Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Chinese billionaire Wang Jianlin has scored a much-needed victory with the buyout of his Hong Kong-traded real estate arm, Dalian Wanda Commercial Properties. The biggest loser is undoubtedly the former British colony, for whom the loss of such a big and important company raises questions about its value as a funding source for Chinese firms. Whether investors who backed the bid can be considered winners will depend on Wang's success in relisting Wanda on a mainland exchange.

On Monday, Wang got shareholder approval to take Wanda Commercial private, the latest in a series of overseas-traded Chinese companies (most in the U.S.) that have sought to withdraw their stock with the aim of listing back home, where valuations are much higher. Despite misgivings from shareholders including the asset-management arm of APG Groep, which wanted a higher price than the HK$52.80 cash bid, Wang won support from the minimum 75 percent of minority shareholders needed.

The deal breaks a string of setbacks for Wang, whose AMC movie-theater chain was forced to raise its offer for Carmike Cinemas in the U.S. last month at a time when box-office takings at home have been suffering. Backers of Qihoo 360's U.S. buyout can only look on with envy at Wanda's five-month exit from the Hong Kong exchange; the Internet security firm has been waiting for eight months.

For Hong Kong, a city that prides itself on being the go-to destination for large Chinese companies, the departure of a real estate developer with a $30 billion market capitalization represents a challenge. Wanda is not only China's largest landlord, but is also on track to overtake Simon Group to become the world leader by rentals next year, according to Citigroup.

The deal is Hong Kong's biggest-ever privatization and the concern for Hong Kong Exchanges & Clearing, operator of the city's stock exchange, must be that it will spur copycats.

Big Loss
Wanda Commercial Property's HK$34.5 billion take-private will be Hong Kong's largest ever delisting
Source: Citigroup reserach

Wanda Commercial rival Evergrande Real Estate began buying into two mainland-listed property companies in April, sparking talk that the indebted firm was preparing to buy out its Hong Kong-traded shares and list via the back door in the mainland. Such exits would be doubly disheartening for Hong Kong at a time when IPOs have slowed and the benchmark Hang Seng Index remains almost 20 percent below last year's peak, despite its recent rally.

Wanda Commercial was trading at 6.6 times last year's earnings as of Friday's close, while Evergrande was on a multiple of 7. The Shanghai Stock Exchange Property Index trades on a P/E of more than 12 and has climbed more than 20 percent from its January low amid a recovery in Chinese home prices and sales.

Homecoming Call
Hong Kong stocks trade at earnings multiples well below those on China's Shanghai Composite Index
Source: Bloomberg

Broader indexes show a persistent valuation gap of more than 40 percent between Hong Kong and mainland Chinese stocks.

Securing the bumper payday that comes from moving a listing from one market to the other may be more easily said than done, though. About 800 companies await approval from the China Securities Regulatory Commission to sell shares in the mainland, a queue that will take years to clear. Reverse mergers, a popular route to a Shanghai or Shenzhen listing for those impatient with the regulatory process, have been reined in of late. 

And while China’s market for initial public offerings is the hottest it’s ever been, the securities regulator is allowing only small companies past the gate. The average size of this year’s offerings has dwindled to $88 million, the smallest since 2005, Bloomberg data showed this month.

That's bad news for a company the size of Wanda Commercial, unless Wang's status as one of China's richest men helps to sway the minds of regulators. Backers of the buyout -- a slew of private investors in China -- can hardly lose: Wanda has promised shareholders a 12 percent guaranteed annual return after two years if the company fails to list by then. Given Wang's comment that Wanda Commercial is worth at least three times the value it's been assigned by investors in Hong Kong, that's unlikely to be enough of a consolation.

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net