Hong Kong Tycoon Li Ka-shing’s Family Values Face Scrutiny
(Bloomberg Opinion) -- The family of Hong Kong billionaire Li Ka-shing is shuffling its corporate cards again, offering to sell $2.2 billion of privately held European infrastructure assets to the group’s listed property flagship CK Asset Holdings Ltd. The Li empire has run into difficulty with such exercises in the past, with minority shareholders rejecting a buyout of the group’s Asian power distributor in 2015. It may be risking a repeat.
In the deal, CK Asset would acquire stakes in four businesses, of which it already has ownership interests in three. The exception is a 20% holding in UK Power Networks, which supplies electricity to more than 8 million homes and businesses in London and the southeast and east of England, including Heathrow Airport. The others are a water distributor and a gas utility, both also in the U.K., and a Dutch company that converts waste into energy. Hong Kong-based CK Asset says the acquisition is a “rare” opportunity to acquire interests in high-quality assets that provide stable recurrent revenue and growth potential.
The pricing looks reasonable. A back-of-the-envelope calculation, based on figures provided in CK Asset’s March 18 statement, suggests the company is paying a multiple in the region of 1.4-1.5 times enterprise value to regulatory asset value for the British businesses — in the ballpark for U.K. regulated utilities, though not cheap. CK Asset will pay by issuing 333 million shares to Li Ka Shing Foundation Ltd., the 92-year-old billionaire’s charity. It will then buy back exactly the same number of shares at a maximum price of HK$51, the notional value at which it is issuing the new shares to the seller. This is an 8.4% premium to the closing price of HK$47.05 before the deal was announced.
If the purchase isn’t objectionable on the face of things, it is certainly a sweet deal for the Li family. The net effect of the acquisition and buyback, if both are conducted as planned, will be to raise their ownership of CK Asset to 45% from 36%. Rules would usually require a controlling shareholder increasing its stake by that much to make a general offer for all of the company. The Li family is seeking a waiver from Hong Kong’s market regulator; that application will also need support from 75% of independent shareholders.
It’s understandable that some are balking. To see why, consider the alternatives. CK Asset had $7.7 billion of cash on its balance sheet as of the end of last year, and a net debt-to-equity ratio of just 6.9%, according to data compiled by Bloomberg. So why not just pay cash? If the controlling shareholder then used the proceeds to raise its stake by buying in the market, it would probably push the price up well beyond HK$51. The HK$17 billion ($2.2 billion) price tag is equal to 49 days of trading in CK Asset stock, based on average volume over the past year.
Is this the best use of the company’s cash, though? If these assets are so attractive, then three of the four are already available at a discount — via CK Asset’s own stock, which is trading at a mere 0.5 times book value, well below its five-year average. Why pay full price to the controlling shareholder, when the company could simply buy more of its own shares? That is precisely what some shareholders would like to see: creation of a more efficient capital structure through a buyback program that isn’t tied to a deal, and without the HK$51 price cap.
To sweeten the deal, CK Asset is guaranteeing dividends and other cash distributions of not less than HK$910 million from the target assets in each of the next two years, and to maintain its existing dividend over that period. That’s a compelling hook for shareholders who will remember how last year’s dividend cut caused the stock to crater. While it’s difficult to quibble with conserving cash during what was then a worsening global pandemic, some may feel they are now being held over a barrel. CK Asset did not respond to a request for comment.
The deal is emblematic of how Hong Kong’s established business elite — and the city itself — has been eclipsed by the rise of mainland China. Over decades, Li Ka-shing has frequently been ranked as Asia’s richest man. Now, his $32 billion fortune doesn’t get him inside the top 10, with Li — who handed the reins of his empire to son Victor three years ago — ranking behind the likes of Tencent Holdings Ltd.’s Pony Ma and Alibaba Group Holding Ltd.’s Jack Ma.
While a new generation of tycoons has been building giant and innovative new businesses across the border, the Li group is still preoccupied with shifting assets from one arm to another via complex structures that make it less than immediately obvious whose interests are being served. Even after the acquisition, ownership of these four infrastructure businesses will still be spread across four Li group entities. CK Asset has a below-average BB score for environmental, social and governance from MSCI, which noted “elevated risk” for independent shareholders from related-party transactions in a report this month. Deals like this don’t help.
The calculation is complicated by the presence of Dutch Enviro Energy and the fact that the CK Assets announcement doesn't disaggregate the HK$17 billion purchase price between the four businesses. Assuming a purchase price of HK$1.15 billion for the Dutch Enviro Energy stake (double the seller's 2013 acquisition cost, according to the announcement), the EV/RAV multiple for the three U.K. regulatory assets would be about 1.49.
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.
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