China Said to Block Pricey Reverse Mergers With Valuation Limit

(Bloomberg) -- China’s stock regulator is capping valuations for some reverse mergers, a listing method favored by companies that previously traded overseas, people with knowledge of the matter said.

The China Securities Regulatory Commission decided that reverse mergers involving companies formerly listed on a foreign bourse can’t be valued at more than 20 times forecast profit, according to the people. The valuation is calculated from the listed company’s estimated earnings following the deal, one of the people said, asking not to be identified because the information is private.

Dozens of U.S.-traded Chinese companies including search-engine operator Qihoo 360 Technology Co. and ticket-booking site Qunar Cayman Islands Ltd. have received buyout offers since the start of last year, according to data compiled by Bloomberg. Companies have announced more than $50 billion of such take-private offers during the period, lured by the prospect of relisting at a higher earnings multiple in Shanghai or Shenzhen, the data show.

Regulators have been concerned that the valuations mooted for some backdoor listings were too high and could affect the market’s stability, people with knowledge of the matter said in May. Stocks on China’s exchanges trade at a median 41 times estimated earnings, the Bloomberg-compiled data show.

Listed companies in China announcing a reverse merger transaction typically provide profit forecasts for each of the next three years. Some local investment banks recently received guidance on the new limit, the people said this week. The CSRC hasn’t formally announced the new valuation cap, according to the people.

The regulator didn’t immediately respond to faxed questions.

The CSRC has been limiting the valuations of domestic initial public offerings during the past two years, people with knowledge of the matter said earlier. Since mid-2014, nearly all first-time share sales in China were priced at less than 23 times historic earnings, according to data compiled by Bloomberg.

--With assistance from Tian Chen and Zhang Dingmin To contact Bloomberg News staff for this story: Fox Hu in Hong Kong at fhu7@bloomberg.net, Vinicy Chan in Hong Kong at vchan91@bloomberg.net, Steven Yang in Beijing at kyang74@bloomberg.net. To contact the editors responsible for this story: Ben Scent at bscent@bloomberg.net, Richard Frost at rfrost4@bloomberg.net, Shiyin Chen at schen37@bloomberg.net.

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