Paul Y.-ITC: Just Say No

Charles Chan, Chairman of Paul Y.-ITC, has made an offer to buy its stakes in Australian-listed Downer EDI, HK-listed China Strategic Holdings Ltd and a pile of property, all for less than 10% of book value. Webb-site.com urges independent shareholders of both Paul-Y and its controlling shareholder, ITC, to vote it down.

Paul Y.-ITC: Just Say No
21st October 2002

In one of the most outrageous attempts to destroy shareholder value that we have ever seen, Charles Chan Kwok-keung (Mr Chan), Chairman of Paul Y.-ITC Construction Holdings Ltd (PaulY, 0498) has proposed a transaction in which he would in effect acquire assets from PaulY at a 90% discount to book value.

PaulY is 42.59% owned by ITC Corporation Ltd (ITC, 0372) which in turn is 34.82% owned by Mr Chan. In an announcement dated 7-Oct-02, ITC and PaulY said that Mr Chan "has requested the directors of [PaulY] to place before its shareholders a proposal..."

The proposal involves the distribution of "Scheme Assets" held by PaulY. The Scheme Assets include:

The total value of these three items in PaulY's balance sheet is $2,302m, although for unspecified reasons, the announcement puts the total Scheme Assets at $2,107m as of 31-Mar-02.

It is proposed that the Scheme Assets will be transferred to a new wholly-owned subsidiary of PaulY. This subsidiary will then be "distributed" to shareholders, except that, as part of the plan, Mr Chan would buy the entitlements of all the shareholders of PaulY except for ITC for HK$0.20 per PaulY share.

The price

The announcement was written so cryptically that it never mentions the total amount of the payment. We can tell you: there are 1,036,744,924 PaulY shares in issue at 31-Aug-02, and ITC held 441,579,452 shares (42.59%). So the difference is 595,165,472 shares (57.41%). That means that Mr Chan would pay $119.0m for 57.41% of the Scheme Assets.

That would leave Mr Chan controlling the unlisted Scheme Assets company of which ITC would own the remaining 42.59%. He has also asked ITC to put forward a proposal to sell this stake to him at the same price per share as he is offering to the other PaulY shareholders - so that ITC would receive just $88.3m.

If both deals take place, Mr Chan would get 100% of the company holding the Scheme Assets for just $207.3m. Even if you take the lower figure of book value at $2,107m, that amounts to a 90.2% discount, a gift of HK$1,900m to Mr Chan.

Just say no

The distribution by PaulY of the Scheme Assets is a "scheme of arrangement", which means it is conditional on approval by a majority in number representing three quarters in value of the independent shareholders (other than ITC) who vote at a meeting for which the date has not yet been set.

If you are a PaulY shareholder

Mr Chan is presumably relying on the fact that the shares of PaulY trade at only $0.217, a 92.5% discount to their net asset value of $2.89 per share. He is hoping that shareholders would rather take $0.20 in cash and see their asset value trashed than hang on and try to realise the underlying value in the stock. The proposal would decimate net assets from $2.89 to $0.86 per share.

It is a cynical ploy to exploit the discount, much of which is based on the very fear of this kind of transaction. But if shareholders stand up and stop the deal, then perhaps in future the discount will narrow, because investors will be more confident that this kind of deal will not happen. As it is a scheme of arrangement, the deal will be voted on a poll where every share counts for 1 vote, not a show of hands. So vote AGAINST.

If you are an ITC shareholder

If the PaulY proposal proceeds, then the sale by ITC of its stake in the Scheme Assets is still conditional on approval by independent shareholders of ITC in general meeting, as it is a "connected transaction". Shareholders of ITC should vote AGAINST the sale of their company's interest in the Scheme Assets to Mr Chan.

However, this will be on a show of hands unless shareholders demand a poll, so if you are a registered shareholder, make sure that you do! We have been waiting for years for the Stock Exchange to close this loophole and require a poll on all resolutions.

The INEDs

Even the board of PaulY has its reservations about this. The announcement went to some pains to indicate this, stating that the proposal was "initiated by [Mr Chan] and not solicited by [PaulY] itself". The distinction is subtle given that he controls the company anyway. In a masterpiece of understatement, they wrote "the directors of [PaulY], other than [Mr Chan] consider the consideration...may not be fair and reasonable".

The independent non-executive directors of PaulY are Vincent Cheung Ting-kau, the Senior Partner of his eponymous law firm and Ernest Kwok Shiu-keung, formerly a partner of Kwok & Chu and now a partner of law firm Koo & Partners.

A waste of time and money

This does not make clear what happens if the proposal is not "implemented" because it is voted down. We call on him to confirm that regardless of the outcome, he will pay all the costs incurred in the proposal - including the fees of lawyers, accountants, printers and independent advisers. The statement also does not say whether he will pay the costs of ITC. He should. It is the ultimate insult to use minority shareholders' funds to put forward such egregious proposals.

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