Morning Flash AP: Baidu secondary listing expected; rumoured take-private would require major geo-political driver

21 July 2020 - 05:36 am UTC

Dealreporter analysts pick out hints of future material developments in merger arb and special situations by combing through transcripts, stock exchange filings, analyst reports and news stories.


After Pinduoduo [NASDAQ:PDD] this month hired CICC, Credit Suisse and Goldman Sachs to handle its secondary listing in Hong Kong, ECM bankers have turned their attention to Baidu [NASDAQ:BIDU] and the other large cap US-listed Chinese e-commerce players.


Once Pinduoduo completes its secondary listing, all four of the US-listed Chinese e-commerce players that are larger than Baidu will have secured a secondary listing. The other three are Alibaba [NYSE:BABA, HKG:9988], NetEase [NASDAQ:NTES, HKG:9999], and [NASDAQ:JD, HKG:9618].


In light of the geo-political policy and the fact that regulatory rather than market forces appear to be driving this homeward procession, it’s logical that Baidu, China’s largest search engine and a global leader in the sensitive area of artificial intelligence, will follow suit.


Indeed, ECM bankers say they are focusing on Baidu, its video steaming subsidiary iQIYI [NASDAQ:IQ] and Chinese courier ZTO Express (Cayman) [NYSE:ZTO].


However, if one hedge fund’s view that Chinese ADRs ‘delist when undervalued and obtain a secondary listing when properly valued’ is anything to go by, then Baidu’s chairman, Robin Li, must have at least explored potential take-private and relist options in recent months.


Despite encouraging 1Q20 earnings, Baidu’s shares are down 10.3% year-to-date and trade at a 20.45x TTM P/E. This compares poorly to Alibaba (+16% ytd, 42.2x TTM P/E), Netease (+50%, 27.8x), (+79%, 220.7x) and Pinduoduo (+118%, negative earnings).


Various reports on 21 May indicate Li has explored a take-private. Four hours after China Daily reported that the company was considering “re-listing in other areas such as Hong Kong” in the wake of US lawmakers’ plans to impose tougher regulatory rules on US-listed Chinese companies, Reuters cited three sources saying Baidu believes it is undervalued and has spoken to trusted advisors about a “delisting” as well as related “funding” and “regulatory” issues. Securities Times China followed up Reuters’ report by quickly pointing out the obvious hurdle to a privatisation – financing.


A take-private at an approximate 20% premium would require around USD 42.4bn in financing, which is a staggering USD 35.6bn more than the amount required for the take-private of Qihoo 360 (now called 360 Security Technology [SHA:601360]), which is the biggest Chinese ADR take-private to date.


As of 31 March 2020, Baidu had USD 3.07bn cash on hand and total interest-bearing debt of USD 10.2bn. The company also has USD 16.2bn in short term investments. This is surely helpful but some bankers the Flash has spoken to have referred to the possibility of a Baidu take-private as somewhat questionable  given the amount of financing needed.


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by Vivian Wong, Yiqing Wang, Jessica Wong