Elliott's Asian Wasteland
The Chinese are famous for their ability to think long term, as shown by the reputed response of former Premier Zhou Enlai when asked about the impact of the French Revolution: ``Too early to say.'' 1
It's a tale that billionaire hedge-fund manager Paul Singer might keep in mind after his Elliott Management was defeated in its attempt to oust Bank of East Asia Chairman David Li and block the company's ability to sell new stock without preemptive rights.
Elliott has amassed a 7 percent stake in the Hong Kong-based bank and is pushing for the company to sell itself, saying in February that BEA has been mismanaged for 20 years and that an auction is the only realistic way to achieve meaningful returns for investors.
The board of BEA, one of the last independent family-run banks in Hong Kong, is having none of it. Li, scion of the founding family and also the bank's chief executive officer, has declined to contemplate a sale and said management will focus on improving the business. Li's re-election was approved with 71 percent of the vote at Friday's meeting, while the share-sale mandate drew 70 percent support.
BEA makes a tempting target. Li, with the rest of his family, owns only about 9 percent of the bank's shares, making it potentially vulnerable. The company has been an underperformer: Net income fell 17 percent in 2015, and is forecast to decline again this year. The stock has traded at less than book value since mid-2015; Hang Seng Bank, a unit of HSBC, is valued at 1.8 times.
Yet BEA has a valuable franchise, including the second-largest overseas bank network in mainland China after HSBC, with 129 branches. Acquirers have been willing to pay a hefty premium for Hong Kong banks, either as a bridge into or out of China. Singapore's OCBC paid 1.8 times book for Wing Hang Bank in 2014. A year earlier, Yue Xiu Group offered more than 2 times for Chong Hing Bank.
A willing seller makes a big difference. Hong Kong's family-run businesses don't yield control easily, even when they own less than a majority of the shares. Faced with the threat of a hostile approach, BEA turned to friendlier faces. It sold more than $800 million of additional shares last year to Japan's Sumitomo Mitsui Banking Corp. SMBC is now the bank's largest shareholder with almost 18 percent, followed by Spain's CaixaBank with 16.7 percent, according to data compiled by Bloomberg.
Elliott says that BEA has issued stock five times since 2007, increasing the number of shares by 36.8 percent and diluting independent shareholders. Hence the hedge fund's opposition to the so-called general mandate 2 (widely used in Hong Kong), which allows companies to sell additional stock without giving existing shareholders the option to maintain their percentage interest. SMBC and CaixaBank also both agreed to restrictions on selling their stakes, which Elliott has argued should be lifted.
For BEA's part, it can be argued that the founding family's connections are an essential business asset. In 2009, it was the first foreign bank to be allowed to offer Internet banking in China. The following year, BEA also became the first to conduct cross-border yuan settlement. Such advances are testament to the strength of the bank's relationships. The case can be made that a non-Chinese controlling shareholder might struggle to maintain that advantage.
The bank is also looking leaner these days. Its efficiency ratio, a measure of operating expenses to income, was 53 percent last year, down from 63 percent in 2011 and only a smidgen below Hang Seng Bank's.
Elliott has had some victories in its campaign. Last year, it successfully took Bank of East Asia to court force the bank to disclose the terms of its share sale to SMBC. And proxy adviser Glass Lewis last week lined up behind the fund by recommending shareholders oppose Li's reappointment as director and reject the general mandate. Still, the adviser said it didn't agree with putting the bank up for sale.
Elliott has a mixed record in Asia. It failed in its opposition to Samsung Group's buyout of unit Samsung C&T last year, which the fund argued was unfair to minority investors. Its public campaign did spark a sharp rally in the price of Samsung C&T shares, though. Similarly, Singer's fund unsuccessfully sought to pressure OCBC into raising its bid for Wing Hang Bank, and eventually sold its stake. Elliott did succeed in getting Singapore real estate firm CapitaLand to raise the buyout offer for its shopping mall unit in 2014, according to people familiar with the matter.
Singer has shown plenty of willingness to play hard-ball, and to be patient. Anyone doubting that need only look at Elliott's experience in Argentina. Singer rejected a 2005 debt restructuring by the country and hung on for a total of 15 years. After an agreement was finally reached in February, Elliott was slated to receive a payment on principal equal to about four times the face value of the bonds it held.
With BEA's management going nowhere, the hedge-fund manager may be in line for a similar wait this time around.
The story is apocryphal. Zhou actually thought he was being asked about the 1968 student riots in Paris. The story's survival nonetheless speaks to popular perceptions of the Chinese psyche.
Rules permit companies to issue as much as 20 percent of their share capital under the general mandate, a ceiling that is sought by many Hong Kong companies. Bank of East Asia's mandate is 10 percent.
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