February 28, 2020 / 4:33 AM / a month ago

Breakingviews - Hong Kong property tycoon builds model buyout

A general view of Mount Nicholson project developed by Wheelock and Company, with one of the four-bedroom houses sold for HK$1.16 billion ($148.7 million), in Hong Kong, China November 1, 2017. REUTERS/Bobby Yip

HONG KONG (Reuters Breakingviews) - A Hong Kong tycoon’s take-private offer could become a model for the city’s stingy real estate industry. Former chairman and majority shareholder Peter Woo wants to take developer Wheelock and Company private using cash and shares in subsidiaries. He’s shrewd to pull the plug on the discounted, thinly traded holding company while an epidemic threatens commercial property sales. The 52% implied premium is fair, and should be a pleasant surprise to local investors.

Shareholders in Wheelock will receive one share each in subsidiaries Wharf Holdings and Wharf Real Estate Investment Company, plus a HK$12 cash payment, per Wheelock share they hold. That adds up to HK$71.90 per share on an undisturbed basis, equivalent to a record high. Wheelock shares spiked close to that level on the back of Thursday’s announcement, but subsequently fell to around HK$60 Friday morning – still up 28% from the announcement.

Property conglomerates listed in Hong Kong generally suffer from low valuations and thin trading volumes, and Wheelock is no exception. Before the take-private offer, its stakes in Wharf Holdings and Wharf REIC were worth around $16 billion combined, a third more than the parent’s own market capitalisation. The deal erases that discount by offering the stakes to Wheelock shareholders directly, whom the company says will also benefit from higher dividends. Delisting the parent, which accounts for just over a tenth of the trio’s average daily trading volume, could also help divert some liquidity into the remaining listed entities.

To be sure, Woo benefits too. Paying out HK$12 per share will cost him around $1 billion in cash, compared to the roughly $5 billion he would have had to fork out on an all-cash deal, based on undisturbed share prices. Shareholders worried the tycoon is buying the company’s assets on the cheap may not have much luck rallying support to stymie the deal, however, as the Wuhan epidemic and Hong Kong’s protest movement continue to hammer prospects for the commercial property sectors in the city and on the mainland.

Minority investors in Hong Kong are hard bargainers at buyouts. An attempt by Li Ka-shing’s CK Infrastructure to absorb cash-rich Power Assets was shot down in 2015 for being too cheap; in 2018 Harbin Electric’s delisting failed for similar reasons. Woo’s offer is a clever attempt to be fair to shareholders, without forking up too much money.

Breakingviews

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