Bain Capital’s “Take Private” of China Fire
1. How and why did China Fire become public in the U.S.?
China fire went public via the reverse merger when shell company which is
already public buys private company and new entity becomes public. The
reason for such a way is ability to bypass some regulations, delays, risks and
costs resulting from a traditional IPO. Fundamental reasons for the going
public decision has some similarities with other Chinese companies that went
public during that time. First category of reasons lies in the process of IPO in
Hong-Kong and China, which was difficult in the beginning of the century, so
companies looked at other markets, including US. Second category is
comprised of access to capital markets. NASDAQ-listed company has more
potential in attracting funding and making deals in US markets, as result many
small and mid-cap Chinese firms decided to go public on foreign market.
2. What are the motives of China Fire’s management and Bain Capital for a
buyout?
China Fire’s management motivation is to flee public US market in less
costly way. This decision has several underlying reasons. Mainly, due to the
scandals with several public Chinese firms the whole sector was viewed
negatively from a financial standpoint. That fact resulted in low share prices
that could be fair for firms related to financial fraud but were obviously below
fair value for trustworthy firms that suffered from overall negative attitude from
investors towards Chinese firms. Therefore, in addition to increased pressure
such firms were unable to successfully rise funds which is one of the main
reasons for going public in the first place.
Bain’s motivation is possibility to acquire an undervalued firm. When market
reduced valuation of particularly every small to mid-cap Chinese firm, an
opportunity for investor to find undervalued firms arose. The main difficulty for
that tactic is ability to differentiate suspicious firms from good ones, which is
entirely possible for Bain’s fund with its PE experience and large network in
US and China. After firm is acquired, Bain can project a somewhat profitable
exit in the future with IPO on local Chinese markets where firm will have more
trust from investors, for example. Moreover, Bain’s ownership will itself
increase value acting as a signal of fraud absence.
3. a) Historical price range goes from 5.23 to 9.56 throughout the year.
b) Broker’s estimate is $8 per share as follows from the case
c) i) Let’s start with calculating P/E ratios for all firms 1 and 2 year forward: