The decision on Monday to approve the HK$1.06 billion sale of 75% of Boto's core artificial Christmas tree and leisure furniture businesses to the Carlyle Group - with the remaining 25% held by Boto - has been widely seen as an example where the views of independent shareholders in Hong Kong have been ignored by regulators in the SAR.
On paper it looks like the company's independent investors voted in favour of selling a franchise that has been profitable for the past seven years, allowing Boto to focus purely on computer animation. But the fact that this side of the business lost HK$8 million in the last year, suggests there is more to the story than meets the eye.
Although independent shareholders officially voted in favour of the deal - getting 52.74% of the vote - there has been fierce debate over quite how independent some of the shareholders actually are.
The Kao family - led by Michael Kao Cheung-chong - owns around 60% of Boto shares. Michael Kao was not allowed to vote, as it was supposed to be restricted to purely independent shareholders.
In which case, the question a lot of investors continue to ask is why were Philip Kao, Michael's nephew and a senior manager at Boto or Liliana Tsen Yun-lei, an executive director of the company and holder of 5.54% of the stock, allowed to vote by Hong Kong Exchanges and Clearing (HKEx).
The anti-sale lobby, led by David Webb, even garnered the support of independent financial advisor Anglo Chinese Corporate Finance, which advised shareholders to vote against the deal on the grounds that the sale price was too low. It was the first time in over 10 years that the IFA had made such a statement.
So how could a deal facing such strong opposition get the go-ahead? David Webb shares his views with FinanceAsia on the Boto sale, the stance taken by HKEx and his disappointment at some of the abstaining voters.
FA: What does the case say about HKEx? Has the regulator set a precedent with Boto or has it always been pro-management?
DW: In Hong Kong, the decks are firmly stacked against independent shareholders. We lost this vote because the Stock Exchange and the Listing Committee accepted appeals from management, which allowed them to push the deal through. It wasn't surprising - a maximum of 4 fund managers are allowed out of 25 members of the Listing Committee. Until the Stock Exchange and its Listing Committees reflect investor interests and give the benefit of the doubt to independent public shareholders, Hong Kong will continue to be a minefield for investors. What was so wrong with the idea of restricting the vote to truly independent shareholders? If the deal was fair, we would have been in favour.
Why do you think the anti-sale lobby was unable to get the full level of support it needed?
We would have won if management-related votes were excluded. Based on the known shareholdings (and we don't know whether senior managers hold further shares off register), fewer than 4.32% of the company's shares were voted by the public in favour of the deal, and 13.22% against.
How unexpected/disappointing was the number of abstainers on the final vote?
It was disappointing that SIIC (parent of Shanghai Industrial) couldn't pluck up the courage to oppose management, and instead just abstained their 5.8% stake. Sources tell me they thought we would win anyway, which was reckless. If they wanted us to win, they should have backed us. An abstention is a wasted vote.
A couple of institutions whose shares (in the light of the outcome) would have swung the deal, chose to cut their holdings, perhaps in fear of what might happen if we won. One was a value investor who should have known better.
What would have been an acceptable price for the shares?
If they'd made a proper bid for the company at 10 times adjusted earnings (about $0.51 per share) I think they would have won. It would still have been a cheap deal. By "adjusted", I mean without the new 2001 inventory provision that they threw in to 2002's results (rather than restate 2001) to make things look worse.
What did you think about the special dividend offer made by the company?
Obviously I will now vote in favour of the dividend [around 26 HK cents per share). Let's hope the Chairman does too. I don't want them to sit on the cash. But that was never an attraction of the deal - and this morning's fall in the price reflects market disappointment.
What are you going to do with your shares now?
I don't plan to continue to be a long-term shareholder. But there's a price for everything.
Are there any prospects for the computer animation business being a success or do the independent shareholders view the revamped company as basically a present given by Michael Kao to his son?
I've been around Imagi's operations, and they seem to be professionally run. I'd say they have as good a chance as any other animation company of scoring. But like most parts of the entertainment industry, it is high beta. They have maybe a 10% chance of a huge hit and a 90% chance of a loss-making cartoon series, each time they do one. The Boto senior management has no track record in this sector.
How much are the shares in the new company worth?
The company is not insolvent, so of course the shares have non-zero value. And they have a 25% stake in the geared buy-out vehicle, so as long as Mr. Kao stays in control, shareholders will get that upside. That's better than the original proposed deal, which was a 100% sale. I'd rather not broadcast what my selling price target is.
What effect, if any, will the Boto case have on your and other private investors purchases of Hong Kong stocks?
The rulings of the Stock Exchange in this case, to allow management to stack the vote and push the deal through, send a strong reminder that Hong Kong is not ready to protect minority interests. Our market is a tilted minefield. Issuers will continue to suffer high costs of equity as long as this "sovereign discount" remains.
What was the atmosphere like at the Special General Meeting, where the vote was cast?
Christmassy: in an adversarial kind of way.
