Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

New World Development now has a price tag on its biggest dealmaking misstep.

The Hong Kong conglomerate offered Wednesday to take its Chinese unit private for $2.75 billion, about $350 million more than if its first attempt at the deal had been structured as a general offer, as it is now, and not a so-called scheme of arrangement.

Per share, New World is paying 15 percent more than its March 2014 offer for the unit, New World China Land. The price is 12.6 times the Chinese subsidiary's earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg, compared with a multiple of 10.25 in 2014.

The earlier deal was approved by 99.84 percent of shareholders but ultimately rejected under a regulation applied to schemes of arrangement known as the “headcount test." Just 0.16 percent of the shares were held by 66 percent of independent shareholders, who were able to thwart the transaction because the company was incorporated in the Cayman Islands -- which retained the test -- rather than in Hong Kong, which replaced it in 2012.

Whole New World
The Chinese conglomerate would have saved millions by structuring a deal differently the first time around.
Source: Bloomberg

Although New World Development's shares have dropped about 17 percent since the company's initial run at New World China, its balance sheet is still strong, and spending some of its $7.7 billion cash pile makes sense. The latest deal also puts in context the company's recent sale of assets to Evergrande Real Estate Group, given New World's broader desire to scale back from second- and third-tier cities and projects with lower gross profit margins and focus on first-tier and so-called 1.5-tier cities (such as Chengdu and Tianjin), as well as mid-sized property projects.

Winding Back
New World Development wants to reduce its exposure to second and third-tier cities.
Source: Company reports

Also, as New World Development points out, its Chinese property arm will be able to finance larger development projects because of the parent's access to more competitive financing terms both from banks and from equity markets.

Full ownership of New World China, which focuses on residential development and investment, will turn out to be an astute move if Chinese house prices continue to rise and, as expected by some forecasters, China's two-child policy spurs demand for more (and/or bigger) homes. The company's second-largest segment, which it describes as "carparks and ancillary facilities," will benefit if automobile sales keep rising as a result of a tax break and the possible introduction of rural subsidies to help stimulate economic growth.

Overall, New World stands to benefit from its $350 million embarrassment.

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

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

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