Putting speculations to rest, Qihoo 360 Technology Co. Ltd. QIHU is officially being taken private by a group of investors headed by the company’s chairman and CEO Zhou Hongyi, without altering any terms of the offer made in June. Shares of Qihoo closed up 1.7% to $73 on Friday.
As per the terms of the deal, shareholders will be offered $77 per ADS (2 ADS equals to three Class A or Class B shares) while Class A & B shares will each be entitled to receive $51.33 in cash without interest. This represents 16.6% premium to the company’s closing price of $66.05 per share as of Jun 16, 2015 when the offer was made while it is 32.7% more than the company’s ADS s average closing price in the last 30 days before receiving the buyout offer. At Friday’s closing price, the buyout price offers a 5.5% premium.
In June, Qihoo had received a buyout proposal from Hongyi along with other investors for $77 per share, valuing the company at around $9.3 billion. Hongyi along with president and director of Qihoo, Xiangdong Qi, who own a majority stake (61%) of the company, have already voted in favor of the deal.
The idea back then was to delist from the U.S. and dismantle the VCE structure to make it eligible for a listing in China. The Chinese government was relaxing its grip on the financial markets, making it more conducive for local players wishing to raise funds. Also, the Chinese stock market was on a huge bull run and listing in China would have fetched much higher valuations.
However, the estimated $5 trillion crash of the Chinese equity markets this summer left investors skeptical of these “go private” deals. Spreads on these non binding private offers had increased as stock prices fell. Some stocks including Qihoo had lost half their market price during the Chinese market rout. However, with the intervention of the Chinese government, markets have started to stabilize and the reopening of the IPO market has given a fresh boost to these deals.
As per a Bloomberg report, in 2015, nearly 38 listed Chinese companies were offered to go private in deals worth a record $30 billion. With Qihoo going private, it is most likely that others will also follow suit as the Chinese stock market has improved considerably.
As per Forbes, “Zhou, Qi and the consortium get to take Qihoo private at a throwaway price given the fact that holders of the ADS were unable to correctly value the company. It wouldn’t surprise me one bit if Qihoo 360 goes public in China or Hong Kong at 2x the buyout price pretty soon and then does another ADS issue on our shores a couple of years down the road. Our loss is Zhou and his consortium’s gain”.
The consortium of investors, which includes Citic Guoan, Golden Brick Silk Road Capital, Sequoia Capital China, Ping An Insurance, Sunshine Insurance, Huatai Ruilian and Huasheng Capital, will raise $3 billion in debt and another $400 million as bridge loan facility to fund the deal. The transaction is expected to close in the first half of 2016, subject to regulatory and shareholder approval.
Qihoo, one of the largest Internet security companies in China, carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader tech space include Actua Corp. ACTA, Ellie Mae, Inc. ELLI and VeriSign, Inc. VRSN. All carry a Zacks Rank #2 (Buy).
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