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.

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

Investors in Dalian Wanda Group Co.'s companies haven't had much good news of late.

Billionaire owner Wang Jianlin's global buying spree is on Beijing's radar and a slowing Chinese box office is taking a toll on his cinema operations. No wonder Wang is taking a leaf out of Hong Kong tycoon Li Ka-shing's playbook and focusing on cash generation first and foremost.

Hong Kong-listed Wanda Hotel Development Co. said in a statement late Wednesday that it had agreed to sell controlling stakes in property projects from Australia to Chicago to affiliate Dalian Wanda Commercial Properties Co., leaving it to concentrate on the management of theme parks and hotels. Last month, most of those domestic theme park and hotel assets were sold to property developers Sunac China Holdings Ltd. and Guangzhou R&F Properties Co. in a $9.4 billion transaction. Shares in Wanda Hotel jumped as much as 41 percent Thursday, before closing up 19.8 percent.

Room Upgrade
Shares in Wanda Hotel Development have almost doubled this year
Source: Bloomberg

Shareholders are right to cheer. This restructuring will turn Wanda Hotel from a company bleeding cash into a cash cow. Sunac is now obliged to pay Wanda Hotel about 650 million yuan ($98 million) every year for the next two decades in management fees. To put this amount in perspective, last year, Wanda Hotel generated just HK$385 million ($49 million) in operating cash flow. In addition, getting the hotel projects off its hands means Wanda Hotel no longer needs to incur any heavy capital expenditure.

House of Horrors
Wanda Hotel's finances have been pinched by expensive project developments
Source: Bloomberg

Wang's hope is that Wanda Hotel will now command a higher valuation. International hotel operators trade at an average 26.3 times forward earnings. With Wanda Hotel going asset light, shouldn't it join the ranks of Marriott International Inc. and Hilton Worldwide Holdings Inc., too?

Having a listed company with a higher valuation can only serve Wang well, because he needs the money. Banks are scrutinizing his funding, and there's little sign that Dalian Wanda Commercial Properties will get approval to list in China anytime soon. In last year's take-private agreement, Wang promised that if he couldn't re-list the unit by August 2018, he would pay investors up to 12 percent annual interest.

Don't expect this latest deal to close quickly, however. A transaction of this size will probably be counted as a reverse takeover, which in Hong Kong means having to meet rules associated with a new listing.

Investors may be experiencing some temporary euphoria, but the hurdles Wang faces aren't over yet.

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

To contact the authors of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net
Shuli Ren in Hong Kong at sren38@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net