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51job Inc: $5.7 billion privatization agreement



(Reading time: 31 minutes)

Key Points

  • 51Job Inc is a US-listed human resource provider operating in Mainland China and offers recruitment services through several websites and applications
  • DCP, a private equity firm, announced a privatization proposal on the 17th of September 2020 in a deal valued at $5.7 billion
  • Since the start of 2021, a record 20 Chinese companies have agreed to similar privatization deals throughout an environment of more stringent Chinese regulations

51job Inc is a leading Chinese human resource provider that serves hundreds of domestic and multinational corporate clients in China. It offers recruitment services through several websites, each with its own mobile application. The company also provides campus recruitment, compliance services, professional training and talent assessment services for corporate clients.

On the 17th of September 2020, an affiliate of the Chinese private equity firm DCP sent a non-binding going-private proposal to 51job, subsequently leading to the formation of a “Special Committee” by the latter’s board three days later in a $5.7 billion deal. The consortium, which made the offer in early May, includes DCP Capital Partners, Ocean Link Partners and 51job’s co-founder and Chief Executive Officer, Rick Yan.

Since the start of 2021, a record 20 Chinese companies have agreed to similar privatisation deals, with a total worth of $20.5 billion. Although it is true that these companies are trying to comply with Chinese increased regulations, there is another reason linked to valuation that might discourage companies from keeping their shares listed in the US.

ChineseAlpha is proud to welcome All M&A as a partner and new contributor. Special thanks to All M&A Founder Ismaël Nadire and his team for the analysis in the Strategic Buyout and Rationale section.

1. The Company

Company Overview

51Job, Inc was founded in 1998 and headquartered in Shanghai, China. It is a leading Chinese human resource provider that leverages technology to deliver an integrated recruitment solution. Currently, it serves hundreds of domestic and multinational corporate clients through 26 Hong Kong and Mainland China offices. It offers online recruitment services for job seekers through several websites, each with its own mobile application. The company is currently seeking to diversify and expand its offering through providing campus recruitment, compliance services, professional training and talent assessment services for corporate clients [1].

Corporate Timeline

Management

2. Qualitative Analysis

To truly understand a business, one must require extensive knowledge of how the company generates revenues and the primary factors that drive its future growth and profitability. Here in this section, our team of analysts will break down complex regulatory, financial and economic concepts for your convenience. Continue reading!

Business Overview

51Job consists of two primary segments, which can be categorised as:

  • online recruitment services
  • other human resource related services

The company generates a majority of revenues from online recruitment services, specifically from employers. However, the company is aiming to diversify its revenues in the long term. For example, the online recruitment service has generated 64.3% of revenues in 2018 and consistently decreased to 61.8% in 2019 and 58.2% in 2020. The push-in diversification is because of the cyclical nature of online recruitment, closely tied to the health and regulations of the Chinese economy and its business environment [1]. These efforts can be observed in the other human resource related services generating 35.7% of revenues in 2018. This segment rose to 41.8% in 2020 [2]. These revenue trends suggest that 51Job has been successful in meeting its long-term goal towards diversification. This ultimately helps reduce systematic (macroeconomic) risk and creates new revenue streams that should translate to sustainable long-term growth.

Online Recruitment Services

This segment refers to the delivery of recruitment advertisements through an online platform. 51Job has a comprehensive portfolio of websites, each with a corresponding mobile application. These sites are exclusively targeted towards the Chinese-speaking workforce and specialise in the different needs of job seekers [3]. This segment generates revenues through charging fees from employers for advertising job opportunities. In addition, some revenue is generated for website design and hosting services for employers to maintain their own dedicated recruitment website within the platforms. Also, premium services are available to job seekers for a fee.

51Job.com is the flagship one-stop platform established in 1999. It is one of China’s most prominent national recruitment websites in terms of recruitment advertisements, registered job user accounts and posted job seeker resumés, with approximately 171 million users and 154 million resumés posted online as of December 31, 2020.

The website primarily targets white-collar workers aged (20-35) and offers various job positions ranging from entry-level to management. The advertisements are updated on an hourly basis which enables quick and timely opportunities for job seekers. On the platform, employers can:

  • post recruitment advertisements, search for job candidates and download resumés;
  • manage, organise and streamline the recruitment process, such as tracking applicant status, establish interview schedules, retain past job postings and maintain candidate folders;
  • place advertising banners, trademarks, logos, website hyperlinks and other forms of advertising to promote their corporate image;
  • communicate with applicants through direct messages, online chat and video interview

Yingjiesheng.com is an online recruitment website focusing on students in China. YJS is uniquely tailored to colleges by disseminating information about application deadlines, on-campus talks, corporate visits and recruitment fairs. In addition, YJS provides an online forum for students to discuss hot topics, facilitating engagement among the user base.

51jingying.com is a platform that connects recruiters with older, more experienced and highly skilled workers. Jingying attempts to address a segment of the Chinese labour traditionally served by local headhunting firms and is largely fragmented. This largely unaddressed market could be a segment of 51Job, which could continue to grow without facing strong competition.

Lagou.com is a recruitment website specialising in technology and engineering in China. Recruitment advertisements target software developers, web designers, systems administrators, data analysts, and project managers. The website addresses a growing demand for workers with the technical skills and expertise required for the technological advancement of the Chinese economy.

51Miduoduo.com focuses on front line workers in the services sector, including sales, customer service and logistics. These jobs are characterised by high turnover rates and flexible employment terms.

Other Human Resource Related Services

This is the growing segment of 51Job and is projected to expand in the future. This is primarily driven by a business ecosystem that is becoming increasingly complex. The revenues are generated from charging B2B service fees.

Business Process Outsourcing is an overarching term for providing direct services to corporate customers. The company receives a monthly fee where compensation is dependent on the complexity of the services offered. These include outsourcing social insurance, benefits and payroll processing and regulatory compliance. This segment is projected to grow as businesses are increasingly seeking third-party services to address administrative functions.

Campus Recruitment deals with the assistance and delivery of recruitment at universities, which generates revenues by charging a fixed fee.

Training consists of providing seminars to the public on behalf of corporate clients. These events are typically classroom-style seminars. However, it also offers outdoor-based and corporate training to promote personal development and team building for employees. The revenues from this segment are generated from attendance fees.

Professional Assessment Tools provides professional assessment tools to assist human resource departments in evaluating the capabilities of job candidates and employees. The business charges a subscription fee based on the number of individuals assessed and the type of tests administered.

Placement and Executive Search is a term for finding high-demand talent and filling urgent job vacancies with specific skills, qualifications, or experience. The business charges a variable fee for identifying prospective candidates and completing new hires.

Salary and Other Human Resource Related Surveys this segment gathers data to analyse compensation and benefits packages across various industries. Human resource departments may use this data to determine salaries and wages. Revenue generation is not stated.

Demand for Human Resource Services

The economic growth of China serves as an important gauge for the development of human resource services. See economic drivers below:

51job is a cyclical company meaning that business operations are sensitive to the health of the Chinese economy. Currently, it is projected that China, by 2028, will become the leading economy in the world [4]. An ageing working population driven by declining birth rates has created an arms race between companies to hire young workers, leading to an increase in demand for recruitment services [5][6][7].

The demand for workers will adapt and change over time due to globalisation alongside the technological developments in China. These trends will require skilled and technically oriented workers with soft skills suitable to the new environment.  Given that 51Job boasts a diversified website portfolio addressing critical segments of the labour market. We believe this is a competitive advantage – allowing the revenues to remain flexible to meet the changing demand for human capital. Below illustrates the historical trend in internet usage in the Chinese population and the growth in users and job resumes posted, which is a primary driver of retaining job seekers and employers on 51Job [8].

Despite the user growth, the number of enterprises registering with 51Job has been decreasing.  According to the latest annual report, the number of enterprises 51Job services are 480,000, 420,000 and 360,000 in the last three years. Despite this, the revenues have remained consistent due to the company’s pricing power.

Economic trends also complement the process outsourcing segment, which is projected to be the main revenue growth driver [1]. This segment is growing because larger enterprises have complex operational structures that demand third-party services in consulting and outsourcing. According to management, the services provided by the segment are at an early stage in China and has low business competition.

A cyclical company is akin to a double-edged sword. It grows and falls with the economy. We have seen adverse effects on 51Job from the economic slowdown and geopolitical uncertainty in 2020 from the COVID-19 pandemic. Employers have responded by spending less on human capital in this environment, leading to record unemployment figures and adverse disruptions to businesses [9].

Inflation

According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for the last three years are 2.3%, 4.3% and 0.4%, respectively. Which are relatively low compared to historical averages are typically favourable for the stock market. An increase in inflation may put the company at risk.

This is due to a substantial portion of assets on the balance sheet consisting of cash, short-term investments, and non-current time deposits. High inflation could significantly reduce purchasing power. Chinese GDP over the last decade was primarily driven by investment and not consumer spending [10]. Inflation in China should likely continue to remain low in the short and medium term. In the long-term, inflation may rise due to more emphasis on a consumer-driven economy resulting from a growing middle class and higher wages [11] [12].

Regulatory Compliance

Through the Cyberspace Administration of China (CAC), the Chinese government has been cracking down on foreign listed Chinese companies that hold large data on citizens citing national security concerns. This started in early July 2021 on the ride-sharing company Didi Chuxing [13]. Two days later, the Chinese government announced more crackdowns on companies that store large data on over 1 million Chinese citizens [14].

Given that 51Job stores, nearly 200 million users and is listed in the US, this company might be a target for data security concerns. Just this year, the “3.15 party” revealed that many recruitment websites, including 51Job, have leaked resumes, resulting in one of its apps being removed from the Chinese app store. This was not the only incident, as, in 2018, almost 2 million resumes were leaked from the platform [15]. 51Job responded by upgrading the resume authorisation process and adding the “who has seen my resume” feature [16]. This may be a vital factor towards 51Job delisting and going private.

51Job may also be a target for anti-trust regulations. Previously, the Chinese government has issued several fines to Tencent, Baidu and Alibaba [18]. As 51Job’s market share continues to expand, the likelihood of regulators stepping in increases [19]. These fines are unlikely for 51Job despite being a market leader, given the intense competition and low barriers of entry to the industry.

In our opinion, 51Job is in an industry that is ultimately favourable to the Chinese government’s long-term ambitions and is likely to experience more regulatory freedom domestically. This statement is supported by subsidies to 51Job granted by the local government to encourage certain enterprises crucial to the business environment. These subsidies include RMB173.8 million, RMB202.4 million and RMB169.8 million in 2018, 2019 and 2020 [1]. Going private ultimately suggests that 51Job is committed to aligning its business operations with government incentives.

Competition

51Job competitors are other dedicated online recruitment businesses, primarily zhaopin.com and zhipin.com, operating in the same segments as 51Job.com. The online recruitment market appears to be fat-tailed, with Zhaopin and 51Job taking a significant market share in China compared to its smaller counterparts Zhipin, Liepin and LinkedIn. Below illustrates the number of registered users and job resumes posted on rival websites. 51job.com is the second-best in terms of registered users. However, it has the best engagement and retention in job resumes compared to its competitors [20]

Future competition may arise from well-established search engines and internet portals, including 58.com, baidu.com, and.qq.com, which provide recruitment advertising in China and are much more diversified in their product offers.  Furthermore, due to low entry barriers in human resource advertising, characterised by low start-up costs, capital requirements, start-up times and the absence of proprietary technology, potential market entrants may quickly acquire customers and individual users within a short period [1].

On the other hand, according to management, the business process outsourcing services market is at an early developmental stage in China. The key competitors are service agencies affiliated with or sponsored by local government, human resources, and social security bureaus. For campus recruitment services, 51Job generally face competitors that also provide online recruitment services. In the training services market, competition comes from local training firms or individual trainers.

3. Quantitative Analysis

At ChineseAlpha, we want our readers to have the best quality reading experience to make the best investment decisions. Continue reading, and we will break down the financial statements (income statement, balance sheet, cash flow statement) and valuation metrics for your ease.

Revenues have grown from 2018 to 2019, with a drop in 2020 due to the impact of the COVID-19 pandemic. Revenue growth is primarily driven by increasing pricing in the online recruitment services, as the number of enterprises serviced has consistently decreased during the same period, as highlighted in the qualitative section.

Another driver in revenue growth is the shift in revenue share towards other human resource services, which has seen consistent growth since 2018 from 35.7% to 41.8% in 2020. This suggests that the company is nearing a pivot point in the types of services it focuses on. This is positive news as the company is diversifying away risk and creating an alternative revenue stream.

The gross margin (revenues – the cost of goods sold) has consistently decreased from 72.5% to 67.1% during the last 3 years. This suggests that COGS growth has outpaced revenues, which means that the company is becoming less efficient over time. This is due to higher salaries, headcount, and direct costs associated with the campus recruitment business. Therefore, this rise in COGS is directly a result of the shift in revenues towards the business outsourcing segment.

The operating margin (Operating Profit / Revenues) has decreased consistently for the last 3 years, suggesting that the operating activities are becoming more costly. This is due to the company’s emphasis on advertising and promotion expenses, which increased by 34.7% in 2020. This may suggest that the company is quietly confident in its long-term brand value in an industry becoming more competitive.

Net profit margin has been volatile in the last 3-years, 33.1%, 13.3%, 29.7%, respectively. To closer inspect profitability, we look at ROA, ROC, ROE to see business efficiency. From 2018 to 2020, all three profitability indicators have consistently decreased, suggesting worsening financial health. Overall, despite having positive growth and income, the company is facing reduced margins and profitability ratios, which is not suitable for the company’s long-term prospects.

What is particularly striking is the increase in cash and equivalents from 2018 to 2020, which has nearly doubled. This suggests that the company has improved its liquidity position. The rise in cash in 2020 is likely a response to the COVID-19 pandemic, where during times of uncertainty, cash is king. This can be highlighted by an increase in the quick ratio (A measure of a company’s ability to pay short-term obligations) from 2.2x to 4.1x during the period. Alternatively, the rise in cash could be strategic in preparation for a significant acquisition or deal. Some analysts argue that holding onto too much cash is a negative sign, suggesting that the company cannot find an efficient way to allocate its capital (stagnated). Also, a high cash balance exposes the business to inflation, where cash could lose its purchasing power.

Interestingly, long-term investments during the period tripled, showing aggressive allocation in capital expenditures, highlighting the company’s long-term ambitions, which is very positive for Investors. The capital expenditures were primarily for the purchases of computers, servers, office equipment, furnishings, software, and the purchases of office space. In 2018, the company paid RMB 57.4 million for 1,615 square meters of office space in Shanghai to accommodate its growing business operation. In the same year, 51Job entered into an agreement to acquire intangible assets, including an online audio/video transmission license for RMB 89.8 million. In May 2021, the company announced a $334 million agreement to purchase a 32,400 square meters complex in the Qiantan area of Pudong District as the new headquarters. This deal is primarily financed using a mixture of cash reserves and debt financing [21]. This is an intelligent decision by the company, given their high cash reserves and low debt. This move should lower its cost of capital (cost of raising money) by strategically raising debt.

To analyse the balance sheet in detail, we look into the asset turnover ratios (Fixed Asset and Accounts Receivable), a measure of how efficient a company makes a profit during the period. Unfortunately, these ratios are decreasing, showing worse profitability. This is supported by the Average Days (Sales) Outstanding, which is consistently increasing, suggesting that it takes longer for a company to collect payments following a sale which is bad for business. On the other hand, the Average Days (Payable) Outstanding is increasing, meaning the company is taking longer to pay its bill, which is good for business. This is because certain cash now is better than uncertain cash later [22] and suggests that 51Job has bargaining power with its debtors to defer payments. Lastly, there were a substantial decrease in long term solvency (%) indicators as the company paid off most of its debt in 2018. This is good for the survival prospects of the company in a worst-case scenario. Overall, this is a good balance.

The decrease in 2020 in cash flows from operating was primarily due to the impact of the COVID-19 pandemic, and the reduction in 2019 is due to weak macroeconomic conditions. On the other hand, the outflow in capital expenditures has decreased in the last 3 years. This is due to large acquisitions in 2018 in office spaces and intangible assets, resulting in less spending in later years. To date, the company has primarily financed its operations through cash flows from operating activities and cash on the balance sheet. These factors indicate a business with long-term sustainability into the foreseeable future. Overall given the circumstances, this is a good cash flow statement.

Valuation

We will take you through each phase of the Discounted Cash Flow Model (DCF) and provide our assumptions. Our analyst selected the DCF Multiple Exit model, where the driver of value is based on the forecasted cash flow of the company alongside the pricing of similar businesses in the market. Furthermore, our analyst extent the growth period for 10 years, which reduces ‘valuation drag’ the reliance of the intrinsic value on the terminal value.

Step 1: Calculate the Weighted Cost of Capital (WACC)

Cost of Equity (CAPM)

51Job is a Chinese business despite being listed on the NASDAQ, where the company conducts its operations. We will factor in the value of a “bottom-up levered beta”, which is the volatility (risk) of a stock compared to similar businesses within an industry alongside a regression beta – The risk of a stock compared to the risk of the market.

Using the Capital Asset Pricing Model (CAPM) the inputs used is as follows:

10-Year Risk-Free Rate = 2.73% (10-year China Government Debt) – Capital IQ

Damodaran Equity Risk Premium = 5.40% [23]

Country Risk Premium = 0.68%

Beta = 0.879% – Capital IQ

Plugging these figures into the equation:

Cost of Equity = Risk Free Rate + Beta * (Equity Risk Premium) + Country Risk Premium 

Cost of Equity = 8.1566%

Cost of Debt (Synthetic Credit Rating Approach)

51Job doesn’t have an official credit rating; therefore, calculating its interest coverage ratio (EBIT/Interest Expense) can create a ‘synthetic’ credit rating using professor Aswath Damodaran’s lookup table.

Interest Coverage Ratio = 867.1

Credit Rating = Aaa/AAA [24]

Default Spread (Aaa/AAA) = 0.63%

Country Default Spread (China) = 0.63% [23]

Average Corporation Tax (China) = 25% – 2021 PWC Tax Report [25] 

10-Year Risk-Free Rate = 2.73% (10-year China Government Debt) – Capital IQ

Plugging these figures into the equation:

Cost of Debt = (Risk-Free Rate + Default Spread + Country Default Spread) x (1-T)

Cost of Debt = 2.745%

Weighted Average Cost of Capital (Discount Rate)

Total Debt = Current Debt + Long Term Portion of Debt + Current Leases + Long Term Leases + Short Term Borrowings

Market Equity Value = Diluted Shares Outstanding x Current Share Price 

Weight of Debt = 0%

Weight of Equity = 100%

Weight of Preferred Shares = 0%

WACC = 8.1566%

Discounted Cash Flow Analysis

Using 3-year historical financial statements and forecasts up to 2023 provided by Capital IQ. We extend the forecast period to 2032. We use conservative assumptions provided by the management and discussion section of the latest financial statement, our internal team and partners. Our analyst used the XNPV function (XNPV = Discounted rate, cash flow, date) with midpoint discounting alongside the year fraction to ensure cash flows are discounted appropriately according to the fiscal year-end date. We use a 2.73% perpetuity growth rate, which is appropriate as 51Job should be nearing maturity in ten years and is in line with the 10-year risk-free rate of 2.73%, which is a reliable proxy to estimate the future growth of an economy and should produce conservative assumptions.

Base case – $80.02

The base case is the most probable course of action of the growth and operations of a company as predicted by our analysts.

  • Implies 7.8% CAGR from 2021 to 2025
  • CAGR of 3.6% to 2031 

According to the base case, the acquisition price is at a fair value to its intrinsic value. Furthermore, by testing this assumption using the sensitivity analysis, which is a model that tests out the inputs of a model in case our analysts misjudged the values. Its fair value should be in-between and $67.15 and $92.13 per share.

Grey sky case – $75.31

The grey-sky case is an alternative assumption that there is a worse than expected outlook for the growth and operations of a company.

  • Implies 7.2% CAGR from 2021 to 2025
  • CAGR of 3.4% to 2031 

Blue sky case – $84.25

The blue-sky case is an alternative assumption that there is a better-than-expected outlook for the growth and operations of a company.

  • Implies 8.6% CAGR from 2021 to 2025
  • CAGR of 5.2% to 2031

4. Strategic Buyout and Rationale

ChineseAlpha is proud to welcome All M&A as a partner and new contributor. Special thanks to All M&A Founder Ismaël Nadire and his team for the analysis in the strategic buyout and rationale section.

In this section, we will analyse the agreed privatisation deal of 51job.

On the 17th of September 2020, an affiliate of the Chinese private equity firm DCP sent a non-binding going-private proposal to 51job, subsequently leading to the formation of a “Special Committee” by the latter’s board three days later. This committee was formed of independent and disinterested directors with the role to assess the viability of the proposal. On the 21st of June 2021, and after months of analysis and deliberation, the committee – with each of its member being paid $50,000 every month during this period – unanimously recommended the $5.7bn privatisation to the board, which then in turn unanimously recommended it to the shareholders.

We will first cover the structure of the deal and its financial technicalities. The consortium of investors led by DCP will utilise a reverse triangular merger method to complete the privatisation. In practice, this means that a Cayman Islands based subsidiary created by the consortium for the purpose of this transaction, and named “Garnet Faith Limited”, will acquire 51job, before then being absorbed and terminated after the merger is complete for a fee of $80 million.  Since the consortium will be the owner of the merger subsidiary, they will then become the sole owners of the newly private 51job – with the latter not changing its operational structure.

Although this might seem like a complicated and odd choice at first glance, it has been well thought through by the board, and has been in preparation for the past year. A reverse triangular merger permits the acquiring firm to gain control of the target’s non-transferable assets, such as contracts with governmental agencies, which is often a hard task when using other acquisition methods. The main downside is that the acquirer takes responsibility of all the liabilities of the company it will acquire because of the pure stock transaction nature. However, in 51job’s case, it has contracts and links with the Chinese government and other collaborators, which it deemed important to the point where it wanted to prepare in advance for such a transaction – indeed, as mentioned in the balance sheet analysis, the company does not hold any debt and has minimal liabilities.

Before going into more details about the transaction, it’s important to understand who the consortium is formed of, and how much control over the company it had prior the transaction. Here are the main actors:

  • Rick Yan, the current CEO of 51job – 16.60% control over the company.
  • Recruit Holdings, a Japanese human resources company similar to 51job in terms of its operations – 32.7% control over the company.
  • Kathleen Chien, the current COO and acting CFO of 51job – 2.0% control over the company.
  • DCP Capital, the Chinese private equity firm leading the transaction – 0% of control over the company.
  • Ocean Link, another Chinese private equity firm, focused on TMT – 0% control over the company.
  • LLW Holding, a shell company owned by undisclosed management members – 0.4% control over the company.

The following chart summarises the global ownership of the company prior to the transaction.

Per the date of the latest Proxy Statement, the members of the consortium and their affiliates own a total of 38,797,172 common shares, representing approximately 56.1% of the total issued and outstanding shares. This means that to gain control over the company, they would need to purchase the roughly 44% remaining, which equates to $2.6 billion.

We have conducted a basic modelling of the transaction in order to bring clarity to the LBO process, and to get an idea of the return rate the members of the consortium can expect.

The $79.05 per share offer, valuing 51job’s equity at roughly $5.7 billion, represents a 28.89% premium over the $61.33 the stock was trading at prior to the announcement. Because of 51job’s odd capital structure – simply put, because of their cash hoarding and reluctance to use debt (which can be explained by their preparation for this reverse triangular merger) – we are in the odd situation where the enterprise value is lower (and so by a significant amount) than the equity value. Although it might not initially make sense, the formula for enterprise value is:

Enterprise Value = Equity Value + Net Debt.

With Net Debt being

Net Debt = Debt – Cash and Equivalents.

Because 51job does not have any debt and has a lot of cash, the net debt is negative, thus leading to a lower enterprise value than equity value.

On the right, we have listed a few multiples in line with the management’s predictions – which are quite arbitrary, especially when looking at the line items as you will see later on – with the goal to obtain a similar internal rate of return as the one they might have based their judgment upon.

By the nature of a leveraged buyout, a mix of equity and debt (with a distinguished preference on debt) is used to fund the acquisition, therefore it is key to understand where the funds of the transaction come from, and what their use will be.

This part of the model is quite self-explanatory, with a detailed account of the different debt facilities the company will use, and of the different providers of equity. It is important to note that both RY Entities and 51 Elevate are shell companies owned by the CEO Rick Yan, and that RY Entities obtained a $450 million loan from a Chinese bank in order to fund this equity. This loan is however not considered in the debt funding because the debt isn’t attributed to the merger subsidiary.

The key takeaway here is the structure of the financing: roughly 70% of the funds will come from debt, and 30% from equity.

We now take into consideration the management’s predictions and adjust every line item that appears in the financial statements which might be affected by the structure of the LBO. It is important to note that since the management’s predictions were made with the buyout in mind (it is not usual for a company to have public 5-year predictions, and even less so for specific revenue related line items), we will not make suppositions regarding the increase in revenue and efficiency that comes with a new private equity owner.

The aim here is to predict the cash flow after all the adjustments related to the new capital structure, in order to predict how much cash will be available to the company and therefore determine its exit valuation. The calculation for cash flow is pretty standard here, it is obtained by following the same procedure as on the cash flow statement: starting from net income, adding back noncash expenses and adjusting for other items such as change in net working capital.

This step is about understanding how repayment of debt will be handled over time by the company. The details of each debt tranche have been provided in the latest Proxy Statement. Both China Merchants Bank and Shangai Pudong Development Bank have agreed to underwrite the debt for 51job, for a total amount of $1.825bn. The debt comes in three tranches:

  • Senior Term Loan Facility
    • Amount: $500 million
    • Interest Rate: LIBOR plus 2.20%
    • Maturity: 7 years
    • Amortisation: Semi-annual instalments starting from 42 months following the initial utilisation
  • Cash Bridge Facility A
    • Amount: $1.1 billion
    • Interest Rate: LIBOR plus 1.75%
    • Maturity: 36 months with a possible 12-month extension
    • Amortisation: To be repaid in full upon maturity
  • Cash Bridge Facility B
    • Amount: $220 million
    • Interest Rate: LIBOR plus 1.95%
    • Maturity: 36 months with a possible 12-month extension
    • Amortisation: To be repaid in full upon maturity

Because of their nature, the Cash Bridge Facilities will only cost in terms of interests and not in terms of mandatory repayments. Indeed, they represent a subsidiary for immediate funds, and the company will have to balance them with its operations. Therefore, the costs recorded are on the final period as interests in our predictions, because that will be the first period for which the 48 months maturity will have passed.

The senior term loan will have a mandatory repayment after 42 months, which is taken into account on the ‘2025P’ column as well.

Now, we enter the final stage in terms of valuation of the investment: the return calculation. We assume an exit on the last day of each year for simplicity of calculation. The key assumption in this section is the Exit EBITDA Multiple value. We have taken 11.2x from the management predictions from 2025, however, we haven’t followed their predictions for the previous years as they were simply too volatile; instead, we added a net multiple point for each year going backwards. This still yields somewhat weird results for the mid years IRRs because they should be lower than the final year IRR, but the inconsistent nature of the predictions makes this mid-process data irrelevant.

Instead, we should focus on the 2025P IRR value, which represents the 5-year return on equity for the sponsors. With the 11.2x multiple assumption, we obtain a 21.4% 5-year IRR, which is somewhat above what private equity firms expect from leveraged buyouts, especially when ‘only’ financed with 70% of debt.

To obtain the IRR, we derived the equity value from the enterprise value yielded by our exit EBITDA Multiple choice, and then took 45% of that in order to represent the return on the equity not previously owned (because the consortium already owned roughly 55% pre-transaction). From there, we utilise the XIRR function in Excel to sum the cash flows and adjust for the years, giving us our desired figure.

Because the EBITDA Exit Multiple is key to this valuation, we have modelled its impact on the IRR and MOIC:

Naturally, as the EBITDA Exit Multiple increases, the implied enterprise value increases, and so do the equity value and return metrics.

This table and graph are useful to give an idea of how much management improvements, which can lead to higher enterprise value, can have a huge impact on the return for the sponsors. For illustrative purposes, one point increase in the exit multiple equates roughly to $300 million on the equity valuation of the company.

Now, we will take a look at the specific return and stake evolution for each member of the consortium. Although the consortium agreed to purchase the company as a whole, their stakes have not been divided equally.

The CEO Rick Yan would see an increase of an over $1 billion on the cash he initially invested, with his company stake increasing to $1.8 billion, thus becoming the largest shareholder of the newly private 51job.

Regarding what will happen in the future with regards to the company structure, the board and the operations will stay the same – at least the management claims so – and the company will keep functioning like before. The only accounting consideration the company must make post-deal is to ensure that $80 million are available on US denominated banks for the termination fee of the merger subsidiary, and the equivalent of $1.4 million in RMB are available for the debt-financing agreements.

Now, we will study the deal from a strategic standpoint. Although there won’t be as much to get into because, by nature of this deal, the true drivers are quite secretive, and one can guess that they are largely related to the recent Chinese crackdown on tech companies – even if the management will assure its shareholders otherwise.

We have identified three key strategic rationales for this deal:

  1. An attempt to align the company’s operations with recent government incentives to reduce regulator action – as elaborated upon in the “Regulatory compliance” section;
  2. A particularly interesting Chinese private equity landscape which is promising good returns;
  3. A somewhat poor trading performance for the US-listing, and the potential for a Chinese listing.

The first reason is covered in the Regulatory compliance section, so we will focus on the second and third reasons.

The Chinese private equity landscape has been rapidly expanding, which shouldn’t come as a surprise considering the global performance of private equity in conjunction with the growth of the Chinese economy. The main hurdle standing in between China’s private equity companies and an even more successful flurry of buyouts is the poor state of the country’s corporate debt market. The CCP has publicly recognised this issue and is on a mission to empower private enterprises, with state-owned banks such as the People’s Bank of China lowering the reserve ratio and freeing up funds for private companies. A lot of the Chinese private equity firms have been sitting on large amounts of cash and equivalents in recent months, with DCP being the prime example with $446 billion in so-called ‘dry powder’ – highlighting their operational capability to participate in flagship deals.

Despite debt concerns, the Asia-Pacific private equity landscape has performed reasonably well, although with noticeable room for improvement (according to a recently published Bain report). The deal count has reached an all-time high in 2020 with 185 completed deals, most of which in China.  Also, the PE industry in China is expected to manage over $6 trillion in assets by 2025, according to data provider Preqin. Technology deals, in particular, have been showing good returns, with EV/EBITDA multiples higher than most other industries and compromising of 42% of deals in the Asia-Pacific region. It is interesting to note that the average for EV/EBITDA exit multiples is at 11.7x, remarkable close to our multiple, although our IRR is higher than the region average.

Since the start of 2021, a record 20 Chinese companies have agreed to similar privatisation deals, with a total worth of $20.5 billion. Although it is true that these companies are trying to comply with Chinese increased regulations, there is another reason linked to valuation that might discourage companies from keeping their shares listed in the US. Indeed, Marcia Ellis, global chair of private equity group at law firm Morrison & Foerster stated that, “a lot of the China-related companies that are listed in the US suffer a sort of China discount, for various reasons”. She thinks “that a lot of these people think if their company were listed in Hong Kong or in China, they would have a much higher valuation”.

A good example of this process is Semiconductor Manufacturing International Corporation, one of China’s largest chipmakers, who decided to delist in the US to move to the Beijing exchange, with a 200% share price increase on its initial trading day.

To conclude, there could be numerous reasons for which 51job might want to go private, however, there is probably little doubt in most people’s minds as to which of these three reasons was the true gamechanger.


Disclaimer: Our content is intended to be used solely for informational and educational purposes, and not as investment advice. Always do your research and consider your personal circumstances before making investment decisions. ChineseAlpha nor All M&A is not liable for any losses that may arise from relying on information provided.



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