CD - Chindata: All Eyes On Privatization (Rating Upgrade)

2023-08-28 09:16:28 ET

Summary

• Bain Capital intends to privatize Chindata at an offer price of $8.60 per ADS.
• CD boasts a potential annualized return of more than +10%, assuming that the privatization transaction is closed by the end of 2023.
• I raise my rating for CD to a buy, after considering the merits of Chindata as an event-driven or special situations investment.

Elevator Pitch

My investment rating for Chindata Group Holdings Limited ( CD ) shares is a Buy. I previously touched on CD's fiscal 2023 financial outlook and potential corporate actions for the stock with my earlier article written on April 17, 2023.

In the current update, I focus my attention on the potential privatization of Chindata Group's shares, and the return for investors assuming that this privatization deal turns out to be successful. As per my analysis detailed later in this article, investors can possibly achieve a low-teens percentage annualized return in the event of successful privatization of CD, and this is why I have upgraded the stock's rating from a Hold to a Buy.

Chindata Has Agreed To Be Privatized By Bain Capital

Seeking Alpha News reported earlier on August 11 that Chindata "signed an agreement to go private and merge with BCPE Chivalry Bidco's, representing Bain Capital, subsidiary."

Based on data sourced from S&P Capital IQ , private equity firm Bain Capital had a 42% equity interest in CD prior to the privatization deal. Bain Capital plans to purchase Chindata's remaining shares that it doesn't own at a price per ADS (American Depositary Share) of $8.60 as highlighted in CD's August 11 media release . In the company press release, it is also noted that the privatization of Chindata is expected to be concluded in Q4 2023 or Q1 2024.

Reasonably Low Probability Of Successful Competing Privatization Offers

In my opinion, there is a very good chance that Bain Capital will be able to complete the privatization transaction for Chindata.

Bain Capital boasts around 87% of Chindata's voting power thanks to its ownership of the company's Class B shares. In its earlier June 6, 2023 letter addressed to CD's board of directors, Bain Capital had stressed that "Bain shareholders do not intend to sell their stake in the Company to any third party." Separately, Bain Capital also noted in its latest comments in early August that "we believe taking Chindata Group private is the best way" to "secure the long-term success of the company."

This implies that other companies that wish to privatize Chindata will find it challenging to secure Bain Capital's buy-in for their competing privatization offers. As an illustration, Bain Capital hasn't found it necessary to match China Merchants Capital's relatively higher offer price of $9.20 per ADS as per the latter's July 2023 privatization proposal.

Potential Upside And Return Upon Privatization Completion

Chindata last traded at $8.30 as of August 28, 2023. As a comparison, Bain Capital's privatization offer price is $8.60, which translates into a potential return of +3.6%.

In a preceding section of this article, I noted that CD's August 11 press release suggested that the company's privatization deal is projected to be completed by either the final quarter of this year or the first quarter of next year. If one assumes that Chindata's privatization transaction is concluded by the end of 2023, investors focused on special situations could potentially earn an annualized return of +10.8% by buying into CD's stock at current price levels.

Potential Downside Isn't Expected To Be Substantial Assuming That Privatization Fails

In Chindata's August 11 press release, the company highlighted that "shareholders of the Company holding less than 12% of the total issued and outstanding Shares immediately prior to the Effective Time shall have validly served and not withdrawn a notice of objection" is one of the key completion conditions for the privatization.

Assuming a worst-case scenario where Bain Capital's privatization of CD isn't successful due to certain completion conditions (like the one highlighted above) being unmet, Chindata's undemanding valuations could offer some form of downside protection.

Chindata's shares have gone up by +32% from $6.28 as of June 6, 2023 to $8.30 at the end of the August 27, 2023 trading, after Bain Capital submitted an initial privatization proposal to the company. But CD's stock is still attractively valued as compared to its peers.

The consensus forward next twelve months' EV/EBITDA valuation multiples for Chindata, VNET Group, Inc. ( VNET ), and GDS Holdings Limited ( GDS ) are 8.6 times, 7.6 times, and 11.8 times, respectively according to valuation data taken from S&P Capital IQ .

Although Chindata's valuations aren't expensive as compared to its key Chinese data center peers, CD's operating earnings growth outlook is relatively better than VNET and GDS. In specific terms, Chindata's consensus forward FY 2023-2027 EBITDA CAGR forecast is +19.9% (source: S&P Capital IQ ), which is superior to VNET and GDS Holdings' EBITDA CAGR estimates of +15.6% and +14.8%, respectively for the same time period.

In other words, if Bain Capital fails in its attempt to privatize CD, Chindata's shares might still be supported to some extent by its attractive valuations on a peer comparison basis.

Closing Thoughts

Chindata has become a special situation or event-driven investment following the signing of the privatization agreement between the company and private equity firm Bain Capital. Bain Capital's significant equity stake and voting power relating to CD's shares imply that competing privatization offers are less likely to succeed. An investment in Chindata now offers a potential annualized return of more than +10% upon the completion of the privatization by the end of this year (estimate), which warrants a Buy rating for CD.

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