December 05, 2019 - 5:30pm EST by
2019 2020
Price: 14.82 EPS 0 0
Shares Out. (in M): 70 P/E 0 0
Market Cap (in $M): 1,040 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0

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It is Xmas and so you get two ideas in one post.

Bitauto privatisation

Bitauto (US-listed ADR) is currently being privatised by Tencent together with Hammer Capital. Bitauto received the preliminary non-binding privatisation offer from Tencent on 13th September. The offer price is USD 16 per ADR which at current share price means roughly 8% upside. This is an all-cash offer.

Just to give some context, Bitauto is the number two auto online classified in China just behind Autohome. Bitauto was founded by Li Bin who is also the founder of Nio Inc (for more context refer to the Nio thread). Tencent and JD first invested in Bitauto in 2015 and they topped up again in 1H 2016. In 2H 2016, Tencent and JD invested USD 550m into an internally incubated business called Yixin. This is an auto financing business. Fast forward to the present day, Bitauto experienced a serious decline in its original media business of selling customer leads to new car dealers partly due to new car market shrinking in China and partly just losing out to Autohome.

Currently, Tencent has 7.8% ownership and JD owns another 25%. Li Bin has a 10% stake. And Cox Enterprise has rough 12.8%. As part of the privatisation deal, Cox, JD and Li have all agreed to vote in favour of this deal which means that there is practically no way this deal is not going through.

So why is Tencent privatising now? To be honest, I don't know for sure. But there are quite a few good reasons why Tencent want to privatise.

1. Li Bin needs money to fund his latest venture Nio. Tencent is also heavily involved there. So this would give Li the cash.

2. Tencent is really after Yixin. Yixin is the auto finance business that is separately listed in Hong Kong. Bitauto owns 43% of Yixin and Tencent owns another 20%.

To be clear, this is not your privatise on cheap valuation in US and relist in China A share market play. Tencent never does that. Tencent only initiated one other privatisation campaign for Yilong in 2015 to facilitate the Ctrip / Qunar merger deal. So Tencent is privatising because they have a strategic plan in mind.

Anyhow, it is extremely likely that this deal will close. The base case I assume 2-3 months from now which is 6 months from the deal announcement. So the IRR is ~36%. Worst case is 1 year and IRR is 8%.

Yixin (HK: 2858) privatisation

So here is the second idea. After the consummation of Bitauto, Tencent will have to announce a mandatory takeover offer for Yixin because Tencent will have 60% of the Yixin shares. So the question is how much will Tencent pay for Yixin. We can get some clue from the Bitauto privatisation offer announcement:

"Possible Unconditional Mandatory General Offer. Based on public filings, the Company currently beneficially owns approximately 43.74% of the total issued shares of Yixin Group Limited ("Yixin"), a company incorporated in the Cayman Islands whose issued shares are currently listed on the Main Board of The Stock Exchange of Hong Kong Limited (the "HKSE") (stock code: 2858). Upon completion of the Transaction, there will be a change in statutory control in the Company whereby the Consortium will acquire control (as defined under the Hong Kong Code on Takeovers and Mergers (the "Takeovers Code") of Yixin. The Consortium, having consulted with the Executive Director of the Corporate Finance Division of the Securities and Futures Commission of Hong Kong ( the "Executive"), will be required to make an unconditional mandatory general offer to all the shareholders and other securities holders of Yixin for all the issued Shares and other securities of Yixin  (other than those already owned or agreed to be acquired by the Consortium or parties acting in concert with it) upon completion of the Transaction pursuant to Note 8 to Rule 26.1 of the Takeovers Code (the "Possible Offer"). As part of the arrangements between the Consortium and JD Global in support of the Transaction, the Consortium has also entered into a deed of irrevocable undertaking with JD Financial Investment Limited ("JD Financial") in connection with the Possible Offer pursuant to which JD Financial has undertaken, among other things, not to accept the Possible Offer in respect of any shares of Yixin owned by it or make any such shares available to acceptance under the Possible Offer provided that the offer price per share for the Possible Offer does not exceed HK$2.00."

My understanding is that JD has promised Tencent that JD will not sell their Yixin shares to anyone else until Tencent make an offer price of HKD 2.00 per share.

HKD 2 per share is a very likely offer price. But there are no guarantees that Tencent has to offer HKD 2 per share. Yixin share price currently is HKD 1.73 per share. That is a nice 15%. The mandatory offer for Yixin should be out the moment Tencent make a binding bid for Bitatuo.

In summary, I think Bitauto privatisation is a 95% probability even with a known upside of 8%. Yixin privatisation is a 95% probability event with less certain upside but higher at 15%. So you can size the two positions however manner appropriate. For Yixin, I would add another 1-2 month delay after Bitauto deal completion.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Deal completion 

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