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Hong Kong’s richest man Li Ka-shing has revamped the holdings of his two flagship companies, Cheung Kong Holdings and Hutchison Whampoa, in an effort to create better value for shareholders.
As part of the deal, two new companies will be formed in place of Cheung Kong Holdings and Hutchison Whampoa, to improve the valuations of the former and increase flexibility for more dividend payouts.
CK Hutchison Holdings (CKH Holdings) will hold all the non-property business of both groups, and be a multinational conglomerate holding assets ranging from telecoms and ports to infrastructure assets, while CK Property Holdings will hold the property businesses of both groups.
The octogenarian Li has been paring his exposure to Hong Kong and China and picking up assets in regulated markets overseas such as the UK and Australia. One banker away from the deal speculated that the division of the property assets could pave the way for the group to further reduce exposure to Hong Kong and China property in the future.
However, according to one person familiar with the deal, the reorganisation process started from the middle of last year and the intention is to create shareholder value.
According to company data, Cheung Kong’s market capitalisation is at a 23% discount to, or HK$87bn less than, its book equity value to shareholders. Cheung Kong holds a 49.97% stake in Hutchison Whampoa and the discount that Cheung Kong Holdings trades at is partly due to the indirect holding structure.
"The transaction is expected to create significant value for shareholders through the elimination of the holding company discount," said Li Ka-shing, who is chairman of Cheung Kong and Hutchison, in a statement. "The distinct business profiles of CKH Holdings and CK Property will enable investors to better value the underlying businesses of the group," he added.
As of January 7, both Hutchison Whampoa and Cheung Kong had a combined market capitalisation of HK$663 billion ($85 billion).
The newly formed companies will also have greater flexibility in paying out dividends, as CKH Holdings will be incorporated in the Cayman Islands, which allows a company to make distributions out of profits and, subject to a solvency test, out of share premium as well. Cheung Kong Holdings is incorporated in Hong Kong, where companies can only pay dividends to shareholders out of retained earnings.
“Dividend payout ratios are becoming more important in a low interest rate environment, and the group is looking for more flexibility in increasing the dividend payout rate,” said the source familiar with the deal.
As part of the deal, Cheung Kong Holdings shareholders will receive one CKH Holdings share for each Cheung Kong Holdings share. Hutchison Whampoa shareholders will receive 0.684 CKH shares for each Hutchison Whampoa share.
Subsequently, all CK Hutchison shareholders will receive one CK Property share for each CK Hutchison share held.
Consolidating infrastructure
The deal will increase the infrastructure holdings of CKH Holdings and also enable it to consolidate earnings from recent acquisitions such as Australian utility Envestra and UK's Northumbrian Water.
Prior to the reorganisation, Cheung Kong Holdings, Cheung Kong Infrastructure and Hutchison Whampoa held minority stakes in several infrastructure assets. According to S&P analyst Cindy Huang, the profits and assets were not being consolidated before but, as CKH Holdings will have majority interest in a number of key assets, it will be able to consolidate the profits. “It will become a more transparent structure because everything will be brought on balance sheet,” said Huang.
After the deal, CKH Holdings will effectively own 71.2% of Northumbrian Water, 62.5% of Wales and West Utilities and 71% of Envestra.
Hutchison Whampoa has been a major borrower in the bond markets but, as the newly formed CKH Holdings will guarantee it and Cheung Kong’s existing indebtedness, Huang does not anticipate any major changes in ratings.
“From a creditors perspective, I think it will be a credit neutral event as the borrowings will be guaranteed by the newly formed merged group,” said Huang.
CKH Holdings will also hold a 40.2% stake in Canadian company Husky Energy.
Pure real estate
Under the proposed deal, all of CKH Holdings development and rental property and hotels will be transferred to CK Property for a combination of CK Property shares and cash. CK Property will be paying HK$55 billion (US$7 billion) in cash for the transfer, and has commitments from banks in place to fund that, the companies said in a slide.
An application will be made for listing of CK Property shares on the Hong Kong Stock Exchange by way of introduction, which means no new funds will be raised.
CK Property will have development landbank of about 170 million square feet including 158 million square feet in mainland China, 17 million square feet of rental properties and more than 14,600 hotel rooms.
While the spinning off of the property business may mean that investors are better able to evaluate it, it could also leave the company with less of a buffer in the event of a property downturn.
Chinese property markets have been going through a rocky time, with slowing sales and an oversupply of homes in China. Meanwhile, the jitters around Kaisa’s default on its loan to HSBC will make it harder for developers to access to the market.
Li Ka-shing controlled companies have been paring their exposure to the mainland property market. In November last year, Hutchison Whampoa sold its stake in Hutchison Harbour Ring, which owns two properties in Shanghai, and has also been selling other property assets in China, reflecting his bearish stance on the market.
The restructuring comes as other Hong Kong family-run conglomerates look at various ways to restructure their business, as a new generation steps in. Li & Fung last year spun off its Global Brands through a distribution in specie
Following the deal, the Li family trust will own a 30.15% stake in CKH Holdings and CK Property. The deal is subject to approvals and expected to close around the end of the first half of 2015, both companies said.
HSBC and Merrill Lynch have been appointed joint sponsors for the spin off.
HSBC was sole adviser to Cheung Kong, CKH Holdings and CK Global Investments for the reorganization. Anglo Chinese is the independent financial adviser to Cheung Kong, CKH Holdings and CK Global Investments.
