Weibo Corp. (NASDAQ:WB) will likely go private once its parent company, Sina Corp. (NASDAQ:SINA) goes private. This is because Sina has majority control of most of WB stock. Sina’s take-private offer is from the chairman and CEO of Sina, Charles Chao.
It seems highly likely that if Chao’s offer is accepted by the Sina board, the next step for the executive would be to take Weibo private. That could imply he will make a 20% or higher premium offer for the remaining public Weibo stock Sina does not own.
Chao’s New Wave MMVX Limited on July 6 made an all-cash offer for SINA stock at $41 per share. With 68.45 million shares of Sina stock outstanding, the offer is worth $2.8 billion.
But here is what is interesting. Sina’s stake in Weibo shares is worth $3.57 billion, about 27.5% higher than Chao’s $2.8 billion cash offer. Barron’s long-time tech journalist Eric Savitz highlighted this lower than the sum-of-its-parts aspect of the offer. Savitz pointed out that Sina controls 44.9% of the shares of Weibo and 71% of Weibo’s voting rights. Actually page 44 of the company’s 20-F states that Sina owns 44% of Weibo stock and 72% of the voting rights.
Regardless, the point is the same: The Charles Chao/New Wave MMVX offer is a low-ball bid. This is despite the fact that the price offered of $41 per share was 10% or so above the prior trading price of the Sina stock.
Is Cash Raise for WB Stock?
Weibo just raised $750 million in debt that it does not need. Weibo is profitable, including on a free cash flow basis. Moreover, it already has a lot of cash. It does not need the cash raised. Unless, of course, it could be used to eventually pay for the Sina go-private deal.
For example, on March 31, Weibo had $2.34 billion in cash and securities. It also has $2.446 in debt. But more importantly, Weibo made $610 million in free cash flow last year. That represented a 34% FCF margin. In addition, in Q1 Weibo generated $56.3 million in FCF.
In other words, the company does not lose money either on a net income or an FCF basis. Weibo doesn’t need to fund any losses with a higher cash balance. It also does not have a cost of goods sold balance. This is because Weibo sells advertising. It has huge margins.
Here is how that cash could help in the Sina deal or maybe in a WB stock takeover offer. Let’s say that the Chao group has to raise its offer for the remaining shares it does not own. It would borrow the money to do this.
But once it has control of Sina it could then force Weibo to pay a dividend or even just lend the money to the Chao group to pay off its takeover loan. Then, if Chao decides to buy out Weibo, it would do the same thing with the cash on Weibo’s balance sheet.
Same Low-Ball Bid
The blogosphere seems to believe that Charles Chao has every intention of relisting the company in China. That is, after he buys it cheaply from U.S. investors.
For example, they point out that the take-private offer for Sina stock is at 1x sales and well below its $120 previous high. Keep in mind, though, that a special committee of the board of Sina has not yet agreed to the deal. They recently hired Morgan Stanley and legal counsel. I suspect the offer will have to be higher to gain board approval.
Potentially the same low-ball bid might be made for Weibo stock, once Sina is taken private. In fact, if the purpose is to later relist Sina in China it would make no sense to keep Weibo, one of Sina’s main subsidiary, listed in the U.S.
On the other hand here is how things could play out: Chao’s offer for Sina stock might have to be higher than $41. That could potentially force the group to pay a higher price for 40% to 50% % of Weibo’s shares that Chao and Sina own in Weibo.
In other words, the Sina deal could push up the market value of Weibo stock, since investors would be expecting a follow-on offer.