By SHULI REN From Barron’s

A buyout of China’s online ad service for car makers and dealers may be unfair to U.S.investors. Will a Cayman court throw it out?

Autohome, which provides online advertising services for car makers and dealers, is the latest U.S.-listed Chinese company to leave shareholders with few rewards in a management buyout. But investors can at least ask the buyout consortium to raise its offer this time, thanks to a landmark case last August in which a Cayman Islands court backed minority interests. Autohome is incorporated in the Caymans.

This seems a low-ball bid for a fast-growing company. CEO James Qin, along with three Chinese private-equity funds, offered to privatize Autohome (ticker: ATHM) at $31.50 per share, a paltry 4% premium to the previous close. The consortium has only a 3% stake in the company, which has a $3 billion market value.

But there’s intrigue here, too. Less than 12 hours before the offer, China’s Ping An Insurance (2318.Hong Kong) agreed to buy a 47.7% interest from Autohome’s majority shareholder, Australian telecom module article chiclet Telstra (TLS.Australia), at $29.55 a share. Telstra, which bought its stake in Autohome in 2013, wants out and will retain only a 6.3% position. The deal will net Telstra’s new CEO Andy Penn a handsome $1.4 billion capital gain in his first fiscal year ending in June.

THE WHEELING AND DEALING set off speculation that the buyout group will work with Ping An, meaning that minority shareholders will have to take the meager offer. With Ping An, Telstra, Qin, and a co-founder aboard, the buyout group would have about 60% of the votes, not far from the two-thirds majority required under the Cayman Islands laws to take Autohome private.

But Cayman law is changing. Last August, a Caymans judge ruled in favor of minority investors after Integra, a Russian oilfield-services company listed in London but incorporated in the Caymans, proposed a management buyout that minority investors deemed too low. The judge agreed: All investors must receive “fair value.”

Minority shareholders don’t seem to be getting fair value in the current offer. Autohome went public in December 2013 at $17 a share. In the past two years, its earnings per share have almost doubled from $0.77 to $1.47 in 2015. The offer doesn’t reflect that growth.

Autohome’s core business, which connects auto makers and dealers with consumers through advertising and subscription services, remains a cash cow even as China’s auto market slows. Its revenue grew 175% from 1.2 billion yuan ($185 million) in 2013 to CNY3.3 billion in 2015, while its margin was a wide 36%. Bank of America Merrill Lynch estimates that Autohome’s core business can still generate 30% top-line growth this year and 16% next year. The $31.50 a share offer values Autohome’s core unit at only 11 times 2016 earnings, excluding cash.

To be sure, not everyone likes Autohome prospects because of a new, loss-making e-commerce venture that sells cars directly to consumers at paper-thin margins. CLSA, which has an Underperform rating on the stock, says it will cannibalize Autohome’s core business because it now competes with its own clients—the offline dealers.

The outcome of this deal will depend on Ping An. Does the big, acquisitive insurer want to incur reputational risk in making a deal that’s shareholder-unfriendly? Alternatively, Ping An can always spurn the buyout group, leaving Autohome shares on the New York Stock Exchange.

IMAGE: data-module-name=”resp.module.article.BylineAuthorConnect” Photo: Pixabay

For more on this story go to: http://www.barrons.com/articles/buyout-at-chinas-autohome-looks-unfriendly-to-u-s-shareholders-1461386994