By Henny Sender From Financial Times

Hedge funds claim that Bona Film and other groups were worth more when taken private
Earlier this month, the Cayman Islands Grand Court granted a petition on behalf of three funds managed by Hong Kong-based Maso Capital to have Chinese movie distributor Bona Film liquidated.

Bona Film is one of a group of previously US-listed Chinese companies locked in bitter legal struggles in the Cayman Islands over the valuation at which they were taken private.

The buyout of Bona in April last year led by its chairman Yu Yong with several of China’s most powerful investors, including Alibaba and Tencent, valued the company at about $880m. But Maso, which had a stake in the company through its funds, believes Bona should have been worth more than four times that, according to people familiar with the claims.

Bona Film is not an isolated example. There are seven other companies facing Caymans lawsuits from hedge funds that believe they have been taken private at levels far below fair value. Funds such as Maso claim that these companies have been bought with the intention to relist them in China at a much higher price and are seeking to use the Cayman Island courts to compel the companies to pay more to former minority shareholders.

These funds point to companies that have delisted in the US only to re-emerge on Chinese exchanges — including Focus Media, Giant Interactive and Perfect World — at valuations three to five times higher than the price at which they went private.

Maso and its lawyers are seeking a winding up of Bona because they believe it “has made a conscious decision to attempt to put assets out of the reach of the company such that any judgment obtained by petitioners would be worthless”, their petition states. ​

Bona is expected to appeal. “There are a lot of moving parts,” says one person involved in the case. The lawyer from Harneys representing Bona and a lawyer for Maso declined to comment.

Documents seen by the Financial Times from a Chinese investment group aiming to raise money from investors wishing to join Bona’s take-private were upbeat. They state that “after its shares have been relisted on the A share market, it is highly possible that the market value will increase significantly”, suggesting Bona was likely to be worth as much as six times that $880m.

$27bn
Deal value of 21 de-listings of Chinese companies in 2015
But the proxy Bona filed with the SEC about its decision to go private was far more gloomy. It cited “the substantial uncertainty in the nature of the company’s business and rising costs and increasing competition [as well as] a slowdown of the overall economy and the depreciation of the renminbi [as contributing to] a significant negative effect on the valuation of the company”. By going private, “management can improve results without the pressures exerted by the public market”, the document added.

Take-privates are a big market. There were 21 de-listings of Chinese companies in the US with a total deal value of $27bn in 2015, and another 16 worth $6.4bn in 2016, according to Dealogic. Such cases have done little to give reassurance about corporate governance — and the noise around existing disputes is set to intensify in coming months.

The list of deals facing challenges in the Caymans — where Chinese companies have preferred to be incorporated because the law there allows controlling shareholders to vote on delisting proposals — includes Qihoo 360 Technology, E-Commerce China, E-House, Homeinns Hotel and Shanda Games. ​

Internet security firm Qihoo 360, for example, was taken private at a valuation of about $9.3bn. Marketing materials from the fundraising “for the privatisation of Qihoo 360 and return of A shares” seen by the FT state that the return to investors assuming an exit in 2019 “may be as high as 5 [times]” and contain ambitious estimates of future net income and other performance metrics going out to 2019. Minority shareholders, though, say that conversations with Qihoo 360 and its advisers before privatisation suggested that the company’s prospects were not nearly that bright. A spokesperson for Qihoo 360 declined to respond to several email queries.

One reason that virtually any company listing in China immediately soars is that money is being forced to stay home, and there are few attractive investment alternatives. But Chinese companies need to have a consistent message for investors no matter where they are.

IMAGE: Chinese companies are often incorporated in the Caymans where the law lets shareholders vote on delisting proposals © Getty

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