Lane Crawford Document Released
17 June 1999
Following our successful lobbying for an increased offer to minority shareholders, Wheelock and Lane Crawford have now posted the Scheme document for the proposed privatisation. The meetings will be held on 12-Jul-99.
Investment Portfolio
Following our prompting, the document reveals for the first time what the investment portfolio, which represents over a quarter of net assets, comprises. We've calculated the estimated shareholdings based on the values given at 11-Jun-99:
| Value on 11-Jun-99 $m |
Price 11-Jun-99 ($) |
Est. shares |
Weight 11-Jun-99 |
Per A-Share ($) |
|
|---|---|---|---|---|---|
| Cheung Kong (Holdings) | 223.6 | 64.5 | 3,467,000 | 42.9% | 1.98 |
| Bank of East Asia | 129.5 | 18.9 | 6,851,800 | 24.8% | 1.15 |
| Henderson Land | 116.2 | 41.2 | 2,820,000 | 22.3% | 1.03 |
| Sun Hung Kai Properties | 52.4 | 65.5 | 800,000 | 10.0% | 0.46 |
| Total | 521.7 | 100.0% | 4.61 |
Obviously none of these stocks has much to do with retailing.
Property
In our original article, we estimated that Lane Crawford House was worth HK$800m. That turned out to be almost spot on. Chesterton Petty valued it at $780m, while Jones Lang LaSalle valued it at $770m. For some unknown reason, Jones Lang LaSalle has been introduced as an additional valuer since the announcement on 25-May-99. It valued the total properties at about 3% less than Chesterton Petty.
The document also reveals that the group owns three other properties worth about HK$136m. There are several godown units at the Grandtech Centre, which was built by sister company Wharf in 1996, valued by Chesterton Petty at $112m, an apartment at Guildford Court, Guildford Road, The Peak, valued at $16.7m, and two floors of an industrial building in Aberdeen valued at $7.5m.
Jones Lang LaSalle valued the Grandtech units at $97m, so the 15% higher value given by Chesterton Petty reminds us that valuations are more art than science.
Letter from Jardine Fleming
The document contains a letter from Jardine Fleming Securities (JF), the independent financial adviser.
In its letter, JF states that it regards Joyce Boutique and Dickson Concepts as the "most comparable companies" to Lane Crawford. It then attempts to show that Dickson Concepts is valued by the market at a 63.2% discount to Net Asset Value at 18-May-99.
We regard this as misleading. The small print states that the figure is based on "the offer price as stated in the document of Dickson Concepts (International) Limited dated 7th May, 1999 in relation to the conditional partial cash offer" while the NAV is "the pro forma adjusted net asset value as stated in the circular" of the same date. Neither figure is disclosed, and most Lane Crawford shareholders won't know what they are.
So we'll tell you. The partial offer price for Dickson Concepts is $2.00 while the market price as of 11-Jun-99 (the latest practicable date used elsewhere in the Scheme document) was $4.35, more than double the partial offer price. The pro forma adjusted net asset value was in fact $5.43. With these two figures, it is clear that Dickson Concepts is trading at a discount of 19.9% to net asset value, not 63.2%.
The JF letter seeks to rely on this misleading figure by saying that the shares in Joyce Boutique and Dickson Concepts "both closed at larger discounts to their respective NAVs than are represented by the A Share Cancellation Price and the B-Share Cancellation Price".
In the case of Dickson Concepts, this argument is falsified by the figures we give above. The price has not "closed" at $2.00, but at $4.35. We think Lane Crawford and JF should clarify this in an announcement. JF states that this is one of the "key factors in arriving at our recommendation". They should clarify whether their recommendation remains the same.
Lane Crawford shareholders may of course consider whether the lower discount of Dickson Concepts reflects its perceived retail expertise. We don't take the comparison to Joyce seriously, since this is about one tenth the size of Lane Crawford and is emerging from a recapitalisation.
Brand Valuation
Lane Crawford and JF appear to have made an effort to address our earlier suggestion that they should take into account the brand value of "Lane Crawford", which represents 149 years of retailing in Hong Kong.
However, JF states that "in principle, value may be attributable to a brand if it contributes to making additional profits for the owner of the brand". It then goes on to conclude that "it is difficult to ascribe any significant value for the name 'Lane Crawford'".
In their equally down-beat Explanatory Statement, Lane Crawford's directors state that they have considered the merits of valuing the Lane Crawford name but conclude that it is not necessary. They say that in their view "only limited interest in the 'Lane Crawford' brand name will exist even if the underlying retail and trading business accompany its sale". How do they know? Will they put a "for sale" sign on the business? We can think of at least one player who might be interested....
Webb-site.com is willing to bet that the brand alone is worth something. Let's start the bidding at a minimum HK$1,000,000 for the exclusive global rights to use the name "Lane Crawford" forever. Our offer is good for one week.
Treasury
We have earlier stated that if the Scheme does not proceed, then we would urge the directors to liquidate the property and investment portfolio and distribute the surplus capital to shareholders. The directors state that "this has been raised in the press as a possible way forward" but that it "is not a realistic option as it would leave the Group without the more stable income it derives from these assets".
That income can hardly be regarded as "stable". The company warns that rental income on the office building will fall after a significant number of leases are renewed or re-negotiated within the next 12 months. In the latest year, income from listed investments was $14.2m compared with $24.2m the year before, and as of 11-Jun-99 the company is still sitting on a $220m paper loss on the stocks it bought, apparently near the top of the market in 1997.
You do not get stable income from playing the stock market. We regard the continual uncertainty over what the company will do next with its liquid assets (including the share portfolio) as one of the main reasons that the shares have historically traded at such a big discount to net asset value.
The company already has sufficient resources. It states that total deposits and cash exceeded borrowings by $279m at 31-Mar-99. So if the Scheme does not proceed, then we would stand by our recommendation to liquidate the portfolio, sell off the office block, and pay out the surplus capital.
Our Position
In case you are wondering, our position has not changed.
One of the main objectives of Webb-site.com is to improve treatment of minority shareholders. We regard the increased offer as a minor victory. If we vote against the privatisation, then due to the size of our stake, the deal would not reach the required 90% approval and would not proceed. In this circumstance, other shareholders would be denied the opportunity to receive the increased offer we have achieved for them (unless they can achieve this in the market).
Therefor, it remains our current intention to abstain from voting at the meetings on 12-Jul-99 to consider the Scheme, in order to allow other minority shareholders the opportunity to receive the increased offer.
© Webb-site.com, 1999
Organisations in this story
Sign up for our free newsletter
Recommend Webb-site to a friend
Copyright & disclaimer, Privacy policy