The Taipan's Last Chance

Can Alasdair Morrison save Jardine, one of British Hong Kong's remaining crown jewels?

In mid-March, Alasdair Morrison gathered 75 senior managers of Jardine Matheson Holdings Ltd., the venerable Hong Kong conglomerate, at the Mandarin Oriental Hotel in Macao for a two-day sermon. The message: It's time to make money. To ram the point home, Managing Director Morrison subjected his lieutenants to biting presentations by outside experts ranging from a professor from the French business school INSEAD to a Goldman, Sachs & Co. analyst. Businesses no longer will be judged on sales growth, Morrison warned, but on their ability to earn at least a 12% return on capital. Laggards will be candidates for the chopping block.

If Morrison succeeds in his quest for profitability, he could put the Jardine group at the forefront of a wave of downsizing and refocusing among Asian companies, similar to what Corporate America went through in the 1980s. Moving Jardine into the vanguard of corporate excellence, however, is a tremendous challenge for this 167-year-old institution. Jardine is one of two hongs, or trading companies, still run by the British, and even now its operations employ 51,000 in Hong Kong alone. The Jardine stable boasts some of the best-known names in Asian business--Mandarin Oriental Hotel Group, retail chain Dairy Farm International Holdings Ltd., and real estate giant Hongkong Land Holdings Ltd.

Yet from investors' point of view, Jardine has become dangerously invisible. Jardine Matheson shares have skidded by 60% since the company shifted its primary listing from Hong Kong to Singapore in 1995. The shares now trade at 28% below the company's net asset value and at a modest nine times projected 1999 earnings. Trading volume is so thin that few stock analysts follow the company any more. Last year, profits from operations fell 34%, to $190 million, on sales of $11.2 billion. Jardine is a company that needs to be fixed fast, or somehow broken up, to realize its true value. And rumors persist that Hong Kong magnate Li Ka-shing wants to do just that in order to grab Hongkong Land, the Jardine empire's crown jewel.

Blame for this sorry state of affairs rests largely with Britain's Keswick family, which clings to financial control of the group even though it owns a mere 4.9% of flagship Jardine Matheson. The family, which declined interview requests, has used this tiny stake as a base on which to erect formidable antitakeover defenses. Investors wish the defenses--and the Keswicks--would go away. Ever since Britain agreed in 1984 to hand Hong Kong back to China, the group under Henry and Simon Keswick has been hobbled by management missteps and misguided acquisitions, including the takeover of British construction giant Trafalgar House PLC and various retail chains in Europe.

These forays were part of the Keswicks' strategy to protect their empire before China took charge of Hong Kong in 1997. The Chinese had long reviled Jardine for its role in the 19th-century opium trade, and the flight offshore angered Beijing even more. Patriarch Henry Keswick didn't help by describing China's communist regime as "thuggish."

It's a mess that someone must clean up. What Jardine really needs is a "cultural revolution," says Clarion Capital Asia Ltd. analyst Hatim Hoosenally, who started covering Jardine in 1980. It's not clear if Morrison, a company insider, can pull off this revolution. Jardine's 50-year-old taipan is the son of a Scottish army chaplain and joined the company fresh out of Cambridge University in 1971. Morrison's first job for the company was selling space on cargo ships that called in Hong Kong, filling them with exports ranging from electronics and textiles to Chinese sea-grass mats. He rose to the top of the organization rung by rung.

MENDED FENCES. Today, Morrison is reluctant to criticize the group's many disastrous past moves. But he has quietly set some things right. He has mended fences with China through persistent diplomacy. "It's basically over," says one Chinese trade official of Beijing's dispute with Jardine. "The company has already admitted its mistakes several times."

Morrison also asserts the group is improving profitability, even though it isn't reflected in the numbers. "It's frustrating that this progress has been masked by the economic downturn," he says. In fact, because of the strong cash flow and low debt at Jardine companies, he's on the prowl for acquisitions, as rivals struggle to stay afloat.

The taipan has brought in fresh blood to reinvigorate a group dominated by upper-crust Scots and Englishmen who learned to manage when profits were fat and competition light. He has hired Ronald J. Floto, an American turnaround expert from Kmart Corp., to run Dairy Farm. Edouard Ettedgui, a French Basque who ran business development at BAT Industries PLC, now manages Mandarin Oriental. Finance Director Norman Lyle comes from Imperial Chemical Industries PLC and Zeneca Group PLC, companies known for their focus on the bottom line.

Morrison also has taken an ax to money-losing businesses. He has sold Jardine's controlling stake in Trafalgar House, along with retailers in Britain and Spain. A Philippine cement company, a Hong Kong optical chain, a small finance company, and a Hong Kong tour boat operator--all of them underperformers--are gone.

Jardine has even ended its role in the securities firm of Jardine Fleming. Founded in 1970 with a $130,000 investment, the firm contributed $100 million in annual profits to Jardine Matheson in both 1993 and 1994, the peak of Asia's bull market. But the firm never fully recovered from a subsequent run-in with Hong Kong regulators and Asia's financial crisis.

The strongest signs of a turnaround are at Dairy Farm. The affiliate boasts $5.7 billion in annual sales and 1,271 Wellcome supermarkets, Mannings drugstores, 7-Eleven convenience stores, and other franchise outlets around the region. But "certain businesses were hopeless," Floto says. He has sold Dairy Farm's grocery business in Japan, drugstores in Taiwan, and retail chains in Britain and Spain. He has also axed supermarket management ventures in Beijing and Shanghai. "Dairy Farm had destroyed value since 1993," he says. "We created value in 1998." Net earnings jumped by 11% last year.

Dairy Farm's next task is to build. Floto plans to invest $750 million over the next three years to redesign stores and open new ones. Recently, it opened Hong Kong's first Hello Kitty restaurant in a joint venture. But one acquisition almost backfired: In February, 1998, Dairy Farm bought one-third of Indonesia's largest supermarket chain, Hero. After President Suharto's ouster three months later, rioters destroyed or damaged 28 of the chain's stores. But Hero was the first in Jakarta to be back in business, and market share in the city has grown from one-quarter to one-third.

MORE ROOMS. Mandarin Oriental, one of Asia's premier luxury hotel chains, is now aiming to double its total rooms, to 10,000, mainly by using its reputation for great service to win management contracts to operate hotels. With its core Asian markets in a funk, Mandarin has bought London's venerable Hyde Park Hotel and is spending $170 million on renovations. It is building a new hotel in Miami and wants to strike franchise agreements with other U.S. hotels.

The heart of Jardine's empire remains Hongkong Land. The company has been a consistent money-spinner, earning $75 million despite the crisis, thanks to its stranglehold on commercial space in Hong Kong's Central district. Its properties include the Landmark shopping and office complex and the three towers of Exchange Square, which houses the stock exchange. So it looks smart to polish up this portfolio. Hongkong Land is spending $300 million to demolish and rebuild the former Swire House, one of its core buildings, and another $100 million to upgrade others in the densely packed area.

But building up Hongkong Land poses another dilemma. To obtain the immense capital required to buy and develop premium sites, the company probably would need to take on a joint venture partner. That would dilute Jardine Matheson's--and thus the Keswicks'--stake. In order to expand, "the Keswicks have to risk losing control," says an executive at a rival developer.

Should the Keswicks lose their grip, they know that raiders such as Li Ka-shing are waiting to pounce. Any big fight could make other publicly listed Jardine units vulnerable. Li acquired another hong, Hutchison Whampoa Ltd., in a hostile takeover 20 years ago and led a failed assault on Jardine in 1988. That prompted the Keswicks, who had already moved the company's legal domicile to Bermuda, to erect the tough antitakeover defenses that have depressed Jardine stock.

For nearly two years, Li has been keeping the Keswicks guessing about his intentions. He recently sold most of the 4.7% holding in Hongkong Land he had accumulated since 1997. But he retains the option to buy the shares back. That means Li can start slowly rebuilding a stake until he reaches 3%, the threshold at which he must report to authorities. A potential ally, Hong Kong Tobacco Co. President Charles T.K. Ho, holds an additional 6%.

There's talk within the Li camp of trying to drive up the price on Hongkong Land. If Li and his allies can accumulate enough stock in the real estate firm, they could scare Jardine Strategic, which owns 32.3% of the company, into buying more shares to head off a takeover. If Jardine attempts to acquire a majority stake, then it would have to make an offer to all shareholders--and thus give rivals a chance to bid higher. That could "put the company in play," says a source knowledgeable about Li's strategy. Whatever Li's plans, he is keeping up the pressure.

STUBBED TOES. The longer other Jardine companies pile up cash, the juicier the group becomes as a target. And a repeat of the many bungled investments of the past could prove fatal. Not all analysts are convinced the group's business acumen has improved all that much. "They stub their toes really badly, take big write-offs, and tell shareholders it will never happen again," says Clarion's Hoosenally. "Then a couple of years later they make another big mistake."

If Jardine doesn't start putting its war chest to use before Asia's economies start to recover, however, there's the danger that it will squander a golden opportunity. Even though Morrison wants to keep the group focused, some analysts think that he should look beyond the core businesses of retailing, property, and hotels, which account for half of profits. "They badly need to find a new growth driver," says Goldman Sachs (Asia) analyst Mike Warren.

As for Morrison himself, it is time to show solid results. With most of Asia still in recession, 1999 is shaping up to be another dismal year. Waiting in the wings for the top job is Hongkong Land Chief Executive Percy Weatherall, a Keswick relative. As long as the Keswicks are determined to keep control, outsiders will be skeptical of how much Morrison--or any other taipan--can really achieve. Jardine has a brilliant past. It must do much more, however, if it is to secure a brilliant future.

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