Quick Pitch: Best Inc (BEST)
Chinese Privatization – 19% Upside
This is yet another Chinese privatization with a 19% spread to the non-binding offer. Such setups generally have extended timelines and are quite risky, with a high percentage of cases failing to reach definitive agreements (see our study on US-listed Chinese privatizations). But I think this one is different – Alibaba is BEST’s largest shareholder and is most probably the driving force behind this privatization together with management. Due to Alibaba’s involvement the deal is more likely to close and the timeline should be shorter. Also, the stock is already at pre-announcement levels which at least theoretically limits the risk if the deal falls apart.
BEST provides freight delivery and supply chain management (sourcing, procurement, warehousing, etc.) services in China and Southeast Asia. In early November, the company received a non-binding acquisition proposal from a buyer consortium (49% economic and 94% voting stake) led by its founder/CEO/chairman at $2.88 per ADS. BEST has formed a special committee and hired a financial advisor to evaluate the proposal. The spread has widened from the initial 4% upon the announcement to the current 19%.
Alibaba is the largest shareholder with 26% ownership and will be rolling its equity stake in privatization. The Chinese e-commerce giant should know BEST inside out as it was one of the earliest investors in the business, participating in Series A-F funding rounds, bought additional stock in the IPO (2017 at $200/ADS adjusted for stock splits), and currently controls two out of seven board seats. Over the recent years, the companies have partnered to launch cross-border delivery services between China and other Southeast Asian countries, with Alibaba using BEST’s sortation and distribution centers, as well as last-mile service stations (see here and here). Importantly, Alibaba has recently launched its cross-border delivery business and might be looking for a tighter integration with BEST services for geographical expansion. During a recent conference call, BABA’s management stated that the key focus of its logistics arm is to build out a global network. Alibaba is also planning the IPO of its logistics arm Cainiao and maybe BEST could be re-incorporated as part of this business after privatisation. I am just shooting in the dark here and have no idea what are Alibaba’s further plans for cooperation with BEST and how tight the integration already is, but there seem to be plenty of ways the two companies could expand the relationship and maybe some of that might be better implemented if BEST is a private company.
There is also an opportunistic angle to this privatization as BEST shares are sitting close to all-time-lows and the business might be inflecting. Since 2017 $200/ADS IPO the stock has been on a downward slope as the company faced challenges, including Covid-related restrictions and intense competition in the express delivery space. Amidst this backdrop, the business has been undergoing a restructuring. Over the recent years, BEST divested its China express delivery business and exited/wound-down several other non-core segments. With the restructuring now completed and a relaxation of Covid restrictions, the company has been inching towards profitability. Two key segments, Freight and Supply Chain Management (87% of revenues), have already turned profitable and are expected to generate positive operating cash flows in 2023.
Valuation wise, little can be said as is usually the case with most of similar US-listed Chinese privatizations. Revenues are volatile (mostly due to divestments) and the company is still burning cash. The transaction values BEST at 0.2x TTM sales. A significantly larger US-listed Chinese freight/express delivery provider ZTO Express trades at a 3.2x multiple, however it is a growing and profitable business with 20% operating margins, so probably not the closest comparable to BEST.
Thanks – if and how are you hedging this?
Not sure I understand your question – the non-binding offer is in cash, so not there is no need for hedging.
Is the current share px at the pre-bid level? If the current share px is significantly higher, how are you hedging any deal falling apart?
BEST currently trades close to pre-bid levels. So if the deal falls apart, I would not expect the shares to fall materially.
But in any case, I do not see any ways to hedge this kind of setup. In stocks with options market, one could buy puts, but usually option prices already reflect probabilities that a transaction might fall apart.
I might be mis-remembering but didn’t you do a study of how often these chinese going private transactions actually get completed? If so, can you remind us of the results, if I’m not totaly senile I thought they were good?
Here you go sir: http://ssi.wpdeveloper.lt/2020/07/analysis-of-us-listed-chinese-going-private-transactions/
How do you see this vs say a Yi?
When it comes to YI, I’m simply baffled by the prolonged wait for management to finalize a definitive agreement. For BEST setup, the main factor is the involvement of Alibaba, which I think will make a difference in terms of timeline and likelihood of closing.
I think this is a pass for me until there is a binding offer. Beyond the low success rate of non-binding offers in China from the study, BEST is running low on cash and it’s quick ratio is terrible, current liabilities are nearly double current assets. So there is some risk of implosion before a binding offer arrives, and one might speculate on whether the offer was only made in order to pump the stock to make raising another round of financing easier.
I do no think Alibaba would be playing games and would join privatization consortium “in order to pump the stock to make raising another round of financing easier.” Intentions in this case seem solid.
A bond of theirs that’s maturing in Oct 2024 traded yesterday for 40c on the dollar, 178% yield. This looks like it’s either getting bought out or going bankrupt.
what platform can i buy this on?
Can someone help explain why their bond is trading 40c on the dollar with the company going private?
I don’t think it meaningfully trading. Bloomberg only shows $11,000 of the bond left outstanding ($200mm at original issued back in ’19). The trade last Thursday was for $2k – so could just have been someone willing to liquidate at any price give no market.
I used to like this idea but then I found out that the Best Take Private idea seems to drag on for years now. I found the following interesting article on Reuters dated 20. Januar 2021. Read yourself.
Alibaba-backed logistics firm Best weighs sale in strategic review
https://www.reuters.com/article/idUSKBN29P0Y6/
The comment von crandyhill above seems to fit now very well: “…one might speculate on whether the offer was only made in order to pump the stock to make raising another round of financing easier.”
DT any thoughts? Risk seems esp low here but the waiting game goes on.
The spread has widened and now stands at 25%. However, I think the situation is less attractive than when I published the write-up.
During a recent conference call, Alibaba’s management stated that the company has delayed the expected IPO of its logistics arm Cainiao due to unfavorable current market conditions – management said the public listing would not reflect the “true intrinsic value” of the subsidiary (see quote below). This might put the acquisition of BEST into question.
The unfavorable market conditions for Cainiao’s IPO seem to be at least partially related to the ongoing fierce price war in the Chinese express delivery market. Falling prices, coupled with softening volume growth, have significantly reduced operating margins across the entire industry in Q3’23. Industry players have experienced substantial share price declines since the non-binding acquisition proposal, including ZTO Express (-29%), YTO Express (-19%), STO Express (-17%), and Yunda (-32%). The issues seem to have impacted Cainiao, which offers its own express delivery service within China while also partnering with other express delivery providers and providing services such as warehousing. Cainiao/Alibaba hold sizable stakes in a number of express delivery companies, including YTO Express and ZTO Express.
It is not clear if these dynamics will have a significant impact on BEST’s operational performance, given that the company is primarily focused on freight delivery as opposed to express delivery (the Chinese express delivery business was divested in 2021). However, it might impact Alibaba’s willingness to acquire BEST and combine it with Cainiao. Also, one of the elements of the thesis was that due to the upcoming Cainiao IPO, Alibaba was under time pressure to complete the acquisition of BEST. With the IPO postponed, there is no longer any rush. Finally, if the price movement in the express delivery players is at least directionally indicative of where BEST would trade if the offer is withdrawn, then the downside might be significant.
Apparently my initial take that “due to Alibaba’s involvement the deal is more likely to close and the timeline should be shorter” turned out to be correct.
Despite my subsequent concerns (see the previous comment) definitive agreement was signed yesterday at the original terms of $2.88 per ADS. Multiple investors, including Alibaba, are rolling over their equity. The spread has narrowed to just 5%. The merger is expected to close in Q3 2024. Shareholder meeting date has not been set yet; however, with 94.5% votes from the buyers consortium, this will likely be just a formality.
A nice win for anyone holding on or buying at the dip on Alibaba’s cancellation of the Cainiao IPO. The cancellation did not appear to have been a meaningful factor in this privatization. In fact, just recently on a Q1 2024 earnings call, BABA reiterated its support for the expansion of Cainiao’s global logistics network and the importance of its infrastructure to the BABA’s core e-commerce operations. BEST’s assets are, of course, well-suited for these expansion plans. This comment from Alibaba should have been a sign that BEST privatization is still on tract – everything seems easy with a hindsight 😉
“In March this year, we withdrew Cainiao’s IPO application. Cainiao provides essential infrastructure to Alibaba’s core e-commerce business, and we hope Cainiao will strengthen its synergies with our Chinese domestic and international e-commerce operations. Alibaba Group will continue to support the expansion of Cainiao’s global logistics network.”
The merger is expected to close in Q3, but no news yet about a general meeting being planned.
It’s strange and I haven’t been able to find any info/updates on this deal anywhere.
Nearly one month after the expected Q3 close, no news at all.
“The Merger is currently expected to close during the third quarter of 2024 and is subject to customary closing conditions, including the authorization and approval of the Merger Agreement by the affirmative vote of shareholders representing at least two-thirds of the voting power of the Shares present and voting in person or by proxy at a general meeting of the Company’s shareholders.
The Consortium Members have agreed to vote all Shares they beneficially own, which represent approximately 94.5% of the voting rights attached to the outstanding Shares as of the date of the Merger Agreement, in favor of the authorization and approval of the Merger Agreement and the Merger. If completed, the Merger will result in the Company becoming a privately held company and its ADSs will no longer be listed on the New York Stock Exchange.”
SC 13E3 released on 10/11 moved the expected close to Q1 2025.
“We are working toward consummating the Merger as soon as possible and currently expect the Merger
to consummate during the first quarter of 2025, after all conditions to the Merger have been satisfied or
waived.”
Not sure whether they’re having trouble with the <7.5% Dissenting Shareholders condition.
"Shareholders of the Company holding less than seven and onehalf percent (7.5%) of the total issued and outstanding Shares immediately prior to the Effective Time
shall have validly served and not withdrawn a notice of objection under Section 238(2) of the CICA."
BEST filed two 13E3 amendments to the 10/11 13E3, on 11/12 and 12/16 (today). The documents are so lengthy that it’s hard to identify what they have amended.
They are still targeting a Q1 2025 close, but have not yet set a date for the EGM.
Spread has widened to 8%.
Is an update/amendments to 13E3 normally a positive or negative signal?
Assuming I didn’t miss anything substantial while comparing the 300-page documents (primarily the newest version versus the original), there don’t appear to be any significant updates regarding the likelihood of the merger closing or the expected timeline. The changes in the new proxy seem to be primarily procedural clarifications, minor text adjustments, and expanded disclosures, reflected in the increased page count.
From my experience, U.S.-listed Chinese companies’ privatizations—especially when delayed—often go completely silent. BEST has not fully followed this pattern. It continues to make incremental adjustments to its proxy filings, which I view as a positive sign.
That said, there’s still no clear explanation for why the merger is delayed relative to the original timeline or when the shareholder vote—a formality—will occur. For now, I’ll remain on the sidelines.
I asked one of the popular AI models about the key differences between the December and November 13E3 files, and was told that there were new participants joining the Rollover Shareholders group.
I haven’t verified the findings personally. Sometimes AI models just made up things up.
I guess some dissenting shareholders are holding up the processes:
(1) They are still trying to get more shareholders to join the Rollover group.
The AI model also told me that members of the Rollover Group would need to contribute some cash too, in addition to their shares (again, I haven’t verified the claim).
(2) They are working on reducing the number of dissenting shareholders, possibly by convincing them to roll over. They don’t want too many shareholders for the private company, but they also don’t want the uncertainty of potentially higher compensation for the dissenting shareholders.
“Shareholders of the Company holding less than seven and one half percent (7.5%) of the total issued and outstanding Shares immediately prior to the Effective Time shall have validly served and not withdrawn a notice of objection under Section 238(2) of the CICA.”
EGM called for 18 Feb: https://www.sec.gov/Archives/edgar/data/1709505/000110465925001117/tm2421090d7_ex99-a1.htm
Approved by 62% of shares and 95% of votes. Waiver of pre-conditions (I think in particular the <7.5% Dissenting Shareholders condition) is till required. No timeline is given but current spread is tiny.
"The completion of the Merger is subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement. The Company will work with the other parties towards satisfying all other conditions precedent to the Merger set forth in the Merger Agreement and completing the Merger in due course. "
@dt so BEST’s total delisting fee is $0.1/ADS (“ADS cancellation fee” of $0.05/ADS + “cash distribution fee” of $0.05/ADS)?
Yes, it’s a bit unusual. Out of nine Chinese privatization cases I reviewed (all covered on SSI), nearly all had just the standard $0.05 ADS cancellation fee. Two cases included an additional $0.02 distribution fee, and one case (BEST) had the highest distribution fee of $0.05. After accounting for all fees, the actual offer amounts to $2.78 per ADS, leaving just over 3% upside.
The privatization of BEST has finally closed. The process took 16 months from the announcement of the non-binding offer.
https://www.bamsec.com/filing/110465925021903?cik=1709505