The recent historic sell-off in the stock market is creating opportunities for Hong Kong-listed companies to go private, and keeping their bankers busy.
Battered by the coronavirus outbreak and nine months of pro-democracy protests, the city’s benchmark Hang Seng Index plummeted 16% in the worst start of a year since 2001.
The sell-off dragged the index below its book value in mid-March, a level seen only three times before in data compiled by Bloomberg going back to 1993. That means traders are pricing firms’ assets at less than their stated worth, which makes it easier for majority owners to buy out other shareholders at bargain-basement prices.
Bankers said the dynamic is driving an increase in take-private conversations. Announced take-private and buyout offers for Hong Kong companies surged to $7.3 billion this year, data compiled by Bloomberg shows.
“Certainly there’s more time spent on take-private dialogues now,” said Kerwin Clayton, co-head of M&A for Asia Pacific at JPMorgan Chase & Co. “Valuation is likely a component of why we’re seeing an uptick.”
Out of the Spotlight
Although cheap stocks make the timing attractive, the underlying reasons for making a move are complex.
Some companies facing tough times may want to carry out deep restructuring in a private context, staying away from public scrutiny, Clayton said.
Century-old, family-run Hong Kong company Li & Fung Ltd. announced a take-private offer March 20, after several difficult years for its main sourcing business due to the rise of e-commerce and more recently the U.S.-China trade war.
A consortium of the Fung family and private equity-backed GLP Pte Ltd., a logistics warehouse operator and investor, offered HK$7.22 billion ($930 million), or HK$1.25 per share, to take the company private. Li & Fung’s share price closed at HK$1.07 on Monday, compared with its historic high of HK$21.3 during the firm’s heyday in 2011.
Other companies choose privatization to unlock what they see as value not recognized by the market in their current form.
Hong Kong billionaire Peter Woo and his family, the largest shareholder in Wheelock & Co., proposed to take the property developer private in a cash-and-stock deal, which includes offering one share each of Wharf Real Estate Investment Co. and Wharf Holdings Ltd. to Wheelock investors.
Wheelock cited the “historical holding company discount of the company’s stake in Wharf REIC and Wharf,” referring to a perception that investors punish holding companies with lower share prices than the sum of their assets should be worth.
Morgan Stanley expects there will be more privatization offers in Hong Kong, particularly in sectors such as property and consumer retail.
“Some Hong Kong companies were not being valued at a level that they should be,” said Dieter Turowski, chairman of Morgan Stanley investment banking for Asia Pacific. “That’s an important contributing factor and way more important today than a few months ago as valuations have become quite cheap.”
Along with companies themselves, global private equity firms are expected to play a part in these situations, as they’re currently sitting on a record-high $388 billion war chest to deploy in Asia, according to a Bain & Co. report.
“It’s usually an owner-driven initiative but increasingly private equity firms are playing an important role,” said Turowski. “A take-private of an undervalued company and potentially teaming up with the major shareholder is a very good way of putting money to work.”
One factor powering an increase in privatization offers is especially industry specific. Some renewable energy companies backed by China’s government are finding Hong Kong’s market unwelcoming, and their parents are pulling the plug.
State-owned China General Nuclear Power Corp. announced on Feb. 28 a proposal to privatize and delist its renewable energy unit CGN New Energy Holdings Co., following a similar move from China Huaneng Group Co. in taking its Hong Kong-listed arm Huaneng Renewables Corp. private.
Huaneng said in a filing in November that the renewable energy unit has not been able to raise additional funds in the equity markets since August 2018. As its price-to-book ratio fell to below one, it ceased to serve the purpose of providing a viable source of funding so no longer justified staying public, the company said.
These state-backed units retreating from Hong Kong exchange may seek to be re-packaged and re-list on the mainland in search of higher valuations. Huadian Fuxin Energy Corp. and China Datang Corp Renewable Power Co., could become the next take-private targets, according to Alvin Ngan, a strategist at Zhongtai Financial International Ltd.
“To maintain a listing status is expensive and not rewarding especially if it’s hard to raise money,” said Castor Pang, head of research at Core Pacific-Yamaichi International Hong Kong. “When shares are trading far below book value, many SOEs will be enticed to consider a take-private.”