I have withdrawn the privatization proposal. Given the current market environment, maintaining Century Internet's listing status is more in line with the company's long-term interests. With the announcement of founder and chairman Chen Sheng, the highly anticipated privatization outcome of Century Internet (VNET. US) has been officially finalized.
21Vianet is the first US stock IDC (Internet Data Center) listed company in China. Together with Wanguo Data and Qinhuai Data (which has been privatized and delisted), it is regarded as the "three golden flowers" in the field of overseas listed independent data center operation services. The withdrawal of this privatization offer means that Century Internet's next step of returning to A or listing in Hong Kong will be substantially shelved.
Securities Times reporters have learned from multiple sources that behind the privatization of Century Internet, there are hidden setbacks in Chen Sheng's personal fund liquidity. Between the constraints of funds and the ups and downs of "bomb disposal", many well-known market participants have been connected, including Qidi Holdings, which has exploded in debt, and Shandong State owned Assets, which has laid out its digital industry.
Several people close to Chen Sheng confirmed to Securities Times reporters that his personal debt problem has been temporarily resolved, and the complete cycle of "relieving the original shareholders - announcing privatization - personal predicament - successfully dismantling the bomb" has been completed. The debt crisis of Century Internet and its founders has enlightening significance for the market - listed companies may find some kind of mirror in many aspects such as equity relief, privatization operation, and mixed ownership reform.
Withdraw privatization offer
In mid July, Century Internet announced that the special committee of the company's board of directors had received a letter from Chen Sheng. As the founder, co chairman, and interim CEO of Century Internet, Chen Sheng has decided not to proceed with his preliminary non binding proposal to acquire all of the company's issued common shares, which he proposed in September 2022, and will immediately withdraw the proposal. This means that the privatization and delisting of Century Internet, which lasted for nearly two years, has officially come to an end.
Century Internet stated that in view of Chen Sheng's withdrawal of the founder's proposal and the lack of substantial progress regarding any other potential privatization or similar transactions of the company (including the preliminary non binding proposal received in April 2022 from Hanergy Investment Group and Industrial Bank Co., Ltd. Shanghai Branch to acquire all issued shares of the company), the special committee has decided to cease further evaluation of any potential transactions at this time and recommends that the board of directors dissolve the special committee. The board of directors approves the dissolution of the special committee.
The privatization operation of Century Internet began two years ago. At that time, Chen Sheng planned to acquire all the issued common shares of Century Internet at a price of $8.2 per ADS (American Depositary Shares); At that time, the company's stock price was around $6. Preliminary estimates suggest that the privatization will cost Century Internet approximately 1.2 billion US dollars (about 8.5 billion RMB).
Among the "Three Golden Flowers" of IDC in the US stock market, Century Internet has the oldest seniority. As a computing power backbone, "data center" is a common term; The concept and business model of "data center" originated from Century Internet. Afterwards, it developed into the only IDC leading enterprise in the Chinese IDC market that developed synchronously with the dual engines of "ultra large scale customization+new generation retail". The company's stock price reached a peak of $44 per share in 2021.
However, in the face of the sell-off of Chinese concept stocks at that time, industry qualifications and fundamentals could not change the market's value reassessment. Compared to Wanguo Data and Qinhuai Data, Century Internet has been undervalued by secondary market capital, which Chen Sheng believes is a good opportunity for privatization. A person close to Chen Sheng revealed to a Securities Times reporter that at the time, Chen Sheng's judgment was that in the highly uncertain global environment, once privatization was completed, it would help the company "liberate" from the short-term profit driven business cycle and assist in transformation.
In order to promote privatization, Century Internet has also established a special committee composed of three independent directors to evaluate the suggestions received from the founder's assessment and other potential strategic choices. Two years later, the special committee was officially dissolved.
A Beijing investment banker told a Securities Times reporter that one of the directions for the privatization of Century Internet is to return to Hong Kong or go public on the A-share market. Previously, companies of the same type in the domestic A-share or Hong Kong stock markets had much higher P/E ratios than in the US stock market, and were more active. Therefore, Chinese concept stocks have the incentive to undergo privatization and secondary listing. Of course, simultaneous listing on two or more exchanges is also an option
What impact does the failure to privatize this time have on the company? Wang Qiyu, Chief Financial Officer of Century Internet Group, believes in an interview with Securities Times that privatization is a systematic project, and secondary securitization is a key issue that needs to be considered. At present, the company's debt indicators, cash flow and other financial performance are very good, but how to conduct a second IPO after privatization? From our judgment, companies with VIE structure have great uncertainty in A-share listing; The liquidity issues faced by listing in Hong Kong in the past two years are also quite obvious
As of December 2023, Century Internet's cash and cash equivalents exceeded 2.2 billion yuan; The total current assets exceeded 9.8 billion yuan, setting a new high for many years.
In Wang Qiyu's view, on the balance between maintaining listing status and privatization, the former is more meaningful for the development of Century Internet. On the one hand, retaining the listing status means having the ability to raise funds in the capital market and is conducive to implementing equity incentives and other measures to attract talent. In addition, it also includes the support of the listing status for the company's brand, influence, and attention in business expansion. If there is a more certain expectation of going public on A-shares or Hong Kong stocks, and the valuation of the US stock is still unsatisfactory at that time, then initiating privatization is a more rational choice for Century Internet
From Relief to 'Self Difficulty'
The reporter learned from multiple sources that behind the failure of privatizing Century Internet, there is a parallel hidden thread - Chen Sheng once fell into a liquidity dilemma, and one of the reasons behind it is related to the explosion of "Tsinghua series" Qidi Holdings.
Prior to 2016, Chen Sheng and the "Lei Jun Group" (including entities such as Kingsoft and Xiaomi) were joint controlling shareholders of Century Internet. Later, through the issuance of new shares, Qidi Holdings was introduced as a new controlling shareholder, with Qidi Holdings holding over 50% of the voting rights at one point. However, since 2020, Qidi Holdings has experienced a huge funding gap and a decline in debt repayment ability, ultimately leading to debt defaults.
In 2021, Qidi Holdings defaulted substantially due to unpaid interest on two bonds totaling $950 million; The following year, Qidi Holdings announced another default on its US dollar bonds.
A person close to Qidi Holdings told reporters that at that time, Century Internet introduced Qidi Holdings with state-owned enterprise and university backgrounds in order to have endorsement support, further consolidate business development, and embrace opportunities in the digital economy. Afterwards, due to its own business crisis and enormous financial pressure, Qidi Group had to choose to monetize after controlling Century Internet for two or three years.
According to the timeline, before and after the explosion of Qidi Holdings, Century Internet announced the repurchase of 48.63 million shares of the company's Class B common stock from Qidi Holdings for a total consideration of approximately $260 million, at a repurchase price of approximately $5.346 per common share or $32.076 per ADS. After the repurchase was completed, Qidi Holdings' voting rights in Century Internet decreased to below 5%. It is reported that Qidi still faces a funding gap after realizing most of its equity in Century Internet, which ultimately led to a default later on.
As the founder, Chen Sheng chose to step in to alleviate the situation by using the Century Internet stocks held by his personal subsidiary as collateral, and borrowing all the money to acquire the Century Internet stocks held by Qidi Holdings.
According to sources close to Chen Sheng, at that time, Chen Sheng, along with his wholly-owned subsidiary, signed a loan agreement with Bold Ally (Cayman) Limited, an investment institution within the Ares Capital system, for a total amount of 50.25 million US dollars. The loan term was one year, and conditional extension terms were explicitly agreed upon in the agreement.
Regarding the reason for Chen Sheng's intervention to alleviate the situation, Wang Qiyu explained to the reporter that on the one hand, it is based on Chen Sheng's persistence in long termism, his confidence in the company's development, and his sense of responsibility; On the other hand, it is based on the alumni relationship of Chen Sheng and Qidi Department, both of whom belong to the "Tsinghua" background of entrepreneurs. At that time, Chen Sheng chose to do his best to provide assistance to Qidi Holdings. As a result, he acquired shares through personal loans, ultimately stabilizing the company's governance structure and boosting market confidence
However, this attempt to alleviate difficulties went smoothly. Since 2021, the capital market has been affected by various factors such as the Federal Reserve's tightening, global economic downturn, and the audit regulatory turmoil between China and the United States, leading to a significant pullback in Chinese concept stocks. The market value of Century Internet closed down 70% for the whole year of 2021.
This directly triggered Chen Sheng's equity pledge crisis. In February 2023, in the event that the collateral cannot cover the principal and interest of the loan, the lender stated that they will exercise the right to dispose of the collateral and sell it in the public market or private equity transactions. This quickly triggered a chain reaction, with one manifestation being the further decline in the stock price of Century Internet. Especially for Chen Sheng, who has a high proportion of equity pledge, it is more like going from relief to "self distress".
When the stock price is high, the leverage ratio of equity pledge is not large; but after the significant decline in Century Internet's stock price, this leverage has been greatly increased, "said the aforementioned Beijing investment banker.
Why does Chen Sheng prefer equity pledge? Wang Qiyu introduced, "Unlike many private entrepreneurs who have been actively involved in data center business, Mr. Chen Sheng has been focusing on it for many years. His core assets, apart from the equity of Century Internet, have nothing else. In terms of borrowing, he can only pledge the equity of Century Internet; during the decline in stock prices, he can only continue to replenish the pledge. However, this round of killing was too fierce, and the stocks that were ultimately replenished were not enough. Chen Sheng personally defaulted on tens of millions of dollars in debt
The White Knight "Bomb Disposal"
Two years later, Chen Sheng's liquidity dilemma finally turned around.
On July 8th of this year, Century Internet announced the refinancing progress of the margin loan provided by Bold Ally (Cayman) Limited to Chen Sheng. According to the announcement, Chen Sheng obtained the loan around August 2021 to purchase over 17.14 million Class A common shares from another important shareholder at the time. The loan was secured by Chen Sheng's common shares in the company.
According to the clues provided by the aforementioned insiders, the "other important shareholder" refers to Qidi Holdings.
According to the aforementioned announcement, with reference to SEC Schedule 13d Amendment No. 8 submitted by Chen Sheng on July 8, 2024, Chen Sheng and all entities wholly owned by him as debtors have settled all their obligations under the Bold Ally loan. The funds for this settlement come from Chen Sheng's existing cash reserves and loans from friendly institutions.
Due to the settlement of the Bold Ally loan, in accordance with the commitment contract disclosed in the Amendment 3D, all collateral for the Bold Ally loan has been released, and Chen Sheng has restored his beneficial ownership of nearly 33.63 million Class A common shares of Century Internet.
Regarding this, the reporter sought more clues from Wang Qiyu for verification. He responded to reporters by saying, "Chen Sheng is the pioneer of China's IDC industry and an absolute long-term fighter. For thirty years, he has only focused on the data center industry, crossing the three cycles of the data center industry and continuously leading the transformation and innovation of China's IDC industry. He works almost year-round, which has touched investors. Every time he encounters difficulties or crises, there are always' white knights' who come to help
The phased resolution of Chen Sheng's personal debt problem is beneficial for easing the selling pressure on Century Internet's stock price. Wang Qiyu introduced that Chen Sheng repaid his personal debt owed to Ares Capital by replacing the loan that was originally in the process of being disposed of as collateral by the lender with a three-year note from a friendly investment institution. The amount after the replacement was also significantly reduced, and the friendly investment institution changed Chen Sheng's stock holdings from equity transfer to ordinary equity mortgage, returning Chen Sheng's stock holdings. This is equivalent to releasing selling pressure.
Is there a connection between Chen Sheng's liquidity dilemma and the grounding of Century Internet's privatization?
Wang Qiyu denied this. Looking at the privatization operations of the US stock market, the vast majority require the backing of large conglomerates. This process is often accompanied by performance betting. Saying goodbye to the privatization path also avoids the huge debt problems of founders associated with privatization cases such as Wanda Commercial Management. However, we still believe that the company's stock price is significantly undervalued at present. With the resolution of Chen Sheng's personal debt problem and the improvement of the company's performance in the future, we have great confidence in the company's future performance
From relief to self pitfall, and then to successful bomb disposal, it's like riding a roller coaster.
The person close to Chen Sheng mentioned to reporters that someone asked him afterwards, "If I had known when I took over Qidi's shares that the stock price of Century Internet would plummet to around $2 per share, what decision would I have made?" Chen Sheng's answer was, "I may be very conflicted, but I will still take over the relevant equity held by Qidi
A different kind of mixed modification
What remains unchanged is that Century Internet still remains in the US stock market; What has changed is that it has acquired a new state-owned enterprise gene.
At the end of 2023, a subsidiary of Shan Gao Holdings (00412. HK), which is listed on the Hong Kong Stock Exchange, signed a $299 million equity investment agreement with Century Internet, making Shan Gao Holdings the largest institutional investor and strategic investor in Century Internet. Shangao Holdings is an important overseas investment and financing platform and emerging industry holding platform for Shandong Expressway Group, while Century Internet has transformed into a mixed ownership enterprise.
It is worth noting that in 2022, Shangao Holdings increased its capital by billions of yuan to control Beikong Clean Energy, adopting a "consolidated investment" model. And for the investment in Century Internet, although it is also a strategic investor, holding about 42% of the company's total share capital, it has not been consolidated.
The important customers of 21Vianet include many Internet giants and head public cloud enterprises, all of which are private enterprises. If Century Internet is completely transformed into a state-owned enterprise, it may lose its flexible service capabilities and quick response capabilities to these customers, and thus lose market competitiveness. Currently, state-owned enterprises, as the most significant strategic shareholders, can maintain the flexibility of private enterprises while to some extent possessing the advantages of state-owned enterprises in management, financing, and other aspects. I believe the current state is the best, which is also the best state that mixed ownership should have, "Wang Qiyu analyzed to reporters.
One of the arguments for "flexibility" is that Shangao Holdings holds a total of 42.1% of the revenue rights (35.7% of the voting rights) of Century Internet, of which 25% of the voting rights have signed a concerted action agreement with Chen Sheng. There is no precedent for this in mixed ownership reform cases. On the one hand, this is based on the flexibility of the mountain high mechanism, and on the other hand, it is based on mutual trust, "Wang Qiyu told reporters.
In this regard, the aforementioned Beijing investment banker believes that "the genes of state-owned enterprises can be empowered, and without consolidation, there is greater flexibility. This gives this merger the meaning of state-owned assets serving private capital. However, how state-owned enterprises can empower private enterprises without consolidation still needs to be further explored in the future
The strategic investment of Shangao Holdings is very important for Century Internet. With nearly $300 million investment from Shangao Holdings, Century Internet has completed the full redemption of $600 million of its convertible bonds. This is another "bomb disposal project" at the level of Century Internet, in addition to solving Chen Sheng's debt problem.
More comprehensive changes are also emerging. With the support of state-owned assets, the comprehensive financing cost of Century Internet has greatly improved, "Wang Qiyu told reporters.
Liquidity management has also become more planned. We previously believed that issuing bonds about six months in advance would suffice in the traditional sense, but we did not take into account changes in the capital market. Now I have requested the finance team to make a rolling funding plan and see the possibility of changes in the next three years, "said Wang Qiyu.
The deeper change still lies in industrial synergy. Shangao Holdings has a long-term industrial layout and is transforming towards new energy and new infrastructure. It not only has sufficient power supply, but also has good cash flow; This is of great significance for the explosive demand for electricity in the AI track where Century Internet is located, as well as for Century Internet's balance sheet repair. Especially in jointly promoting the development of low-carbon and efficient clean energy systems and enhancing the collaborative competitiveness of integrated computing, it has opened up new imaginative space for the market.
Collaboration has been finalized. In March of this year, Ulanqab City signed a strategic cooperation agreement with Century Internet and Shangao Holdings Group, planning to build a green G-watt AIDC super intelligent computing flagship base integrating "source network load storage" in Ulanqab.
Ordinary servers are evolving into intelligent computing centers, and Ulanqab, as one of the eight major nodes of 'East Data West Computing', the Mengxi power grid can achieve the most stable low electricity price supply. At the same time, there is only a one hour high-speed rail ride between Ulanqab and Beijing, the most mainstream position of this large model. Therefore, the dual advantages of computing power layout are superimposed, "Wang Qiyu told reporters.