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Dangdang Orphaned by Cash-Challenged HNA

Bottom line: The collapse of Dangdang's $1.2 billion sale of itself to HNA shows the deal was most likely fueled by backdoor connections with no grounding in financial reality, and the company will probably be sold ultimately at a much lower price.

It's Friday and I'm quite looking forward to the weekend, so I thought I'd indulge myself with a more gossipy post on the latest troubles of e-commerce has-been Dangdang. Anyone looking for good stock tips with this one will probably be somewhat disappointed, since Dangdang was one of a large group of Chinese firms to privatize from New York over the last few years in pursuit of higher valuations by re-listing at home.

A number of companies from that re-listing wave have already re-listed here in China, often with results that bore out the thesis that such a process was well worth the effort. Among those are names like Focus Media (Shenzhen: 002027) and Homeinns (Shanghai: 600258), which are now worth considerably more as China-traded companies than they ever were in New York. Another notable success is WuXi AppTec (Shanghai: 603259), a drug maker that was part of the larger WuXi PharmaTech that de-listed from New York in 2015.

Dangdang was hoping to follow that trend, but unfortunately appears to rapidly be emerging as one of the high-profile failures from that homecoming wave. I'll recount the tale shortly, including details of the collapse of the company's latest homecoming plan. But first let's recount why exactly this particular deal fell apart, as well as how it shows that not all homecomings are created equal, and that overzealous Chinese stock buyers still recognize a dud when they see one.

Dangdang was one of China's earliest companies to recognize the potential of e-commerce, and was at one point likened to a Chinese equivalent of Amazon (Nasdaq: AMZN). But for a number of reasons, the company squandered its early-arrival status and relatively positive reputation, and was ultimately overtaken by current leaders Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD), which have made a mint from the market.

Dangdang managed to make its New York IPO in 2010 when the company was in decline but still relatively well known. But it never really went anywhere, and actually posted several years of losses during a period of intense competition as Alibaba, JD and others, including the real Amazon, duked it out for market share.

The company privatized on the belief that it could get a better valuation at home, and was worth around $556 million when it finally left New York. Never mind that it was a company in decline and that its biggest asset by then was probably its name that was relatively well known by longtime China Internet users. The company's husband and wife co-founders thought they had found gold when they engineered a deal to sell their firm to financial conglomerate HNA earlier this year for 7.5 billion yuan ($1.2 billion), which would be about double what it was worth at the time of its privatization just a year earlier.

Coming Unglued

But now it seems that deal has come unglued, with word this week that HNA has scrapped the purchase as it focuses on its own major debt-reduction campaign. (English article) Frankly speaking, I and many others were quite surprised when the original deal was announced back in April. That's because HNA is one of a group of Chinese firms that went on aggressive global buying sprees over the last six or seven years, and suddenly came under pressure from Beijing last year to reduce their massive debt.

As HNA was selling off assets left and right, including a large stake it held in hotel giant Hilton (NYSE: HLT), this sudden lone acquisition looked quite peculiar. I always suspected there was an inside story behind this Dangdang sale, most likely that Dangdang's founders or other major stakeholders were calling in a favor from their HNA friends to unload an asset that nobody else wanted. After all, this kind of backdoor deal happens relatively often in China, especially in this kind of situation.

So it doesn't come as a huge surprise at all that the deal ultimately fell apart, most likely because it was simply built on a wink and a nod without any real financial consideration. The reality is probably that Dangdang would have been lucky to get its initial $556 million valuation back in any sale or re-listing in China, because the company is rapidly losing relevance in China's e-commerce market. Accordingly, I wouldn't be surprised if it's quietly sold at a much lower price in the next few months, quite possibly without any announcement at all to hide the embarrassment.

 

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