Deals

Matthew Brooker is an editor with Bloomberg Gadfly. He previously was an Opening Line columnist, an editor and a bureau chief for Bloomberg News. Before joining Bloomberg, he worked for the South China Morning Post. He is a CFA charterholder.

This was a defeat foretold. Companies with an excess of cash on their balance sheets often become takeover targets. Rarely, however, are shareholders offered so little to exchange their holdings.

Cheung Kong Infrastructure's all-stock bid for Power Assets Holdings was at a premium of only 1.8 percent when announced in September. A subsequent increase in the proposed share-exchange ratio to 1.066 from 1.04 failed to impress.

The $12.4 billion deal had plenty of strategic logic but was never able to overcome suspicions that it was tilted in favor of CKI and, by extension, its controlling shareholder, Hong Kong's pre-eminent business tycoon and richest man, Li Ka-shing.

The votes at yesterday's meeting tell the story. More than 99.9 percent of CKI shareholders voted in favor. Over at Power Assets, only 50.8 percent of independent shareholders supported the deal, well short of the 75 percent threshold required.

Proxy advisers Institutional Shareholder Services and Glass Lewis both had recommended Power Assets investors vote against the offer, calling it too low. Brokerage CLSA said it was ``almost impossible'' for the offer to pass unless it was sweetened further.

Besides the disputed exchange ratio, there was the issue of the special dividend. CKI proposed a HK$5 (65 cents) payout, subsequently raised to HK$7.50, conditional on the offer being approved. Power Assets shareholders, not unreasonably, questioned why CKI investors should share in a dividend being funded by their company's $8.7 billion cash pile, arguing that the payout should be made before rather than after the takeover.

Electric Piggy Bank
Power Assets Holdings Net Debt, HK$
Bloomberg data

This proposal directly benefited the controlling shareholder. Li's flagship, CK Hutchison, owns about 76 percent of CKI, which in turn holds about 39 percent of Power Assets.  A HK$7.50 dividend paid by Power Assets would have meant about HK$6.2 billion flowing to CKI. Post-takeover, the same dividend paid by CKI would have meant about HK$14 billion going directly to CK Hutchison.

Given the lay of the land, the mystery is why the companies pushed ahead with yesterday's shareholder votes without a sweetened offer. While both expressed disappointment with the outcome, they can't have been surprised.

While Power Assets shares dropped 5.4 percent when the market opened, minority shareholders will be glad to have held on to their cash and will renew pressure for the company to pay a special dividend. It may be too early for them to celebrate. Yesterday's meetings are a rare reversal for Li, who like most Hong Kong corporate titans is accustomed to controlling his companies with a minimum of interference from minorities. 

Show Us the Money
Cheung Kong Infrastructure's leverage has risen
Bloomberg Intelligence

Yet the 87-year-old remains the effective controlling shareholder of Power Assets, and in a position to direct the company's strategy. The takeover was designed to strengthen CKI's over-leveraged balance sheet so that the combined company could pursue global acquisitions in energy, transport, water and other infrastructure assets. An alternative would be for Power Assets to pursue such deals on its own, at least for the next 12 months (until another takeover offer could be made.) Religare, a brokerage, has cited the National Grid's U.K. gas-distribution business as a possible target. Keep watching.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Matthew Brooker in Hong Kong at mbrooker1@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net