Li Ka-Shing Offers Slim Payout Now With Promise of Sweet Returns

Updated on

The last time Hong Kong’s richest man rejigged his corporate empire, Li Ka-shing offered a slim payout to minority shareholders, who ended up profiting handsomely anyway. His latest deal may go the same way.

Li’s Cheung Kong Holdings Ltd. offered a 2.3 percent discount when it bought Hutchison Whampoa Ltd. earlier this year. Investors got stakes in a larger conglomerate and a property spinoff -- holdings now worth 30 percent more than Hutchison stock before the reshuffle. That beat the benchmark index’s 7.5 percent drop through Wednesday, as well as gains in every other large company trading in Hong Kong.

The returns show why shareholders are cheering the tycoon’s latest lowball deal: Cheung Kong Infrastructure Holdings Ltd.’s Tuesday offer to buy out its $19 billion electricity arm, Power Assets Holdings Ltd., with stock valued at just 1.8 percent above the last close.

Shares of the target jumped Wednesday by the most in almost seven years, while Cheung Kong Infrastructure gained the most since 2011, adding a combined $2 billion of market value. The merger could lead to higher dividends and will bring benefits over a six- to 12-month period, said Niklas Hageback, who helps oversee about $189 million at Valkyria Kapital Ltd.

“They will squeeze out much more efficiencies, and that will be beneficial to the shareholders,” said Hageback, who owns Power Assets shares and said he may buy more. “If you take it in a longer perspective, and we have a normal stock market environment, then this is also likely to outperform.”

Blocked Deals

Li is offering investors in Power Assets, which has an $8.7 billion cash hoard but declining return on equity, the chance to get stock in a company with faster earnings and dividend growth, according to Credit Suisse Group AG. The combined company will own and operate power utilities, waste management and highways in the U.K., Australia and China.

Still, “it won’t be easy” to get Power Assets investors’ approval, given the low premium compared to other successful privatizations, Citigroup Inc. said Wednesday. The ratio between the two companies’ share prices is near a historical low, and Cheung Kong Infrastructure has room to offer a 15 percent premium to Power Assets shareholders, according to Morgan Stanley.

The 1.8 percent premium on offer trails the average 24.2 percent paid in utility acquisitions globally in the past 12 months, according to data compiled by Bloomberg. Acquirers of Hong Kong-listed companies in the past five years offered an average 15.3 percent premium.

Power Assets’s independent shareholders can block the takeover if more than 10 percent of them vote against it.

Other takeover deals by tycoons in Hong Kong have failed before. New World Development Ltd., controlled by the family of billionaire Cheng Yu-tung, last year didn’t garner enough votes for its $2.4 billion attempt to buy its listed Chinese property unit. That’s despite offering a 32 percent premium.

In January last year, Glorious Property Holdings Ltd. shareholders rejected an offer by Chinese businessman Zhang Zhirong to take the developer private.

Global Investments

Cheung Kong Infrastructure Chairman Victor Li said Tuesday that “bigger is better” in the infrastructure business, so the added heft will help it compete for investments globally. A larger market value gives it a better chance of becoming a constituent of Hong Kong’s benchmark index, Citigroup analysts led by Pierre Lau wrote in a report Wednesday.

The new company would also have a bigger free float, as control by the Li family drops to just under 50 percent from

75.7 percent before the merger. The offer comes after a 42 percent jump in Cheung Kong Infrastructure shares over the past three years, outpacing the 6.4 percent gain in Power Assets and

7.4 percent rise in the benchmark Hang Seng Index.

“The small premium is just short term, but if you’re looking at medium to long term the consolidation will bring synergy effects,” said Linus Yip, a Hong Kong-based strategist at First Shanghai Securities Ltd. “We are encountering difficult times as the global economy is losing steam. It’s a good time to consolidate.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE