Third Time Lucky for Harbour Centre?
20 July 1999
Wharf and Harbour Centre Development (HCD) yesterday confirmed that they were in preliminary discussions to privatise HCD by way of a scheme of arrangement. This follows hot on the heels of the privatisation of Lane Crawford by Wharf's controlling shareholder, Wheelock. This was covered extensively in previous articles.
We'll take you through the recent history of HCD, and reveal some information on its investment holdings which we've pieced together from public disclosures.
Third attempt
HCD was established in 1965 and listed on 15-Feb-71. Wharf has tried to privatise HCD before. On 23-Apr-93 Wharf announced a proposed privatisation of HCD at HK$9.00 per share in cash. At the time, Wharf held 57.54% of HCD.
The Independent Board Committee, consisting of Mr. Hui Sai Fun and Mr. H.M.G. Forsgate, considered the terms to be "fair and reasonable" and recommended shareholders to approve the deal. Mr. Hui was Deputy Chairman of HCD and Chairman of private property group Central Development, owner of Central Building and Central Tower in (you guessed it) Central. Mr. Forsgate was a director of Wharf until his retirement in 1979, having joined the group in 1947.
However, after the first document went out proposing the scheme on 21-May-93, it must have become clear to Wharf that the deal would not win approval, because on 15-Jun-93, the date set for the meeting to approve the scheme, the meetings were adjourned and Wharf announced an increase in its offer to $10.50 per share.
The net asset value of HCD had been quoted in the first document (as of 19-May-93) at $10.12 per share and by the time of the second document (as of 22-Jun-93) the value had risen to $10.65 per share, due to increases in the market value of its listed investments. So Wharf's second offer represented an increase of 16.7% and a 1.4% discount to net asset value. The small discount probably just reflects market fluctuations in NAV and we suspect the deal was struck with the opposing shareholders at NAV on 15-Jun. Needless to say, the Independent Board Committee thought the increased offer was also "fair and reasonable". They were advised by Schroders Asia.
Privatisation Failed
In the end, the second privatisation did not achieve the required 90% approval of the minority shareholders who voted on 12-Jul-93. Mr. Hui resigned from HCD on 1-Oct-93.
We don't know who blocked the privatisation at either stage, but we do know that Hongkong and Shanghai Hotels had a shareholding in HCD at the time. At 31-Dec-92, they held 33,765,000 shares representing 10.72% of HCD. They sold it progressively through 1993 and 1994, making an extraordinary profit of $297m and achieving an average sale price of $11.08 per share, significantly more than the Wharf offer.
It is reasonable to suppose that there were at least two separate opposition groups, since the increase was probably designed to satisfy one group, but the deal still failed. It is interesting to note that on 20-Oct-97, HCD disclosed an increase in Wharf's holding, by 4.02% from a previous 57.61% to 61.63%. This is equivalent to 9.5% of the public float prior to the purchase. Since the turn-out of shareholders at general meetings is almost never as high as 95%, the 4.02% stake would have been enough to block the privatisation. It therefor seems possible that the second blockage has been removed.
HCD, 1993-1998
Since the 1993 offer, HCD has conducted a number of substantial transactions.
In 1996, the company sold 3 hotels in Texas, part of the Omni chain, for HK$1,055m, making a small profit of $24.2m. It also bought a site at 60 Victoria Road, Kennedy Town for $146m which is still held for a proposed redevelopment into a 3 to 4-star 242 room hotel.
In 1997, the company sold its 23.95% stake in Furama Hotel Enterprises during the takeover by Lai Sun Development. This was a well-timed sale by the controlling Fu family, for cash at the top of the 1997 bull run, when property values were at their craziest.
HCD benefited from the general offer, recording a profit of some $1.15bn on its Furama stake. Unfortunately, they turned around and put it all back into the HK and overseas stock markets. Total purchases of listed investments for HCD in 1997 were $3.05bn, only $12m less than they received from sales of investments, which included the Furama stake sale of about $1.65bn. There must have been net losses on other transactions of about $182m, reducing the exceptional profit on the Furama sale to $969m.
The 1997 results recorded a $336m provision for the reduction in value of long term investments, and the resulting book cost exceeded market value at 31-Dec-97 by a further $328m. In 1998, HCD made no changes to its investment portfolio, and the market value declined by a further $189m.
At Webb-site.com, we believe listed companies should not use shareholders' funds to play the stock market. This is poor corporate governance. If a company has surplus funds, it should return the excess cash to shareholders, who can then choose whether or not to put these funds back into the stock market.
The Investment Portfolio
So what stocks did HCD buy? We don't know, but we do have a clue. According to a disclosure made by Wheelock, on 4-Nov-97 the interest of Barclays Private Bank & Trust in Wheelock increased through a 1% boundary to 61.02% from a previously disclosed 60.16%. Of this interest, 1.00% was held by a company called Hundred Tone Investments Ltd. That's equivalent to about 20.3m shares of Wheelock. HCD's 1997 accounts show that Hundred Tone is a wholly-owned subsidiary domiciled in the BVI. It's not possible to know the timing of the purchase of these shares, but on 4-Nov-97 the Wheelock share price was about $9.00. So perhaps about $180m was spent on Wheelock shares.
Other Investments
In 1997 HCD acquired interests in two associates. One, Hopfield Holdings (20% owned) is the joint venture vehicle for the Kowloon Station Package 2 development with the MTRC. The rest of this is held 20% by Wharf, 20% by Wheelock, 20% by New Asia Realty & Trust (NART), and 20% by Realty Development Corporation (RDC), all of which are HK-listed. RDC is a 72.4% subsidiary of NART, which in turn is a 74% subsidiary of Wheelock, which has a 48% interest in Wharf. Are you still with us?
HCD's other associate is a 50% interest in a company called Gallaway Tune, which is recorded as a BVI investment holding company. We don't know what investments it holds, but a glance at the Mar-98 accounts of RDC shows that it owns the other 50%.
HCD's total investment in these associates in 1997 was $519m, with no increase in 1998.
Cross Holdings
While we are on the subject of cross-holdings, note that RDC has a similar 50% investment holding BVI associate called Diamond Heights Investments. A glance at the Dec-98 accounts of Beauforte Investors Corporation (BIC) shows that it owns the other half. BIC is listed and 49.9% owned by Wharf. BIC also holds 8.7% of the Lane Crawford B-Shares for which it will shortly receive $50.8m following the privatisation by Wheelock.
Given that Wheelock was once known as World International (Holdings), this tangle of cross-holdings must be the original World-Wide Web.
HCD Today
HCD's main assets today are:
Hongkong Hotel
The Hongkong Hotel is in Canton Road, Kowloon. Completed in 1969, the hotel currently has 665 rooms and is in a prime location next to Star House, the Star Ferry pier and the vast Ocean Terminal/Harbour City shopping complex. The site on which the building stands has an area of 58,814 sf, allowing a potential development of 882,210 sf with a plot ratio of 15 times. The land was originally leased in 1864 for 999 years and was once part of the wharf and godown area. Old leases like this contain no restrictions and thus no premium will be payable to the Government if a change of use is proposed on redevelopment.
As part of the hotel building, there is also 35,000 sf of office space and 136,540 sf of retail space.
Wharf has recently disclosed plans to demolish the strip of buildings which now stands hidden behind the Gateway 1 & 2 complex, making way for a 3.02m sf 100-storey tower. Interestingly, the Hongkong Hotel was the only building in the strip not mentioned in the list of buildings that would be demolished (comprising 4 office blocks and the other 2 hotels). Privatising HCD will allow Wharf to include the Hongkong Hotel site in the project, and execute it as a 100%-owned vehicle, rather than having to do a joint venture with HCD in order to get hold of its land and consolidate the plots. As the owner of the only plot of land on that strip that Wharf does not own, HCD could quite reasonably demand a high price for co-operating with the plan.
The hotel and its retail/office portion were written down to valuations of $1,918m and $816m respectively in the Dec-98 balance sheet, valuing the combined building at $2,734m. This equates to an accommodation value of about $3,100 psf based on a 15x plot ratio for redevelopment.
Kennedy Town Site
The site is still held for redevelopment at a carrying cost of $155.1m and has been in the "planning stage" since 1996. The lease expires in 2064.
Associated Companies
HCD has a 20% interest in the Kowloon Package 2 residential project. If Wharf privatises HCD this will take Wharf's direct interest in the project up to 40%. According to press reports, the group and MTRC recently agreed a reduced land premium with the Government of HK$1,327 psf. This followed the consortium's winning bid in the MTRC tender in Oct-97, just days before the market crashed. The tender was for the right to co-develop the site with MTRC. Developers typically offer the MTRC a profit share and sometimes property from the project, and the MTRC picks the most attractive offer.
At the time of the tender, the land premium was not finalised, opening the way for the subsequent reduction. MTRC is not taking such chances these days, and has set premiums with the Government on the latest project (Kowloon Package 3) before commencing the tender process.
We have no idea what HCD's 50% associate Gallway Tune's investments are worth, since they are not visible in the balance sheet of HCD.
Listed Investments
We don't know what these are worth now, but the Hang Seng Index has risen about 34% since 31-Dec-98, the year-end of HCD. As was the case with Lane Crawford, it will be necessary for HCD to disclose the stock components of the investment portfolio at the latest practicable date. The market value at 31-Dec-98 was $961.1m. As explained, we believe that part of this may be Wheelock shares which have risen strongly this year.
What is Fair and Reasonable?
We see no reason why shareholders should be offered anything less than current adjusted net asset value, nor should they receive much more. HCD is basically a bundle of readily identifiable and easily-valued assets. Unlike Lane Crawford, there is no debate to be had about the value of a retail business and its stock in trade.
Net asset value must be adjusted to reflect the value of the hotel building either in its current form or as a redevelopment site if greater, and must also reflect the latest practicable valuation of the investment portfolio and the value of the interest in the Kowloon Package 2 project.
Wharf's last attempt to privatise HCD (after a cheap opening bid) was basically at net asset value, and they should save themselves the effort and go straight to NAV to secure public approval of this deal.
© Webb-site.com, 1999
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