Henderson Investment, Round 3
31 October 2007
There he goes again. Lee Shau Kee's Henderson Land Development Co Ltd (HLD, 0012) is making a third grab for Henderson Investment Ltd (HI, 0097). This time, rather than try to privatise the company, which he has twice failed to do, HLD is proposing to buy the jewel in HI's crown, the controlling 39.06% stake in The Hong Kong and China Gas Co Ltd (HKCG, 0003).
To buy the 2,367m shares in HKCG, HLD is offering 636.9m of its own shares and HK$3,707m in cash. At yesterday's closing price of $69.70, the HLD shares are worth $44,391m, so the total offer is $48,098m (US$6.21bn), or about HK$20.32 per HKCG share, close to yesterday's closing price of $20.80 per share. When the proposal was announced on 2-Oct-07, the offer was deliberately pitched to be worth the average closing price of HKCG in the previous 10 trading days, and since HLD and HKCG shares have moved broadly in tandem, that is still the case.
HI would then distribute the proceeds to its shareholders, who would receive, for each HI share, 0.209 HLD shares and $1.21 per share in cash, or a total value of about HK$14.57 based on yesterday's closing price of HLD. As HLD owns about 67.94% of HI, its rights to its own shares would cancel out. The net new HLD shares would be about 204.2m shares, or a 10.51% enlargement of HLD. HI would remain listed as a small-cap with a mainland bridge and toll road and net assets of about HK$2.00bn, or about $0.66 per share.
Now there is one simple reason why shareholders of HI should vote against this proposal. The market share price of HKCG represents the price of a minority share, because HI controls HKCG. If HI were to put the controlling stake in HKCG up for sale by tender, it would almost certainly receive a substantial premium for control of the company. So why should it sell the 39.04% stake to anyone for less than that, without seeking bids in the market?
In the circular to shareholders, the Independent Financial Adviser CIMB-GK Securities (HK) Ltd says:
"since HLD, by virtue of its 67.94% controlling interest in [HI]...is already a controlling shareholder of HKCG, we consider it reasonable to value the HKCG Interests based on the HKCG Average Closing Price."
That statement is devoid of any logic. All shareholders of HI should be treated equally and at arm's length, so it should be irrelevant that HLD holds the majority of HI's shares - that doesn't entitle them to a discount on the fair value of a controlling stake in HKCG.
We urge HI shareholders to vote against the sale at the EGM on 12-Nov-07. And if HI really wants to sell the controlling stake in HKCG, then it should put it up for sale by fair and open tender and accept the highest bid after providing equal information to all interested parties. Alternatively, it could distribute its HKCG shares to its shareholders, in which case HLD would receive about 26.54% of HKCG and other shareholders would receive the rest. That would put HLD below the 30% takeover threshold, and open HKCG to possible bids.
Influential in the outcome of this vote will be US-based activist hedge fund manager Elliott Capital Advisors, L.P., headed by Paul Singer, which has increased its holding since the proposal was announced, and holds 9.34% of HI as of 9-Oct-07, or 30.8% of the independent shares permitted to vote. A simple majority of the votes cast will carry or defeat the resolution. Voter turnouts are seldom more than 75% (turnout at the last privatisation vote was 71%), so they almost have enough to block or pass it on their own, but don't leave it to chance - cast your vote against.
© Webb-site.com, 2007
Organisations in this story
- HENDERSON INVESTMENT LIMITED
- HENDERSON LAND DEVELOPMENT COMPANY LIMITED
- HONG KONG AND CHINA GAS COMPANY LIMITED (THE)
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