Hong Kong Parkview Group said on Tuesday it would buy 12 property projects from Cofco Land at a total cost of HK$14.167 billion ($1.8 billion). The transaction will transform the Hong Kong-listed company from a small-scale property investor that holds one single floor in an office property in the Central district into a sizeable owner of mixed-use and commercial properties in China.
Cofco Land is a wholly owned subsidiary of Achieve Bloom, which became the controlling shareholder of Parkview in July 2012. They are both part of Cofco Corp, a Chinese state-owned enterprise that focuses primarily on food and agricultural products but is also one of just 16 SOEs approved by the government to develop and invest in real estate projects.
Hence, Achieve Bloom’s acquisition of a controlling stake in Parkview was widely viewed as part of a recent trend that has seen Chinese property developers buy Hong Kong-listed shell companies in order to use them as capital-raising platforms for their real estate projects. Achieve Bloom, which currently owns 69.3%, did not initially say this was the plan, but in response to media reports in November last year, it noted that Cofco’s long-term strategy is to make a “possible asset injection” into Parkview in the future.
A source said the Cofco group has been working on a plan to seek a backdoor listing of its property assets in Hong Kong for two to three years in response to the restrictions regarding real estate financing in China. However, the large size of the asset injection means it is treated as a reverse takeover and, because it is less than two years since Achieve Bloom took control of Parkview, the company will need to seek a new listing approval.
Once the new listing and the asset injection are completed, Parkview will change its name to Cofco Land Holdings.
Parkview’s share price initially jumped on confirmation that there will be a substantial injection, gaining 15.5% to HK$4.62 shortly after opening on Tuesday. This was after it had already jumped 7.7% last Monday and 14.3% last Tuesday morning, which led to the stock being suspended mid-session. However, it t finished the day 8% lower at HK$3.68.
Parkview noted that the new shares that Cofco Corp will receive as payment for the acquisition will be issued at a minimum price of HK$2 each – a 50% discount to the latest market price of HK$4 before the announcement. There will also be significant dilution for the existing shareholders given the number of new shares to be issued.
Parkview said the latest market price of HK$4 before the announcement “cannot be taken as the true value of the shares” and added that there appeared to be “a lack of correlation” between the market price and the underlying business operations and financial performance of the company.
Indeed, given that Parkview’s only property was valued at HK$409 million at the end of June and it reported revenues of just HK$4.59 million in the first six months this year, a market cap of about $275 million is a bit on the high side. Clearly, the share price has gained in anticipation of an asset injection already – in September last year the stock was at one point quoted above HK$7 – and based on the actual value of the properties to be injected it seems the market may have overshot the mark somewhat.
Other Chinese property companies that have acquired shell companies in Hong Kong recently include China Merchants Property Development, Vanke, Gemdale and the Dalian Wanda Group. Of them, only China Merchants Property has announced an asset injection so far, although the others are expected to follow suit in due course.
Another SOE, Greenland Group, agreed to buy 60% of Hong-Kong-listed SPG Land
Holdings in May and injected a number of Chinese projects into the company. SPG Land is already a developer in its own right, rather than a shell company but, like the other deals, the purpose of the acquisition was to gain access to financing.
In the announcement, Parkview said it is expected that the enlarged group will have “a strong capability” to raise both equity and debt to develop its business and create value for its shareholders.
China Merchants Property almost completed its asset injection and had already carried out a $228 million share placement with the help of Goldman Sachs when it emerged in late June that it lacked the land use rights for one of the properties. The deal was then called off and the placement was cancelled.
Interestingly, the shell company it bought, Tonic Industries Holdings, announced on Monday that the asset acquisition plans have been resumed and the company will file a new application to list the larger group. Assuming it gets the go-ahead from its independent shareholders, Tonic aims to raise at least $212 million from a new share placement to maintain the free-float at the required 25%. This time Citi and China Merchants Securities will be joint bookrunners alongside Goldman, according to a source.
Depending on the placement price, some or all of the proceeds may be used to fund the HK$6.688 billion property acquisition, Tonic said.
Parkview is also planning a share placement of at least HK$4.64 billion ($600 million), but all the money raised from that will go to the company to fund its future operations and project developments.
The acquisition of the 12 property projects will be funded through the issuance of new shares and convertible preference shares to Cofco. The amount of preference shares will depend on how many shares Parkview will be able to issue without the free-float falling below the required 25%. As the preference shares have no voting rights, the controlling shareholder can own more than 75% of the equity in the company without breaching the free-float rule. The preference shares will pay no interest and will convert into common shares on a one-for-one basis.
If the placement of approximately 2.32 billion new shares is completed as planned, there will be no need to issue any preference shares. The placement shares will be offered at a minimum price of HK$2. If it is priced above that, the higher price will also be used for the issuance of shares to Cofco.
The 12 property projects - which include two mixed-use projects in Chengdu and Beijing, two commercial properties in Hong Kong and Shanghai, four hotels in Beijing, Nanchang and Suzhou (two of which are still under construction), one integrated tourist project in Sanya, as well as minority stakes in three property projects in Shanghai, Sanya and Chengdu - have been valued at about HK$11.3 billion by Savills.
In addition to these, Cofco Land also owns six mixed-use property projects under the Joy City brand that will not be part of the current asset injection, as the transfer of these would have required regulatory approvals that are not currently in place. That process could be long and uncertain and, rather than to wait for it to be completed, Cofco decided to exclude them for now.
However, Cofco Corp is expected to grant Parkview call options to acquire these six projects at a later date. The options will be valid for eight years after the current transaction is completed.
The acquisition cost equals a 25% discount to the valuation plus the cost of acquiring the loans provided by Cofco Land to the various projects.
Once the acquisition is completed Parkview will have a market capitalisation of about $2.4 billion, which includes $1.8 billion of property assets and the $600 million of cash raised through the placement. The shares issued as payment and as part of the share placement will account for 94.6% of the enlarged share capital, or more than 1,700% of the current issued share capital.
According to the earlier mentioned source, the aim is to complete the acquisition by the end of this year. The next step is for the company to file a listing application with Hong Kong Exchanges and Clearing, and to go through a listing hearing, a process that typically takes about six weeks. The shares will not be allotted until after the placement has been approved by independent shareholders at an extraordinary general meeting, however.
The shareholders also need to approve the asset injection and the issue of shares and potentially preference shares.
HSBC is the sole sponsor of the new listing and will be the bookrunner on the placement. It is also acting as a financial adviser to the company with regard to the asset injection.
