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"I have withdrawn the privatization proposal. Given the current market environment, maintaining 21Vianet's listed status is more in the company's long-term interests." With an announcement from founder and chairman Chen Sheng, the highly anticipated privatization of 21Vianet (VNET.US) was officially finalized.

Photo courtesy of Wang Xiaowei

21Vianet is China's first US-listed IDC (Internet Data Center) company. Together with GDS and Chindata (which have been privatized and delisted), it is regarded as one of the "three golden flowers" in the field of independent data center operation services listed overseas. The withdrawal of this privatization offer means that 21Vianet's next step of returning to the A-share market or to Hong Kong for listing has been essentially stranded.

Securities Times reporters learned from multiple sources that behind the privatization of 21Vianet, there were twists and turns in Chen Sheng's personal capital liquidity. Between the constraints of funds and the ups and downs of "bomb disposal", many well-known market participants were linked, including TusHoldings, which had a debt explosion, and Shandong State-owned Assets, which had a layout in the digital industry.

Several people close to Chen Sheng confirmed to the Securities Times reporter that his personal debt problem has been resolved in stages, with a complete closed loop of "relief of the original shareholders - announcement of privatization - personal difficulties - successful defusing". The debt turmoil of 21Vianet and its founder is instructive to the market - listed companies may find some lessons in equity relief, privatization operations, mixed ownership reform and many other aspects.

Withdrawal of privatization offer

In mid-July, 21Vianet announced that the special committee of the company's board of directors had received a letter from Chen Sheng, who, as the founder, co-chairman and interim CEO of 21Vianet, decided not to move forward with his initial non-binding proposal to acquire all outstanding common shares of the company in September 2022 and would immediately withdraw the proposal. This means that the nearly two-year privatization and delisting of 21Vianet has officially come to an end.

21Vianet said that in view of the withdrawal of the founder's proposal by Chen Sheng and the lack of substantial progress regarding any other potential privatization or similar transactions of the company (including the initial non-binding proposal from Hanergy Investment Group and Industrial Bank Co., Ltd. Shanghai Branch received in April 2022 to acquire all the issued shares of the company), the Special Committee decided to stop further evaluation of any potential transactions at this time and recommended that the Board of Directors dissolve the Special Committee. The Board of Directors approved the dissolution of the Special Committee.

This round of privatization of 21Vianet began the year before last. Chen Sheng planned to acquire all the issued common shares of 21Vianet at a price of $8.2 per ADS (American Depositary Share); the company's share price was around $6 at that time. According to preliminary estimates, the privatization cost 21Vianet about $1.2 billion (about RMB 8.5 billion).

Among the three IDC companies in the US, 21Vianet has the longest history. As a computing power backing, "computer room" is a common name; and the concept and business model of "data center" originated from 21Vianet. Since then, it has developed into the only IDC leader in the Chinese IDC market that develops simultaneously with the dual engines of "ultra-large-scale customization + new generation retail". The company's stock price peaked at US$44 per share in 2021.

However, facing the sell-off of Chinese concept stocks at that time, industry qualifications and fundamentals could not change the market's revaluation. Compared with GDS and Chindata, 21Vianet was given a lower valuation by secondary market capital, which Chen Sheng believed was a good time for privatization. Someone close to Chen Sheng revealed to the Securities Times reporter that Chen Sheng's judgment at the time 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 help with transformation.

In order to promote the privatization, 21Vianet also set up a special committee composed of three independent directors to evaluate the suggestions received from the founders and other potential strategic options. Two years later, the special committee was officially disbanded.

A Beijing investment banker told the Securities Times that one of the goals of 21Vianet's privatization is to return to Hong Kong or A-shares. "Previously, the price-earnings ratio of similar companies in the domestic A-shares or Hong Kong stocks was much higher than that in the US stock market, and the activity was higher, so Chinese concept stocks had the motivation to privatize and re-list. Of course, listing on two or more exchanges at the same time is also an option."

What is the impact of the failure of this privatization on the company? Wang Qiyu, CFO of 21Vianet Group, said in an interview with a Securities Times reporter that privatization is a systematic project, and secondary securitization is an issue that needs to be considered. "The company's current financial performance, such as debt indicators and cash flow, is very good, but how to conduct a secondary IPO after privatization? From our point of view, companies with VIE structures have great uncertainty in A-share listings; the liquidity problems faced by listing in Hong Kong in the past two years are also quite obvious."

As of December 2023, 21Vianet's cash and cash equivalents exceeded RMB 2.2 billion; total current assets exceeded RMB 9.8 billion, a multi-year high.

In Wang Qiyu's view, in the balance between maintaining the listing status and privatization, the former is more meaningful for the development of 21Vianet. "On the one hand, maintaining the listing status means the ability to raise funds in the capital market, and it is also conducive to implementing equity incentives and other measures to attract talents; in addition, the listing status also includes the blessing of the company's brand, influence and attention in business expansion. If there is a more certain expectation of listing on the A-share or Hong Kong stock market, and the valuation of US stocks is still unsatisfactory at that time, it is a more rational choice for 21Vianet to start privatization."

From relief to self-trafficking

Reporters learned from multiple sources that there was a parallel hidden thread behind the failure of the privatization of 21Vianet - Chen Sheng was once caught in a liquidity dilemma, and one of the reasons behind this was the collapse of the "Tsinghua-affiliated" TusHoldings.

Before 2016, Chen Sheng and the "Lei Jun Group" (including Kingsoft and Xiaomi) were co-controlling shareholders of 21Vianet. Later, TusHoldings was introduced as the new controlling shareholder through the issuance of new shares. TusHoldings' voting rights once exceeded 50%. However, since 2020, TusHoldings has experienced a huge funding gap, its debt repayment capacity has declined, and it eventually defaulted on its debts.

In 2021, TusHoldings committed a material default due to its failure to pay interest on two bonds totaling US$950 million; the following year, TusHoldings again announced a default on its US dollar bonds.

A person close to TusHoldings told reporters that 21Vianet introduced TusHoldings, which has the background of state-owned enterprises and universities, in order to provide endorsement to further consolidate business development and embrace the opportunities of the digital economy. Later, due to its own operating crisis, TusHoldings was under huge financial pressure and had to choose to cash out after controlling 21Vianet for two or three years.

According to the timeline, before and after the TusHoldings explosion, 21Vianet announced to repurchase 48.63 million Class B common shares of the company from TusHoldings, with a total repurchase price of approximately US$260 million and a repurchase price of approximately US$5.346 per common share, or US$32.076 per ADS. After the repurchase, TusHoldings' voting rights in 21Vianet dropped to less than 5%. It is reported that TusHoldings still faced a funding gap after cashing out most of its shares in 21Vianet, which eventually led to a default.

As the founder, Chen Sheng chose to provide relief by using the shares of 21Vianet held by his personal subsidiary as collateral, and all the loans were used to acquire the shares of 21Vianet held by Tus-Holdings.

According to people close to Chen Sheng, at that time, Chen Sheng and 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 US$50.25 million. The loan term was one year, and a conditional extension clause was clearly stipulated in the agreement.

As for the reasons why Chen Sheng stepped in to help, Wang Qiyu told reporters that on the one hand, it was 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 was based on the friendship between Chen Sheng and TusHoldings, both of whom were entrepreneurs with a Tsinghua background. "At that time, Chen Sheng chose to do his best to help TusHoldings. From the results afterwards, he acquired shares through personal loans, which ultimately stabilized the company's governance structure and boosted market confidence."

However, this relief was successful. Since 2021, the capital market has been affected by a variety of factors such as the Fed's tightening, the global economic downturn, and the Sino-US audit supervision storm, and Chinese concept stocks have generally faced a sharp correction. The market value of 21Vianet closed down 70% in 2021.

This directly triggered Chen Sheng's equity pledge crisis. In February 2023, when the pledged assets could not cover the loan principal and interest, the lender declared that it would exercise the right to dispose of the pledged assets and sell them in the open market or in private transactions. This quickly triggered a chain reaction, one of the manifestations of which was the further fall in 21Vianet's stock price. Especially for Chen Sheng, who pledged a high proportion of his equity, it was more like going from bailout to "self-trapped".

"When the stock price was high, the equity pledge leverage ratio was not large; but after the stock price of Century Internet fell sharply, the leverage became very large," said the aforementioned Beijing investment banker.

Why did Chen Sheng prefer equity pledge? Wang Qiyu said, "Unlike many private entrepreneurs who have set up a wide range of businesses, Mr. Chen Sheng has been focusing on data center business for many years. His core assets are nothing but 21Vianet shares. In terms of borrowing, he can only pledge 21Vianet shares; when the stock price fell, he could only continue to pledge more shares. But this round of decline was too fierce, and the additional pledged shares were not enough. Chen Sheng eventually defaulted on tens of millions of dollars of debt."

Chen Sheng (Photo provided by Wang Xiaowei)

White Knight "Bomb Disarming"

Two years later, Chen Sheng’s liquidity dilemma finally turned around.

On July 8 this year, 21Vianet 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 more than 17.14 million Class A common shares from another important shareholder at the time. The loan was secured by the common shares owned by Chen Sheng in the company.

Photo courtesy of Wang Xiaowei

According to the clues provided by the aforementioned person familiar with the matter, "another important shareholder" refers to TusHoldings.

According to the aforementioned announcement, Chen Sheng and his wholly owned entities, as debtors, have settled all their obligations under the Bold Ally loan with reference to SEC Schedule 13D Amendment No. 8 filed by Chen Sheng on July 8, 2024. The funds for this settlement came from Chen Sheng’s existing cash reserves and loans from friendly institutions.

As a result of the settlement of the Bold Ally Loan, pursuant to the commitment indenture disclosed in the 13D Amendment, the collateral for the Bold Ally Loan has been fully released and Chen Sheng has regained his beneficial ownership of approximately 33.63 million Class A common shares of 21Vianet.

In this regard, the reporter asked Wang Qiyu for more clues. He responded to the reporter, "Chen Sheng is the founder of China's IDC industry and an absolute long-termist fighter. He has been focusing on data centers for 30 years, going through three cycles of the data center industry and continuously leading the transformation and innovation of China's IDC industry. He basically works all year round, which has touched investors. Every time he encounters difficulties or crises, there is always a 'white knight' to help him."

The phased solution to Chen Sheng's personal debt problem is conducive to easing the selling pressure on 21Vianet's stock price. Wang Qiyu introduced that Chen Sheng repaid his personal debt to Ares Capital and replaced the loan that was originally under the disposal of the lender with a three-year note with a friendly investment institution. The amount after the replacement was also greatly reduced. In addition, the friendly investment institution changed the transfer of Chen Sheng's shares from equity to common equity mortgage and returned Chen Sheng's shares, which was equivalent to releasing the selling pressure.

Is there any connection between Chen Sheng’s liquidity dilemma and the failure of 21Vianet’s privatization?

Wang Qiyu denied this. "Looking at the privatization operations of US stocks, most of them require the support of large consortiums. This process is often accompanied by performance betting. Saying goodbye to the privatization path also avoids the huge debt problems of founders that accompany privatization cases such as Wanda Commercial Management. However, we still believe that the company's current stock price is greatly undervalued. 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-trapping" and then to successful bomb disposal, it was like a roller coaster ride.

The aforementioned person close to Chen Sheng revealed to the reporter that someone later asked Chen Sheng: "If you knew that 21Vianet's stock price would plummet to around US$2 per share when you took over Tus-Holdings' shares, what decision would you make?" Chen Sheng replied: "I might be very conflicted, but I would still take over (the relevant shares held by Tus-Holdings)."

A different kind of mixed reform

What remains unchanged is that ChinaNetCentral still remains in the U.S. stock market; what has changed is that it has gained an additional state-owned enterprise gene.

At the end of 2023, a subsidiary of Hong Kong-listed Shangao Holdings (00412.HK) signed an equity investment agreement with 21Vianet for a total of US$299 million, making Shangao Holdings the largest institutional investor and strategic investor of 21Vianet. Shangao Holdings is an important overseas investment and financing and emerging industry holding platform of Shandong Hi-Speed ​​Group, while 21Vianet has transformed into a mixed-ownership enterprise.

It is worth noting that Shangao Holdings invested tens of billions of yuan in 2022 to control Beijing Enterprises Clean Energy, adopting a "consolidated investment" model. Although it is also a strategic investor in 21Vianet, its holdings account for about 42% of the company's total share capital, but it is not consolidated.

21Vianet's important customers include several Internet giants and leading public cloud companies, all of which are private enterprises. "If 21Vianet becomes completely state-owned, it may lose its flexible service capabilities and rapid response capabilities to these customers, and thus lose its market competitiveness. At present, state-owned assets are the most significant strategic shareholders. We can maintain the flexibility of private enterprises and have the advantages of state-owned assets in management and financing to a certain extent. I think the current state is the best, and this 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 earnings rights (35.7% of the voting rights) of 21Vianet, of which 25% of the voting rights have signed a concerted action agreement with Chen Sheng. This is unprecedented in mixed-ownership reform cases. "On the one hand, this is based on the flexibility of Shangao's mechanism, and on the other hand, it is based on full trust in each other," Wang Qiyu told reporters.

In this regard, the aforementioned Beijing investment banker believes that "the genes of state-owned enterprises can empower, and there is greater flexibility without consolidation. This makes this merger and acquisition have the meaning of state-owned capital serving private capital. How state-owned enterprises can empower private enterprises without consolidation still needs to be explored in the future."

The strategic investment from Shangao Holdings is very important to 21Vianet. With the help of the nearly $300 million investment from Shangao Holdings, 21Vianet has fully redeemed its $600 million convertible bonds. This is another "bomb disposal project" at the 21Vianet level, in addition to solving Chen Sheng's debt problem.

Changes are also taking place at a broader level. "With the support of state-owned capital, 21Vianet's overall financing costs have greatly improved," Wang Qiyu told reporters.

Liquidity management has also become more planned. "We previously believed that in the traditional sense, it would be enough to issue bonds about half a year in advance, but we did not take into account changes in the capital market. Now I have asked the financial team to make a rolling funding plan to see possible changes in the next three years," said Wang Qiyu.

The deeper changes are still in industrial synergy. Shangao Holdings has a long-term industrial layout. In the transformation to new energy and new infrastructure, it not only has sufficient power supply, but also good cash flow; this is of great significance to the explosive demand for power in the AI ​​track where 21Vianet is located, as well as the repair of 21Vianet's balance sheet. In particular, in jointly promoting the development of a low-carbon, efficient clean energy system and enhancing the synergistic competitiveness of computer integration, it has opened up new imagination space for the market.

In March this year, Ulanqab City signed a strategic cooperation agreement with 21Vianet and Shangao Holding Group, planning to build a green G-watt AIDC super intelligent computing flagship base integrating "source, grid, load and storage" in Ulanqab.

"Ordinary servers are evolving into intelligent computing centers. As one of the eight nodes of 'East Data and West Computing', Ulanqab's western power grid can provide the most stable low-price electricity supply. At the same time, it is only more than an hour's high-speed rail ride away from the most mainstream position of this large model, Beijing. Therefore, it has two advantages in terms of computing power layout." Wang Qiyu told reporters.

Editor: Peng Bo

Proofreading: Gao Yuan