Lo bid for HI
6 November 2002
Henderson Land Development Co Ltd (HLD, 0012) has today announced a privatisation offer at HK$7.35 per share for the shares it doesn't already own in Henderson Investment Ltd (HI, 0097), which is 73.48% owned by HLD and 1.43% owned by Mr Lee Shau Kee (Mr Lee), the Chairman of both, who in turn owns 65.21% of HLD.
HI is an investment holding company which owns 36.42% of The Hong Kong and China Gas Co Ltd (HKCG, 0003), 43.67% of Miramar Hotel and Investment Co Ltd (MHI, 0071), 30.98% of Hong Kong Ferry (Holdings) Co Ltd (HKF, 0050) and 66.67% of Henderson Cyber Limited (HC, 8023). HKCG owns 18.05% of HC.
HKF has a small cross-holding of 0.16% in HI, and directors own 0.06%. So that leaves 700,718,572 shares, or 24.87% of HI held by independent shareholders.
In the announcement, HLD remarks that the offer price represents a premium of 8.4% over the net tangible asset value of HI of $6.78 per share (30-Jun-02), but this conveniently overlooks the fact that the stake in HKCG is held in the HI books at the attributable share of net assets, not market value. As a de facto monopoly utility with a lot of sunken assets and property development potential in its old gas works, HKCG is worth a lot more than book value. At 30-Jun-02, HKCG had unaudited net assets of $3.10 per share (cum-dividend) but closed today at $10.55.
At today's closing price, the 36.42% stake in HKCG is worth $21.87bn, or $7.76 per HI share. That means the offer on the table of $7.35 per share is worth less than the stake in HKCG, and HLD would get all of the other assets for free (in fact, it would be paid $0.41 to take them). There is no great rocket science in the price HLD is offering - it just happens to be the highest market price in the last 12 months, reached on 17-May-02.
If you add in the premium to book value based on the market price of HKCG, then this raises the book value of HI from $6.78 to about HK$12.26 per share. That is our current estimate of fair value of HI. All the other listed companies (MHI, HKF and HC) are basically property companies in one form or another, and should be included based on their share of net assets, which is how HI accounts for them.
So at $7.35, HLD is offering a discount to fair value of about 40.0%. Also remember that we have only taken the market price of a minority share in HKCG, not the price for the controlling stake which HI owns. If it were ever to sell the controlling stake, it would almost certainly get more than market price.
Block this deal
The good news is that this deal is a scheme of arrangement, and as such it will go to independent shareholders' approval on a poll vote. It requires only 10% of the independent shares to block the deal. As there is a free float of 24.87%, that means that 2.49% will be enough to block it.
TraHK
HI, with a market cap of $20.43bn, is the 24th largest company in the Hang Seng Index. The Tracker Fund of Hong Kong (TraHK, 2800), which tracks the HSI, currently has 2,753,922,500 units outstanding, and each 1m units hold about 10,138 shares in HI, so that means it holds about 27.92m shares or about 0.99% of HI. It is managed by State Street Global Advisors.
As an index fund, TraHK also owns 0.99% of HLD, but that doesn't make this proposal neutral for them, because HLD is only acquiring 26.52% of HI (including the non-public shares held by directors and HKF). So for every dollar that TraHK loses from a discounted privatisation offer, it only makes back $0.2652 through its share of HLD. This equates to an overall loss of HK$100.7m for TraHK in terms of the underlying asset value of its shareholdings. For this simple reason, we urge TraHK and any other HSI tracking fund to commit to vote against the offer. The tens of thousands of Hong Kong public investors who put their faith in the Government's launch of TraHK deserve nothing less.
TraHK has a Supervisory Committee of 5 persons, comprising two from the Exchange Fund Investment Ltd (EFIL, which was set up by HKMA to manage the Government's equity portfolio), Lawrence Fok, Deputy COO of HKEx, Marvin Cheung, the local Chairman and CEO of KPMG, and Fong Hup, the Senior Audit Partner of Deloitte Touche Tohmatsu.
KPMG audits HLD and Deloitte audits HI, so these gentlemen may have a conflict of interest if asked to rule on the matter. Mr Cheung was named in July as Chairman of the merged SEHK listing committees due to be in effect on 1-Jan-03.
EFIL
We also call upon the Hong Kong Government to disclose the number of HI shares it still has in the HKSAR Exchange Fund (via EFIL) and vote them against the privatisation.
Increase not ruled out
Under Rule 18.3 of the Takeover Code, which includes privatisations, an offeror can increase its offer so long as it has no publicly stated that the offer will not be increased. HLD has not made any such statement. Interest rates are at record lows, and HLD, which is advised by HSBC, is believed to be arranging a loan facility to pay the purchase price with an interest rate of only 2.5%. That may even go lower after tonight's US Federal Reserve meeting. The dividend yield on HKCG alone is 3%, not to mention the income on all the other HI assets.
So Mr Lee, if you want to privatise HI, put your hand in your HLD pocket and pay investors a decent price. A 40% discount is just insulting.
How you can help
If you hold HI shares or manage a fund holding HI shares, please contact us and tell us in confidence:
- how many shares you hold;
- whether you intend to vote against the current proposal; and
- what you think an acceptable privatisation price would be.
We will not disclose your name or shareholding to third parties without your consent, but we will announce the aggregate opposition to the current offer and, if sufficient, approach HLD to seek a better deal.
If investors in Hong Kong unite on issues like this, then they will seldom be on the receiving end of such grossly inadequate terms in future.
© Webb-site.com, 2002
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