Billionaire Li Ka-shing’s biggest company may exit one of the two largest supermarket operations in Hong Kong as it seeks to expand other businesses.
Hutchison Whampoa Ltd. (13), which last month agreed to acquire Telefonica SA’s Irish unit, is conducting a strategic review of supermarket chain ParknShop, the company said in a statement on July 20. The supermarket chain could fetch $3 billion to $4 billion in a sale, said a person with knowledge of the matter, who asked not to be identified as the information is private.
“When you look at Hutchison in the last year, they have not done any major sales of assets,” said Jackson Wong, vice president of Hong Kong-based brokerage Tanrich Securities Co. “They have been rather aggressive in buying up telecom services. So selling ParknShop at a good price might be a quick and dirty way instead of listing the chain.”
Hutchison is considering a sale because of the supermarket business’s slow growth, and as the conglomerate seeks to raise cash after striking several acquisitions recently, the person said. The company has announced $4.7 billion of takeovers in the past two years, data compiled by Bloomberg show.
The company has no intention of withdrawing from the city, it said, after the Wall Street Journal reported Li plans to exit a Hong Kong grocery market that’s mature and growing slowly. A timetable hasn’t been set for the review and there is no certainty of a transaction being completed.
The company is working with Goldman Sachs Group Inc. on the review, said two people with knowledge of the matter.
Li, Asia’s richest man with an estimated net worth of $26.9 billion, won the nickname “Superman” in Hong Kong for his investing prowess.
ParknShop and Wellcome are the two largest supermarket chains in Hong Kong with 33 percent and 40 percent share, respectively, according to London-based Euromonitor. China Resources Enterprise Ltd.’s CR Vanguard Supermarket ranked third with 7.8 percent, it said.
China Resources could be a suitor for Li’s chain in Hong Kong, said Jacqueline Ko, a Hong Kong-based analyst at Kim Eng Securities (HK) Ltd. China Resources got 6.9 percent of its sales from Hong Kong last year, according to data compiled by Bloomberg.
“It wouldn’t be a surprise that China Resources might be interested -- they always do M&A,” Ko said. “They said in the past Hong Kong is difficult to get into because it’s always dominated by ParknShop and Wellcome.” China Resources had cash and near cash items of HK$16 billion at the end of last year, according to data compiled by Bloomberg. Vincent Tse, China Resources Enterprise’s spokesman, declined to comment.
A sale of ParknShop doesn’t have to be confined to traditional supermarket operators, Cusson Leung, a Hong Kong-based analyst at Credit Suisse, said by phone today.
“Even though Chinese or foreign supermarket operators may be interested, it may also draw interest from financial investors such as private equity funds,” Leung added “ParknShop could be a very ideal candidate for a business trust spin-off as it has huge amount of steady cashflow and it could offer lucrative yields.”
In Hong Kong, where 16 percent of its revenue is generated, Hutchison made 53 percent of its sales from retail, quarter of which was from ParknShop, Watsons and electrical devices retailer Fortress, according to its 2012 annual report.
ParknShop in Hong Kong has more than 270 stores, and has delivered growth from productivity and cost efficiency, the annual report said. In China, the supermarket operations reported declines in total revenue, reflecting lower consumer spending from slower economic growth, according to the annual report.
“ParknShop is one of their large retail arms, I do expect more of this coming when the price is right, especially now that others know they are interested in selling their assets,” said Tanrich’s Wong.
Europe accounted for 42 percent of Hutchison’s revenue, where retail also led sales. Telecommunications was the second-biggest driver of sales in both regions, according to the annual report.
Hutchison shares rose as much as 1.1 percent to HK$85.45 in Hong Kong today before trading at HK$85.2 as of 1:15 p.m. local time. The benchmark Hang Seng Index dropped 0.1 percent. China Resources advanced as much as 2.4 percent.
Hong Kong Commitment
“It’s not clear whether Li is planning to sell ParknShop, but even if he were to sell, no one should ever doubt Hutchison’s or Li’s commitment to Hong Kong,” said Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong. “ParknShop is a valuable franchise which would be hard to replicate, with commanding market share and effectively a duopoly position in Hong Kong. Hutchison will surely get a strong valuation for the business.”
Hutchison agreed on June 24 to buy Telefonica SA (TEF)’s O2, Ireland’s No. 2 mobile operator, for as much as 850 million euros ($1.1 billion) to increase the group’s wireless market share to 37.5 percent. The company was also in talks with Telecom Italia SpA (TIT) over a potential merger of their Italian mobile-phone assets, but they were halted over disagreements about valuation, according to people familiar with the matter.
Hutchison’s joint venture in December sold its stake in a company that owns Singapore’s Marina Bay Financial Centre’s Tower 3 for S$1.035 billion ($817 million) to DBS Group Holdings Ltd. The Hong Kong-based operator of ports and telecommunication networks has sold stakes in other real estate companies, and in October 2009 sold its computer-services company to Avnet Inc. (AVT), a U.S. distributor of technology products.
Jeremy Lau, a Hutchison spokesman, declined to comment on the potential valuation today.
Hutchison reported in March full-year profit that beat analyst estimates on improved earnings from retail, telecom and utilities businesses from China to the U.K. Growth in retail and property as well as foreign exchange gains boosted operating income, the company said.
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