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Chinese Tech Unicorns Try a Different Approach to Raising Cash
Selling convertible securities allows companies to raise capital with less dilution to existing shareholders
After multiple rounds of fundraising, some of China’s most valuable private technology companies are turning to a less common way of raising capital: Issuing convertible securities.
Ride-hailing giant Didi Chuxing Technology Co. is in talks with potential investors about a sale of bonds that could later be exchanged into stock shares in the Beijing-based company, according to people familiar with the matter. It isn’t known how much Didi is trying to raise in this manner, but the company recently accelerated talks about a potential initial public offering that could take place later this year, people familiar with the matter previously told The Wall Street Journal.
Another fast-growing Chinese startup, Beijing Bytedance Technology Co., in recent weeks issued about $300 million in convertible bonds to private-equity firm KKR KKR 1.12% & Co., according to other people familiar with the matter. The company, which owns a popular Chinese news-aggregation app called Jinri Toutiao, was valued at $22 billion in an equity fundraising round in late 2017, according to an individual familiar with that transaction.
Spokespeople for Didi, Bytedance and KKR declined to comment.
The emerging trend is a result of technology companies’ increasing need for cash to fund their expansion at home and abroad, which has involved heavy spending on marketing and other costs to acquire customers and fend off rivals.
Selling convertible securities allows companies to raise capital with less dilution to existing shareholders, while giving buyers of the instruments an opportunity to reap additional gains if and when the debt converts into stock down the road.
The securities, which have both stock and bond-like characteristics, typically pay investors interest for an initial period and can be converted into shares in the issuing company, often at a predetermined price or price range. The annual interest payments on convertible securities also can be a few percentage points lower than rates on traditional unsecured bonds.
Some high-profile technology companies that previously sold convertible securities before going public include Chinese e-commerce giant Alibaba Group Holding Ltd. and music-streaming company Spotify Technology SA . When Alibaba issued such instruments in 2012, investors in effect were given the right to swap the convertible securities for common shares in the company at a discount to Alibaba’s IPO price when it went public at in 2014.
In the case of Spotify, the company issued $1 billion in convertible debt to a group of investors in 2016, also about two years before it went public. Sea Ltd., a Southeast Asia digital entertainment and e-commerce company backed by Tencent Holdings Ltd. , also issued convertible securities before it went public on the New York Stock Exchange last year.
Private companies selling convertible bonds often have a road map for an eventual IPO, typically within 12 to 18 months, said Aaron Oh, head of structured equity origination for Asia Pacific at Credit Suisse Group AG . If an IPO doesn’t materialize, however, companies could be on the hook to repay debtholders.
Didi and Bytedance are among a new wave of fast-growing Chinese internet and technology startups that eventually could challenge the dominance of China’s e-commerce giants Alibaba and Tencent in some areas. Both startups have raised funds by selling equity several times in recent years.
Didi as of the end of 2017 had raised more than $20 billion in equity and debt funding, according to Dow Jones VentureSource, and the company was valued at $56 billion in its last private-fundraising round. The company is eyeing a valuation of at least $70 billion to $80 billion when it goes public, people familiar with the matter previously told the Journal.
It isn’t clear how much Bytedance is worth based on the new capital injection. Some recent trades in its unlisted shares valued the company between $35 billion and $40 billion, said a person familiar with the situation.
Jinri Toutiao, a personalized news app founded by Chinese entrepreneur and Bytedance CEO Zhang Yiming, is one of China’s most popular news apps, with 120 million daily active users. Toutiao, which translates to “Today’s Headlines,” curates entertainment, business and general news, using artificial intelligence to analyze users’ reading histories and feeds them content based on their preferences. Bytedance also runs Douyin, a short-video streaming platform that is gaining in popularity.
Both Didi and Bytedance have had their share of recent controversies. On May 11, Didi suspended one of its ride-hailing services after a 21-year-old female passenger was killed by a driver after using the company’s carpooling service. Didi earlier this month said it would review all of its drivers and overhaul its customer service.
In April, Bytedance’s humor app, Neihan Duanzi, was shut down by Chinese authorities on the grounds that it hosted lewd content, including dirty jokes and memes, which the authorities said wasn’t keeping with “a clean online audiovisual environment.”
Toutiao also was temporarily removed from Chinese app stores due to concerns over what a national media watchdog called “vulgar” content. The move prompted a public apology by Mr. Zhang, its CEO, who said the company would hire more censors and improve its Artificial Intelligence systems and filtering to be more socially responsible.
Mineral Deposits bidder ERAMET still hopeful of shareholder support, despite target rejection
The Mineral Deposits [ASX: MDL] target statement released on Tuesday (22 May) that rejects ERAMET’s [EPA: ERA] AUD 1.46 (USD 1.10) cash per share offer has not deterred the bidder despite the independent report finding the offer neither fair nor reasonable and estimating fair value at AUD 2.04 - AUD 2.52 per share, said a source familiar with the situation.
Mineral Deposits shares have continued to trade through terms, closing 5.9% higher today at AUD 1.795.
The source noted Mineral Deposits is relying on wildly optimistic mineral sands forward prices, operating performance and therefore earnings numbers.
The source said that were shareholders not supportive of ERAMET's offer, they would not have sold their shares into the offer at AUD 1.46 per share and below that prior to the offer announcement.
Mineral Deposits shareholders are now no longer selling because ERAMET has placed a price floor, and shareholders think they can extract more, the source said, but their action of previously selling at AUD 1.46 per share when there was no bidder speaks to their intent.
The French group’s proposed offer is subject to a 50.01% minimum acceptance condition and has approval from Australia’s Foreign Investment Review Board (FIRB).
ERAMET has a 13.3% relevant interest in Mineral Deposits including from Ellerston which tendered its entire 7.9% stake towards the proposed offer in a pre-bid agreement disclosed on 27 April.
This news service has reported that Tim Robertson, managing director of Farjoy which holds 7.8% in Mineral Deposits, claims he has spoken to shareholders owning over 50% of the integrated mining company and that none plan to accept ERAMET’s offer.
As previously reported, this news service has spoken to five shareholders accounting for some 42% of the register, who described the offer as too low and not compelling.
The offer is scheduled to close on 21 June.
ERAMET and MDL would not comment beyond their statements.
Mineral Deposits shares have continued to trade through terms, closing 5.9% higher today at AUD 1.795.
The source noted Mineral Deposits is relying on wildly optimistic mineral sands forward prices, operating performance and therefore earnings numbers.
The source said that were shareholders not supportive of ERAMET's offer, they would not have sold their shares into the offer at AUD 1.46 per share and below that prior to the offer announcement.
Mineral Deposits shareholders are now no longer selling because ERAMET has placed a price floor, and shareholders think they can extract more, the source said, but their action of previously selling at AUD 1.46 per share when there was no bidder speaks to their intent.
The French group’s proposed offer is subject to a 50.01% minimum acceptance condition and has approval from Australia’s Foreign Investment Review Board (FIRB).
ERAMET has a 13.3% relevant interest in Mineral Deposits including from Ellerston which tendered its entire 7.9% stake towards the proposed offer in a pre-bid agreement disclosed on 27 April.
This news service has reported that Tim Robertson, managing director of Farjoy which holds 7.8% in Mineral Deposits, claims he has spoken to shareholders owning over 50% of the integrated mining company and that none plan to accept ERAMET’s offer.
As previously reported, this news service has spoken to five shareholders accounting for some 42% of the register, who described the offer as too low and not compelling.
The offer is scheduled to close on 21 June.
ERAMET and MDL would not comment beyond their statements.
RIB Software: the unicorn rainy-day fund
RIB Software is a German-listed technology company with grand aspirations. What SAP's enterprise resource planning software has done to manufacturing, it hopes to do to the construction industry. Digitisation of planing, design and project management for builders and property companies it hopes will be big business.
German investors seem to have bought in to the idea, awarding it a tech-unicorn size €1.1bn valuation of around ten times sales. They also recently handed RIB €131m to spend, the third time the group has sold stock to raise funds since listing in 2011.
What might strike some as odd, however, is that RIB Software also paid a dividend last year, and intends to distribute €9m again this year. It's a little like attaching a yo-yo to a piggy bank.
Dividends at a fast-growing tech company are unusual, but then RIB has been reporting healthy profits for years. Investors might quibble over the €21m of research and development costs which are capitalised, rather than put through the profit and loss statement, but the group does produce cash.
On RIB's preferred measure of adjusted operating ebitda, it made profits of €40m on sales of €108m last year. Cash flow from operations was €22m. It ended the year with €135m of cash in the bank and cash-like securities.
As we have previously highlighted, raising funds while sitting on lots of cash can prick up the ears of sceptical investors. It was something the conglomerate Steinhoff International did for years, before the accounts were withdrawn as unreliable in December. Ubiquiti, a US maker of tech hardware, attracted the attention of short sellers for raising debt while holding cash offshores.
So why did well-resourced RIB Software tap investors for another €131m?
Mads Bording, RIB chief operating officer, told us:
We've done this equity raise to make sure we have sufficient funds to execute on our strategy
The investor community also supports the capital raises, he said, and the company can't know what market conditions will be like for the next five years. Mr Bording said RIB aims to €100m on its balance sheet “for acquisitions, for a rainy day”.
The company said at the time of March's capital raising it had earmarked €35m for deals in prospect. It also plans to buy three to five Managed Services Providers (MSPs), which set up and manage cloud infrastructure (infrastructure as a service, in the jargon) for other companies via the internet.
Asked what else RIB would do with the money it had raised, Mr Bording also said the company was “building a new layer on our tech”. Artificial Intelligence also features in the company's plans, he said, where it was “investing in teams of our own, so we have to do that very quickly”.
He also gave the example of opportunity missed with Blue Beam, a software group providing PDF-based workflow solutions to the construction industry, acquired for $100m by Nemetschek in 2014. Had RIB bought it instead, the company could be valued at twice what it is now, he said. .
Such a focus on valuation appears to be another uncommon aspect of RIB's approach. In a recent presentation to investors, for instance, it laid out the maths of how it could be valued as a €2bn company. The slide was clearly marked “no management guidance”:
Raising the money ahead of time isn't necessarily the wrong thing to do, suggesting a Germanic sense of caution, perhaps. Investors might want to exercise a similar level of caution when assessing why a company with lots of cash, wants more.
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US corporate bonds have worst start to year in decades
Negative returns reflect rising interest rates and issuance by weaker borrowers
High-quality US corporate bonds had their worst start to a year in at least two decades, as interest rates rose and companies continued to tap the capital markets in significant numbers.
Investors holding corporate bonds with investment-grade ratings had lost 3.8 per cent by the end of last week, according to ICE BofAML Indices, as the Federal Reserve raised rates and shrank its presence in the bond market.
A reduction in the supply of new corporate bonds, which many had predicted at the start of the year would prop up prices, has not been as sharp as expected this year, because while technology companies retreated, companies with lower credit ratings came to market in their stead.
Without the tailwind of shrinking supply, investors have been hammered by the effects of rising US Treasury yields, said Peter Tchir, head of macro strategy at Academy Securities.
Negative returns have been most pronounced in the highest-grade corporate bonds, which borrow at rates closest to those on risk-free Treasuries and which, because of their longer average maturities, are most sensitive to interest rates.
“The bulk of what’s driving this is the move in interest rates, which has been pretty extreme,” he said. Last week, the 10-year US Treasury yield climbed above 3 per cent to its highest level since 2011. Bond prices move inversely to yields.
High-yield bonds, where trading is less sensitive to rates and more closely tracks perceptions of credit risk, had lost just 0.3 per cent for the year to last Friday.
In investment-grade bonds, credit risk is seen as having declined modestly since the start of the year — although since a nadir in February, when the yield spread over Treasuries reached its lowest in nearly 20 years, spreads have climbed 25 basis points, according to ICE BofAML indices.
With wider spreads and higher Treasury yields coming simultaneously, the 100-day performance of US corporate bonds — that is, returns since mid-February — has been the third worst of any period since 2000, JPMorgan strategists said in a note on Friday.
Spreads have widened in part because there has been a shift in the types of companies selling investment-grade debt to investors.
The tech sector’s bond issuance is down 81 per cent compared to this time last year, according to Dealogic, as changes to US tax law allowed them to tap their offshore cash for activities they would previously fund with borrowing.
But borrowers in the food, beverage, retail and metals industries have all sold at least twice as much debt as they did last year, according to Dealogic. The overall decline in corporate bond issuance year to date — 8 per cent, according to Dealogic — has been smaller than expected.
“Investment-grade issuance has still been fairly aggressive, even though it’s down,” said Max Gokhman, head of asset allocation with Pacific Life Fund Advisors. “We’re definitely concerned about IG.”
The US tax changes have also encouraged tech companies to shrink their pile of bond investments, reducing a potential source of demand for corporate bonds that could counter the price pressure from rising rates and robust supply.
“With only a small . . . decline in supply volumes this year, no wonder the technicals of the high-grade market have been challenging,” wrote Hans Mikkelsen and his team of strategists at Bank of America Merrill Lynch.
Ryanair keen to acquire assets from lossmaking rivals, Norwegian, Alitalia
Ryanair [LON:RYA] is keen to take advantage of any takeover or restructuring deals in the sector which might offer acquisition opportunities, The Irish Independent reported.
Chief executive Michael O’Leary said significant divestments by lossmaking rivals as a result of competition issues are inevitable and Ryanair would be interested.
He named Norwegian Air Shuttle [OSL:NAS] and the collapsed Italian airline Alitalia as potential vendors. Norwegian is understood to be in line for a EUR 1.5bn offer from International Consolidated Airlines Group [LON:IAG], as reported yesterday, 21 May.
O’Leary predicted that rising fuel prices will cause Norwegian to “go bust” before the year end, a claim denied by a spokesperson for the Norway-based carrier, the item reported.
O’Leary also predicted consolidation within the European airline sector will result in only four or five major players, the item reported.