insiders are trying to take the company private again for $12/share. Not the worst possible outcome for shareholders, given that most should expect to lose money if you don’t redeem your SPAC shares for trust value. At the same time, it does not make this transaction an obvious great deal for insiders. You take the company public at $10/share (effectively less since a bunch of warrants are given away as well) and then you buy it back less than two years later for $12/share. I have no doubt that insiders are getting a good deal. It is just not as obvious as IPO’ing your company for $10/share and buying it back for half price. New Frontier Health seems like a reasonable decent business and in their latest investor presentation they estimate a SOTP valuation of $15/share and a growth scenario that could get to $45/share.
Insiders own 39.3% of the company and the definitive merger agreement was signed less than a week ago. So we don’t have to worry that for example recent changes in the Chinese/US regulatory landscape have given insiders second thoughts about completing this deal. At the moment the stock is trading at $11.19, offering a 7.2% spread to the merger consideration. With an expected deal closing in the fourth quarter of this year I think this is a pretty decent opportunity. There are Chinese going private transactions with bigger spreads, but for a Chinese deal without any visible hair on it, I’ll take it.
Author is long New Frontier Health