GLOBAL REPORT—The private buyout offered to 7 Days Group Holdings Limited by a consortium of shareholders valued at $634.7 million is likely to occur, according to a research analyst based in Hong Kong.
Noah Hudson of Guotai Junan Securities said the group of shareholders that proposed the private buyout, including Co-founder and Co-chairman Boquan He and Co-chairman and former CEO Nanyan Zheng, could be strategizing to increase the company’s value as a private entity and take it public again down the road.
“I think they believe that 7 Days is undervalued in the market, and so they can buy it on the cheap now (and) then, maybe in a few years, take the company public again on another exchange that is more friendly toward China-concept stocks at a much higher valuation,” Hudson said via email.
Many Chinese concept stocks listed in the U.S., including 7 Days, are down because a number of investors are reluctant to buy due to related scandals in recent years, he said. Chinese concept stocks are stocks that do a significant level of business activity in China.
In 2011, several Chinese companies listed in the U.S. and Hong Kong were found to be committing fraud, leaving investors victims of scams.
“While there are plenty of bad apples, the good companies are getting lumped in with the bad ones, as far as investors are concerned,” Hudson said. “So good companies like 7 Days end up being undervalued in the market.”
Room for negotiation
Although the proposed deal is valued at approximately $58 million more than 7 Days’ market capitalization of $576.74 million as of approximately 10 a.m. eastern time, Hudson believes shareholders could negotiate the $12.70 price per share being offered.
“I think there is room for current shareholders to negotiate the price higher within a range that the consortium would still find acceptable,” he said.
Shareholders who have owned stocks in the company for a year or so would take a loss if the deal goes through at $12.70, Hudson said. 7 Days’ stock was at $15.89 a year ago. Going back further, 7 Days’ stock price reached its all-time high of $24.97 in December 2010, Hudson said.
On the other hand, newer shareholders might find the $12.70 offer price attractive as it is a 31.8% premium to the volume-weighted average closing price during the last 30 trading days, he said.
Year to date, the company’s stock price is up nearly 4.5% as of mid-morning Friday.
Reviewing the offer
The next step for the consortium that proposed the private buyout is to conduct due diligence on 7 Days, Hudson said. Because that consortium includes two insiders, He and Zheng, “I expect that there will be no surprises,” he said.
Vivian Chen, investor relations director for 7 Days, said in an email that the company still is in the preliminary stages of the evaluation process.
“The board is reviewing the proposal, and we expect it to form a special committee to consider the proposal at some point in the near future,” Chen said.
Several other analysts declined to comment on how the private buyout would affect the company.
During 7 Days’ most recent earnings call in August, executives reported opening 88 properties during the second quarter of 2012 with 226 in the pipeline as of 30 June.
Despite a slowdown in hotel performance during the period, CEO Lin Yuezhou said the company would continue to execute its rapid growth strategy.