Stop the Press

SCMP Group, publisher of the leading local English language paper, has admitted it has too much capital and is proposing a share buyback offer which its largest shareholder, Kerry Group, will not accept, thereby increasing its stake above the takeover threshold. Webb-site.com recommends independent shareholders to vote AGAINST the plan and instead urge the company to pay a special dividend. If Kerry wants full control, it should make a privatisation offer.

Stop the Press
4th September 2002

Last night, with its interim results, SCMP Group Ltd (SCMP, 0583) announced a plan to make a share buyback offer to purchase up to 10% of the issued shares at $3.60 per share. That's just a 5.1% premium to the market price of $3.425 per share when it was suspended at 15:23 yesterday. Normally suspensions take place for a whole afternoon or day, so this appears to have lacked planning.

Kerry Media Ltd and its concert parties (Kerry Group) hold 34.93% of SCMP Group and has undertaken not to accept the offer, but they would obviously like you to do so, since that would increase their holding from 34.93% to 38.81%.

Under the recent revisions to the Takeover Code, SCMP Group was one of the companies left in the "twilight zone" as Kerry Group had less than the old bid trigger of 35%, but more than the new bid trigger of 30%. Accordingly, it is allowed to move freely in this zone so long as it stays between those two levels. Any move through 35% would trigger a general offer obligation.

The buyback offer is conditional on independent shareholders approving a "Whitewash Waiver" under Note 1 of the Notes on dispensations from Rule 26 of the Takeover Code. To Americans a Whitewash Waiver might sound like the presidential pardon of Nixon, but in HK and UK it is the waiving of the obligation to make a general offer.

Your vote counts

Unlike transactions under the Listing Rules, where a show of hands often rams things through, the vote of independent shareholders (excluding Kerry Group) under the Takeover Code must take place on a poll, with 1 vote per share and proxy votes being counted. So this is a chance for institutional investors to fulfil their obligations to beneficiaries and get their votes counted.

Under the "creeper" limit in Rule 26.1(c) of the Code, if this deal is approved, then Kerry Group will be free to increase its holding at the rate of 2% per annum after the buyback without making a general offer. It would only take 5 years to achieve majority control, and after that it can buy as much as it likes. The passage through the 35% limit is therefore crucial.

SCMP admits it has too much money

Under "reasons for the offer", SCMP states that "the Group's future capital requirements do not require the maintenance of the current capital base". In other words, they have too much money.

SCMP states that if the offer had taken place at the beginning of the latest audited financial period, which ran for 18 months to 31-Dec-01 (due to a change of year end), then net asset value per share would have decreased by 22.95% from $1.22 to $0.94 at the end of the period, and the return on shareholders' funds would have increased from 22.91% to 31.55%.

That's fine, and we indeed encourage companies to return surplus capital to shareholders, but the correct approach is to distribute the surplus cash by way of a special dividend to all shareholders, not to treat it as an opportunity to creep the largest shareholder over the bid trigger, giving it control without making an offer.

Instead of buying back 10% of the company at $3.60 per share, a special dividend of $0.36 per share would have the exact same effect of enhancing the return on shareholders' funds, while leaving Kerry Group with the same percentage of the company and leaving open the possibility of a future bid premium.

Shareholders who wish to spend their dividend on buying more shares would be free to do so. If Kerry Group wishes to go over the takeover threshold, then it should make a full bid for the company.

We urge independent shareholders to vote AGAINST the resolutions to approve the offer. Instead, write to the SCMP and demand that your company pays a special dividend of not less than $0.36 per share, since they have now admitted that they have too much capital.

Frankly speaking, SCMP should know better than to try a manoeuvre like this. Its Deputy Chairman and Publisher of the newspaper, Thaddeus Beczak, is also Chairman of the Stock Exchange's main board Listing Committee.

Investors who care about corporate governance should also note that Kerry Group controls two other companies listed in Hong Kong, Shangri-La Asia Ltd and Kerry Properties Ltd.

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Stop the Press 4th September 2002

Your vote counts

SCMP admits it has too much money

Stop the Press
4th September 2002