China reverse merger pioneer looks at 'go private' route

SINGAPORE/NEW YORK Fri Dec 9, 2011 12:12am EST

SINGAPORE/NEW YORK Dec 9 (Reuters) - The group that helped pioneer backdoor U.S.-listings for Chinese companies has a new business proposition for its former clients -- advising on how to reverse a reverse merger.

This weekend Tim Halter, chief executive of reverse merger specialists Halter Financial Group, will chair a gathering in the southern Chinese city of Guangzhou, which includes a conference titled: "U.S. Capital Market: Survive, Go Private and Beyond".

A rash of accounting scandals at U.S.-listed Chinese firms has sent investors fleeing the sector, with Halter Financial's own USX China index down 20 percent since November 2010, according to its website. Meanwhile the Nasdaq Composite Index is up 5.8 percent and the Dow Jones Industrial Average has risen 9.6 percent.

Halter's associate, HFG China, is hosting the event to help Chinese companies decide whether to keep their U.S. listing or go private and possibly re-list in another market.

To add a bit of stardust, the gathering lists former U.S. President Jimmy Carter and former British Prime Minister Gordon Brown as the keynote speakers. Spokeswomen for Brown and Carter did not immediately respond to Reuters' requests for comment.

Texan businessman Halter made his fortune buying up dormant listed shell companies and using them to take his clients public without having to go through the full rigour of the initial public offering process. His firm's website indicates its first reverse merger of a Chinese company was back in 2003 and it has taken at least another 15 public since then.

But with the accounting scandals taking their toll on the share prices of U.S.-listed Chinese companies, Shanghai-based HFG China is now looking to help take some of those companies off the stock market.

"With all the negativity centered around U.S.-listed Chinese companies, many companies are re-evaluating enduring the high listing costs, regulatory burdens and increased SEC scrutiny associated with being a U.S. public company," HFG China said on the website for its conference.

"For companies no longer interested in remaining listed in the United States they have the option to terminate their U.S. listing by going private," it added.

The conference is pitched at Chinese companies looking at their capital raising options or considering cross-border mergers and acquisitions, but will also feature a series of sessions on the global economic outlook.

Carter will give a speech at the event on "Building Hope: Our Shared Responsibility", while Brown will talk about "Overcoming the First Crisis of Globalisation", according to the conference schedule.

They won't be the first high profile former leaders to speak at a Halter event -- former U.S. President George W. Bush spoke at the company's first such conference in 2010 in Shanghai.

PRIVATE ROUTE

Any companies opting to take the privatisation option would not be the first -- last month Harbin Electric went private through a buyout by its chief executive and private equity firm Abax Global Capital, while China Funtalk shareholders were bought out in August..

Lawyers say many others are likely to be interested in following given the erosion of U.S. investors' faith in Chinese firms.

"When being public doesn't give you access to capital, to heck with it -- go private and go elsewhere," said Thomas Shoesmith, leader of the China practice at law firm Pillsbury Winthrop Shaw Pittman in Palo Alto, California.

The challenge for any firm taking the privatisation and re-listing route will be to see if investors on other stock markets will be more enthusiastic.

The agenda for the Halter Financial gathering includes talks on the capital markets in Europe, Taiwan and Hong Kong, with industry experts saying exchanges closer to China are likely to be particularly attractive options.

"The attractions of re-listing on a local market are quite compelling to many CEOs," said Crocker Coulson, president of CCG Investor Relations in New York, a firm that has worked with several reverse-merger Chinese stocks.

However, listing in Hong Kong or on a domestic Chinese exchange often tends to be tougher in terms of pre-listing scrutiny and earnings requirements than the United States, he added.

CREDIBILITY CRISIS

The press release for the gathering says accounting irregularities by a small number of companies has caused the "crisis of credibility that is harming the majority of good, legitimate companies".

However, some of Tim Halter's former clients are among those that have faced accounting problems.

Shengdatech, which Halter brought to the market in 2006, had its auditor KPMG resign in April citing "serious discrepancies" in its bank statements. It has now been de-listed, has filed for bankruptcy and its board is suing the company's chief executive for obstructing an investigation into fraud.

Some companies say they are not convinced the market has got so bad they need to leave just yet.

"We did receive several privatisation/dual listing proposals in very primitive form," said Winston Yen, chief financial officer of Orient Paper Inc, whose shares were pressured last year by short-sellers alleging fraud.

"However, we will not seriously consider any of them unless our stock continues to be depressed in the next 12-24 months," he said.