To understand the challenges faced by China-based startups in the wake of Beijing’s recent regulatory clampdown, consider the plight of the Chinese subsidiary of Tim Hortons, the iconic Canadian coffee and doughnuts chain.
In 2019, Restaurant Brands International, the Canadian-American company that owns Tim Hortons, as well as Burger King and Popeyes, teamed up with Cartesian Capital, a New York–based private equity fund, to bring Tims Coffee House, an upscale version of the Tim Hortons franchise, to China. The venture opened its first store in Shanghai’s People’s Square and expanded rapidly, adapting its menu to the palate of Chinese consumers as it grew.
Sales boomed in 2020, despite China’s COVID-19 outbreak. Tims China now boasts 200 outlets in 10 Chinese cities including Beijing, Hangzhou, and Chongqing, and projects 2021 sales of $103 million. Its backers, which include Sequoia China and Chinese video gaming giant Tencent Holdings, have grand plans. They hope to increase store count to 2,750 by 2026, making China the franchise’s largest market outside Canada. To get there, says Tim Hortons China CEO Lu Yongchen, the chain plans to open a new store every 36 hours.
But here’s the rub: Growing at such breakneck speed will need capital—lots of it. And in the past month, authorities in China and the U.S. have thrown down a regulatory gauntlet that has made it all but impossible for China-based ventures to raise cash from a tried-and-true source: selling shares on Wall Street.
Beijing last month imposed new rules requiring Chinese ventures to obtain the blessing of the nation’s cybersecurity watchdog before listing in the U.S. Meanwhile, U.S. Securities and Exchange Commission chair Gary Gensler said this week that he has asked agency staff to “pause” approval of IPOs of Chinese firms using third-country shell companies until those firms boost disclosure of their political and regulatory risks.
And so Tims China has devised a novel workaround. The company plans to go public by merging with Silver Crest Acquisition Corp., a U.S.-listed special purpose acquisition company (or SPAC) that is backed by Hong Kong– and Shanghai-based private equity firm Ascendent Capital Partners. The deal, which will value the business at $1.7 billion and is expected to close in the fourth quarter of this year, according to Silver Crest’s Monday SEC filing, will test the waters for using U.S.-listed SPACs to link Chinese companies with global investors at a moment when relations between Washington and Beijing are unusually fraught.
No time like the present
Chinese firms taking the SPAC route to Wall Street may benefit, at least for now, from regulatory uncertainty on both sides of the Pacific. “There’s a queue of firms waiting for the final rules to emerge from [Chinese regulators], who are also facing tougher disclosure requirements from the U.S. Securities and Exchange Commission. To the extent that SPACs can offer those firms an exit route today, the interest is probably there,” says Thomas Gatley, corporate analyst at Beijing-based Gavekal Research. “I suspect that…Cartesian Capital wants to get out now in case new regulations cause problems,” he adds.
For Tims China, a U.S. SPAC listing means quicker access to global capital for the company’s outsize expansion plans. SPAC mergers offer startups in high-growth sectors a faster, more flexible, and lower-cost method to raise funds in a compressed listing timeline, says Bruce Pang, head of macro and strategy research at China Renaissance Securities.
Plus, the coffee chain’s business is less likely to raise regulatory red flags, especially compared with domestic Big Tech firms, which are on Beijing’s watch list. Tim Hortons China “seems like a pretty uncontroversial business. Their sector is not on the negative list…so I don’t see that [going public] via SPAC will raise a ton of opposition,” says Gatley. Companies in certain sectors like food and beverages and manufacturing, small- to mid-cap firms, and those keeping a low profile will be less affected by Beijing’s new rules, adds Pang.
So far this year, the value of Chinese listings in the U.S. has reached nearly $13 billion, according to Refinitiv data. But the pipeline of Chinese firms hoping to sell shares in New York has been frozen since July, when Chinese regulators lowered the boom on ride-hailing firm Didi Chuxing, just days after its $4.4 billion NYSE debut, for failing to heed officials’ warnings to delay its listing. In the aftermath, China’s State Council decreed that domestic firms listing overseas are subject to stricter scrutiny. The Cyberspace Administration of China, the nation’s data security watchdog, later said that all firms with over 1 million users—a threshold that includes virtually any significant Chinese venture connecting to customers via the Internet—must undergo a cybersecurity review before going public abroad. Scores of Chinese companies have since suspended or abandoned their U.S. listing plans.
While Beijing’s new laws are focus on cybersecurity and consumer data protection, it’s unlikely that the coffee chain will face much backlash. The company has noted that it will comply with all regulations and transfer all Chinese consumer data to an onshore firm before its Nasdaq listing. Given the low sensitivity of data Tims China is likely to collect, “my guess is that they wouldn’t have any trouble getting through the new [cybersecurity] approval process,” says Gatley.
But the SPAC alternative still has risks. Pang warns that Chinese regulation related to overseas listings is “rife with uncertainties” and that “investors should be reminded that China’s regulatory framework could [still] undergo dramatic change.”
U.S.-listed SPACs looking for deals in China still face a “good deal of risk,” says Brock Silvers, chief investment officer at Kaiyuan Capital. For Tims China specifically, the transaction remains subject to regulatory approval in both markets, and there’s no guarantee as to whether it can go forward given the current climate, he says. And while the company has excluded Chinese customer data from the deal, attempting to resolve Chinese regulatory issues, “it’s uncertain if that will be enough. Even if this deal should close, it seems unlikely to start a trend of such China acquisitions,” adds Silvers.
That uncertainty may deter blank-check companies from pairing with viable mainland firms, coupled with the numerous incidents of fraud among Chinese firms during the early 2000s’ reverse merger craze, says Perrie Weiner, head of North American securities litigation at Baker McKenzie. “Investors should expect even more intense scrutiny now that Chinese operating companies are becoming the target acquisitions of U.S. SPACs. If not managed properly, the de-SPAC merger aftermath can be disastrous—for the company and for its shareholders.”
There are potential hurdles on the U.S. side as well. Gensler says the SEC will enforce “targeted additional reviews” of IPO filings from any companies with significant China operations. He reiterated his stance on Tuesday via Twitter video, stating: “I believe China-based companies that want to raise capital from American investors should disclose more of the information we need to make informed investment decisions.”
Tims China may face fewer barriers. Even so, warns Gatley, the “optical risk [remains]…of sticking their head up above the parapet while everyone else is on pause.”
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