In This Bermuda Triangle, It’s Value That Goes Missing

Jardine Matheson Holdings Ltd.’s $5.5 billion buyout of its biggest unit has driven up the shares of both companies and unwound a structure that has long been the target of corporate governance critics. Not everyone is satisfied, though. Minority shareholders of Jardine Strategic Holdings Ltd. contend the terms of the deal are unfair to them, with the offer price representing a 43% discount to the company’s own assessed net asset value at the end of December 2020. They're right to be unhappy.

In its circular on the deal last week, the Hong Kong-based conglomerate focused on the premium to the market price: The $33 per share offer is 20% more than Jardine Strategic’s closing price on March 5, the last business day before the proposal was made public, and 47% more than the stock’s volume-weighted average price over the prior 12 months, a period that encompasses the pandemic slump. That looks pretty good, until you consider Jardine Strategic’s estimate of its net asset value at the end of 2020. In its preliminary annual results on March 11, the company put this figure at $58.22 per share, fully $25 above the offer price. The shareholders’ circular makes no reference to the NAV discount.

What’s particularly galling for minority investors is that the buyout is effectively a done deal, with Jardine Matheson able to vote its 85% stake in Jardine Strategic at next month’s shareholder meeting, rendering any objections moot. The 189-year-old group’s engineering of that situation, to the advantage of the controlling Keswick family, is a master class in how to maneuver through the gaps in transnational governance, and one that may raise questions for regulators from London to Singapore and beyond.

In Hong Kong, where the Jardines companies were listed until 1994 and where the group still has its operational headquarters, a related-party transaction of this nature would require approval by minority investors, with the controlling shareholder abstaining. The listing rules are similar in Singapore, where most trading in the Jardines companies takes place. However, these listings are secondary, so the rules don’t apply, the theory being that the main regulator should be where a company has its primary listing. That is London. But in 2014, the Jardines companies downgraded their U.K. listing status from “premium” (as primary is now known) to “standard” (formerly secondary), weakening minority shareholder protections. The group made the switch shortly before a rule change that would have made the downgrade itself subject to independent shareholder approval. Meanwhile, company law in Bermuda, to which the group moved its place of incorporation in the 1980s, also allows Jardine Matheson to vote its stake.

The buyout is “regulatory arbitrage at its finest,” according to Justin Tang, head of Asian research for investment advisory firm United First Partners in Singapore. He calls the discount “egregious” and compares the disappearance of value for Jardine Strategic investors to a corporate Bermuda Triangle, an area of the North Atlantic where ships and planes are said to have vanished mysteriously.

Minority investors aren’t bereft of options. Shareholders who vote against the transaction can apply to the court in Bermuda to appraise the value, though this may be a daunting prospect for Singapore’s mom-and-pop investors. If the court sets a higher price than the offer, then Jardines would have to pay the difference to dissenting shareholders.

To be sure, net asset value isn’t necessarily a guide to what investors should expect to get. It’s common for diversified groups to trade at less than the sum of their parts, what’s known as the conglomerate discount. Still, almost all of Jardine Strategic’s value comes from its stakes in other listed group companies: Jardine Matheson itself, Hongkong Land Holdings Ltd., Dairy Farm International Holdings Ltd., Mandarin Oriental International Ltd., and Jardine Cycle & Carriage Ltd. This gives the NAV a high degree of transparency and certainty. UFP’s Tang estimated the NAV at $47.69 in a March 12 report, an indicator of how much upside might be available — worth the trouble, if enough investors join the action to defray the costs. Jardine Strategic shares closed $1.10 higher than the offer price at $34.10 on Monday, indicating market expectations that there is value to be gained from dissenting.

Given its lock over approving the deal, Jardines has little incentive to increase the offer. The group asserts that the premium is attractive, and that this is a unique opportunity to exit in cash from a stock that has historically had low liquidity (a somewhat circular argument given that Jardine Matheson’s buying has contributed to the dearth of trading). Still, it’s worth noting that the offer price is 83% above the low of $18 in March last year; a buyout proposal three or six months ago might have looked much more opportunistic.

Arguably, minorities should have seen what was coming. Hong Kong-based independent shareholder activist David Webb wrote critically, and prophetically, of Jardines’ U.K. listing downgrade in 2014, noting the possibility of investors facing a “Hobson’s choice” buyout offer. “Jardine Group has been expert at exploiting loopholes,” Webb said in an email Monday. The U.K.’s “standard” listing rules “are not fit for purpose, because they permit this behavior,” he said.

It’s an old Asian story. Markets such as Hong Kong and Singapore have elaborate rules governing related-party transactions precisely because of the prevalence of family-run groups where self-dealing offers the potential to disadvantage minority investors. Jardines found a way to avoid such inconveniences. As it turns out, there’s no mystery in this Bermuda Triangle.

Adjustments need to be made to eliminate double counting resulting fromthe cross-shareholding structure: Jardine Matheson owns 85% of Jardine Strategic, while Jardine Strategic owns 58% of Jardine Matheson.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew Brooker is an editor with Bloomberg Opinion. He previously was a columnist, editor and bureau chief for Bloomberg News. Before joining Bloomberg, he worked for the South China Morning Post. He is a CFA charterholder.

©2021 Bloomberg L.P.

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