Bid by PAG and Oasis Management carries a 20% premium and values the Hong Kong-based provider of digital marketing tools at $640 million 

Key takeaways:

  • Private equity bid for iClick comes amid a growing exodus of U.S.-listed Chinese companies from New York
  • iClick shares are down more than 24% year-to-date despite solid revenue growth and improving profitability

By Warren Yang

A coalition of investors that have launched a bid to privatize iClick Interactive Asia Group (ICLK.US) are betting the provider of digital marketing tools will be better off as a closely held company. They may have a convincing case.

Hong Kong-based iClick said last Friday that it received a preliminary takeover offer from Asia-focused private equity firm PAG and Oasis Management Co., a Hong Kong-based activist hedge fund.

The group offered to buy all of U.S.-listed iClick’s shares, except those held by management and other strategic shareholders, for $6.75 apiece, valuing the company at about $640 million and representing a 19% premium to the stock’s last closing price before the announcement. iClick’s shareholders include Chinese e-commerce software-as-a-service (SaaS) provider Baozun (BZUN.US), which acquired a stake in the company early this year.

If the buyout succeeds, iClick would join a growing list of U.S.-listed Chinese companies going private, a trend that began in the mid-2010s and started accelerating last year.

One of the most recent cases saw recruitment site operator 51job (JOBS.US) in June agree to a $5.7 billion buyout deal with a management-led group. Sina Corp., which owns Chinese social media site Weibo, in March quit the Nasdaq, ending a two-decade-long listing, after being bought out by a group controlled by its chairman.

Those companies chose to privatize after failing to shore up their sagging share prices – a common complaint among many such firms that increasingly feel their shares aren’t appreciated by U.S. investors well enough. That trend could be accelerating as many U.S.-listed Chinese shares have hit all-time lows in the last few months.

At its latest share price, iClick trades at a price-to-sales (P/S) ratio of just 2, which looks low for such a strong growth tech company. By comparison, highly profitable global digital marketing giants Google and Facebook trade at far higher P/S ratios of 8.6 and 9.5, respectively.

There are multiple drags on Chinese stocks these days. The most recent selloff is being fueled in part by souring sentiment for Chinese companies among U.S. investors due to tensions between the world’s two largest economies. Then, there are Chinese government crackdowns on an ever-growing number of industries. And we should also add the Covid-19 pandemic, which has hurt everyone, Chinese and global firms alike.

It’s a similar story for China-focused iClick. The company’s shares are down more than 24% year-to-date through Sept. 24, although the decline is actually much milder than the huge drops for many U.S.-listed stocks from China’s battered tech and education sectors.

iClick’s shares rose a bit after disclosure of the buyout offer, but they were still about 11% below the buyout price at the end of Monday. They are about 26% below their 2017 IPO as well.

Whereas most of the privatization deals to date have been launched by management-led groups from inside the target companies themselves, the iClick one differs in that it comes from outsiders. Such bids could become increasingly common in the months ahead due to extremely low prices that may make many Chinese companies look like bargains to value-oriented private equity buyers.

iClick certainly seems to fall into that category, with a stock performance that seems increasingly out of sync with its improving profitability.

Booming Business

iClick’s revenue more than doubled over the three years to 2020, and its gross profit increased even faster, indicating improving margins. Management expects revenue to rise as much as 33% this year, driven by a more than doubling for “enterprise solutions” – one of its two main business segments.

Marketing is one of the two and accounts for the bulk of revenue, offering companies software systems using data and artificial intelligence to acquire customers. The other business consists of enterprise products, which are offered in a partnership with Tencent, to help users manage clients gained through iClick’s marketing tools.

The company even made a small net profit in this year’s second quarter, according to the latest quarterly results released last month. This came after years of annual losses dating back to at least 2017, though the company admitted the profit owed mostly to one-time items related to changes in value for some derivative products related to its stock.

To boost its slumping shares, iClick has been buying back its stock. It repurchased $10 million worth of shares last year and plans to spend as much as $25 million again this year. This year’s repurchase program could equal up to nearly a quarter of iClick’s cash holdings as of June 30. If it didn’t have to worry about supporting its stock price with such buybacks, iClick could use that money to grow its business, for example, through acquisitions or other new initiatives.

A mix of a depressed valuation and growth potential can be a recipe for juicy returns for private equity firms like PAG, which has previously made similar investments. At the start of this year, PAG acquired a small stake in Mobvista (1860.HK), another Chinese company that offers mobile marketing services, through convertible bonds.

PAG also has a large portfolio of investments in Chinese companies across various other sectors. In 2019, it acquired a controlling stake in Hisun Bioray Pharmaceutical for $540 million in what was the largest private equity investment in China’s biotechnology industry at that time.

Two years earlier, it took over Yingde Gases, ending a widely publicized saga involving a boardroom fight. That story also saw PAG’s partner in the iClick buyout attempt, Oasis, emerge as a vocal minority shareholder. Yingde is now planning a return to the Hong Kong stock market, Bloomberg reported last month.

In a similar way, PAG most likely believes it can improve iClick’s performance for a potential eventual re-listing. For now, though, iClick shareholders seem a little skeptical that a deal is imminent, given the lingering gap between the offer price and the stock’s latest close.

They may be right to tread carefully as any transaction could require lengthy negotiations – especially since in this case the offer doesn’t appear to have direct support from any company insiders. The 51job deal took nine months to come to fruition, with the company’s top manager ending up being part of it. There’s also always the chance a bidding war could erupt if iClick’s management team makes a counteroffer or resists the deal if it believes the price is too low.

Whoever ends up privatizing the company, such an outcome could make things click better for iClock by removing its burden of being a publicly traded company.

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