At a time when China’s tougher monitoring of its companies has hampered capital raising through foreign IPOs, smaller Chinese companies in need of capital are racing for quick offshore listings through the merger route with blank-check enterprises, according to corporate executives and bankers.
The businesses see an opportunity to acquire capital and get listed by minimizing the time and scrutiny by the regulators required for traditional market debuts, as a slew of special purpose acquisition companies (SPACs) look for candidates to combine with, they added.
However, the increasing Ukraine crisis, which has increased market volatility and decreased investors’ risk appetite, might put a damper on fundraising efforts in the near future.
SPACs are shell companies that gather money from institutional and retail investors through stock exchange listings and invest it in a trust with the intention of merging with a private company and going public.
While Wall Street’s frenetic blank-check mergers have slowed in recent months due to valuation mismatches and certain authorities tightening restrictions, competition in Asia is heating up due to the region’s enormous number of unicorn businesses.
“We badly need capital to help us grow,” said Tian Rui, general manager of Nongdinghui Technology, which is engaged in building online marketplaces that serve to connect farmers to consumers and one that is seeking to get listed at the Nasdaq this year through the route of a merger with a blank-check company.
“A SPAC is a very good tool to help accelerate our expansion,” while traditional IPOs take too long, said Tian.
ETAO International Group, a digital healthcare company that offers telemedicine, hospital care, pharmaceutical services, and health insurance, announced in January that it will go public on Nasdaq through a merger with a publicly traded SPAC, valuing the company at $2.5 billion.
Santime Technology, a solar technology startup, and Ailulu Technology, a pet entertainment firm, are two other Chinese companies targeting a publc listing in the United States through a SPAC merger, according to officials at both companies.
“The potential for it (SPAC) to be faster, and the fact that you have a little more control over the process… might make a difference in this environment,” said Lin Xiaoxi, Hong Kong-based partner at law firm Linklaters.
According to SPAC specialised investment bank Chardan, ten Chinese corporations raised $2 billion through mergers with US-listed SPACs between 2019 and 2021.
However, negotiations came to a standstill last year, with only one SPAC merger completed, as the US government strengthened monitoring of Chinese businesses’ New York listings in the aftermath of Beijing’s massive crackdown on technology companies.
Some blank-check corporations have been deterred from merging with a Chinese company due to regulatory tightening in both China and the United States, but investors are not likely to overlook the chances, according to Joel A. Gallo, ETAO’s Shanghai-based CFO.
“This (SPAC) method of going public was chosen … due to the ability to accelerate the listing process while reducing the costs associated with going public.”
Because of greater value expectations and more prospects for such acquisitions in that market, most Chinese companies choose to list in the United States through a SPAC merger. A structure for onshore SPAC listings has yet to be established in China.
The increased Chinese interest coincides with the recent introduction of a market for SPAC listings in Hong Kong and Singapore, raising competition for transactions even as Wall Street’s appetite for them wanes.
Ailulu executive Ding Jian said a Nasdaq listing via a SPAC deal would accelerate his business’s worldwide ambition, while Santime founder and CEO Harry Ze said a Nasdaq listing via a SPAC deal would be more realistic for his company.
According to Zhang Yexuan, founder of a Chinese solar energy vehicle start-up that plans to list on Nasdaq next year, offering via a SPAC is also a more practical alternative for a technological firm with less business track record than an IPO.
The Chinese securities authority is yet to make public the final guidelines for raising capital by domestic businesses overseas and it’s not obvious whether SPAC listings would also be subjected to greater scrutiny, some advisers anticipate the door to continue open.
Drew Bernstein, co-chairman of Marcum Bernstein & Pinchuk, a China-focused international accounting company located in the United States, believes small businesses will be unaffected by the new offshore capital raising laws.
“So going after the smaller deals (in China) to be able to get things done seems to make sense,” Bernstein said.
(Adapted from Reuters.com)