If you can’t buy them, bankrupt them; Private Equity Capitalizes on Chinese Firms’ Depressed Shares

JUNE 11, 2013, 9:10 AM

Private Equity Capitalizes on Chinese Firms’ Depressed Shares


HONG KONG – If you can’t buy them, bankrupt them.

Three months ago, Ambow Education Holding, a troubled operator of tutoring centers in China that was listed on the New York Stock Exchange, was the target of a $108 million privatization bid by Baring Private Equity Asia.

On Monday, Baring emerged as one of several big shareholders that had succeeded in pushing Ambow into provisional liquidation by a court in the Cayman Islands, where the company is registered, after a dispute with management over an investigation into possible financial misconduct.Rapid downfalls have not been uncommon among Chinese companies listed in the United States in recent years, after a wave of accounting scandals led to a broad sell-off of such stocks. At the same time, a growing number of private equity firms have sought to capitalize on depressed share prices of Chinese companies by making buyout offers.

But Ambow’s situation stands out.

“Perhaps no company ever transited as quickly from a private equity firm’s sought-after takeover target to being liquidated,” said Peter Fuhrman, chairman of China First Capital, an investment bank and advisory firm based in Shenzhen, China.

Ambow was taken public in 2010 in a $107 million deal led by JPMorgan Chase and Goldman Sachs. Its market value rose to more than $1 billion that year but came under pressure throughout 2011, along with many other Chinese stocks.

Then in July 2102, Ambow disclosed in stock exchange filings that a former employee had come forward claiming “financial impropriety and wrongful conduct” related to the company’s purchase of a training school in China in 2008.

Ambow said it had hired outside lawyers to help its audit committee carry out an internal investigation of the matter and that it would not comment further. Its shares promptly dropped by half, from more than $4 apiece to just over $2, then continued to slide until early this year.

Baring, a firm based in Hong Kong that used to be part of the Dutch financial services company ING, began its privatization bid for Ambow on March 15 at $1.46 per American depositary share. It was a 45 percent premium to the share price at the time.

Then things got messy. On March 18, three of Ambow’s four independent directors resigned. On March 22, the law firm Fenwick & West resigned after nine months of leading the investigation into possible financial misconduct. That same day, the Chinese affiliate of PricewaterhouseCoopers, also known as PwC, resigned as Ambow’s auditor.

“In its letter, PwC stated it was resigning as a result of its concerns that the investigation may not be given the necessary resources and time, and the presence of existing management may make conducting an investigation of the scope that PwC believes is warranted unlikely,” Ambow said in a filing. The New York Stock Exchange suspended trading in the shares.

Baring withdrew its privatization bid on March 25, 10 days after it was made, citing the resignations and the trading suspension. It said in a letter that “as a result of these unexpected events, we have concluded that it is not possible for us to proceed.”

The petition to the Cayman court to liquidate Ambow was filed in April by a fund run by the Asian unit of the Avenue Capital Group, a New York investor in distressed stocks and bonds that owns 21.6 percent of Ambow’s shares.

According to filings on Monday to the United States Securities and Exchange Commission announcing the success of the petition, the move was supported by Baring, which has a 10 percent stake in Ambow, and an investment unit of the Australian bank Macquarie, which holds an 11.6 percent stake.

The petition accused Ambow’s chief executive, Jin Huang, of abusing her power in relation to the investigation into possible financial misconduct and of “obstructionist tactics designed to entrench her control of Ambow.”

In a statement last month, Ambow firmly rejected the accusations, saying there was “no basis” for any of the claims and that “the filing of the petition and the relief it seeks are wholly inappropriate.”

In its ruling on Friday, the Cayman court appointed the auditing firm KPMG as provisional liquidator for Ambow. KPMG will also take control of the investigation into possible financial misconduct.

The situation is complicated because Ambow’s operating business — like many Chinese companies listed in the United States — is based in China but controlled by the offshore-registered listed company through a series of complex holding structures called variable interest entities, or V.I.E.’s.

One such foreign control structure was recently ruled invalid by China’s highest court.

“Right now our control over the operating assets in China has been quite limited,” Tiffany Wong, a partner at KPMG China and herself one of the court-appointed liquidators, said on Tuesday. “We haven’t got access to the books and records of company at the moment.”

Monday, Tuesday and Wednesday are public holidays in mainland China, and Ms. Wong plans to meet with Ambow management in Beijing later this week. “We will be seeking to stabilize the company,” she said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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