When Spencer Fung first unveiled his US$150 million, three-year plan in 2017 to remake the 111-year-old trading company founded by his great-grandfather into a trailblazer in the digital era of online shopping and smart retailing, he was in charge of a HK$30 billion (US$3.9 billion) giant that had made its fortune as the broker between the two largest economies on earth.
Since then, a trade war has sullied ties between the United States and China, tearing asunder the intricate global network of suppliers and customers that had taken decades to stitch together.
In March, the unthinkable happened: the world economy was devastated by a pandemic, and the share price of Li & Fung plunged, reducing its value to a mere HK$4 billion. That threw a wrench into Fung's ambitious restructuring works. Within days of plumbing those depths, Fung announced that his family " along with a partner in Singapore " would take Li & Fung private.
"In light of global economic uncertainties, the company's transformation will involve execution risk, and the associated benefits will require a longer time to materialise. The offerers believe that the transformation of the company will be more effectively implemented away from the public equity markets." Fung, the firm's CEO and its fourth-generation leader, said in a statement on March 20 in announcing the take-private plan. Fung declined to be interviewed for this story.
Spencer Fung, Group Chief Executive Officer of Li & Fung, briefs the media on the company's three-year plan in Lai Chi Kok on 17 June 2019. Photo: Nora Tam alt=Spencer Fung, Group Chief Executive Officer of Li & Fung, briefs the media on the company's three-year plan in Lai Chi Kok on 17 June 2019. Photo: Nora Tam
The company is part of a wave of privatisation deals that has swept across Hong Kong's stock market since the start of this year, as depressed valuations amid poor investor sentiment provided golden opportunities for controlling shareholders to buy out their companies' assets at rock bottom prices.
Hong Kong's benchmark Hang Seng index rose by more than 6 per cent this week, recovering from the plunge a week ago when China's legislature surprised the market with its plan for a national security law for the city.
Still, Asia's third-largest equity bourse is also trading at the third-lowest valuation across the region's 14 markets, weighed down by a recession mired in the coronavirus pandemic and almost a year of anti-government protests, creating the perfect conditions for more take-private proposals.
"The longer the weak market sentiment drags on, the higher the chances of success for privatisation deals," said Kenny Tang Sing-hing, CEO of China Hong Kong Capital Asset. "Privatisation offer prices, while substantially higher than the prevailing stock prices, are usually much lower than the underlying value of the companies' assets due to pessimism in their industries."
There are five take-private transactions valued at US$8.76 billion under way in Hong Kong, initiated by controlling shareholders, since the start of February, according to Refinitiv's data and stock exchange filings.
Deals jumped to a 12-month high of US$6.2 billion in February, tracking the Hang Seng's descent from its high in mid-January just before Hubei's provincial capital of Wuhan " the first global epicentre of the coronavirus pandemic " went into lockdown on the eve of the Lunar New Year.
Peter Woo Kwong-ching, Hong Kong's eighth-wealthiest man, with a US$12 billion fortune according to Forbes, unveiled an HK$48.1 billion (US$6.2 billoin) cash-and-stock offer in late February to privatise Wheelock and Co., the city's fourth-largest developer by market value. Woo, who turns 74 in September, could not be reached for comment.
Under the plan, the holder of every Wheelock share would receive HK$12 (US$1.60) in cash, plus one share each of Wharf Holding and Wharf Real Estate Investment (Reic), the two property units that own the Harbour City mall, and Times Square " located near the world's most expensive retail strip " in their portfolio.
Corporate structure before and after privatisation. alt=Corporate structure before and after privatisation.
At the time of the proposal, the take-private package offered a 47.8 per cent premium to Wheelock's prevailing stock price. Since the proposal, the stock prices of Wharf and Wharf Reic have both tumbled, raising concerns that the proposal may not be attractive enough for investors.
The plan would need the nod by at least three in four of Wheelock's minority shareholders, who together control a combined 30 per cent of the company's shares, during a general meeting scheduled for June 16. The opponents of the take-private offer must not exceed 10 per cent of the total shareholders, according to the rules for the proceedings.
It is "highly uncertain" whether the Woo family's privatisation plan can succeed, said Kenny Wen, wealth management strategist at Everbright Sun Hung Kai. "The offer has lost some of its appeal to common investors."
The uncertainty underscores an investor sentiment in Hong Kong " especially towards the real estate sector " that has rapidly deteriorated in the span of just three months.
Peter Woo Kwong-ching in his office in Tsim Sha Tsui on 6 August 2014. Photo: May Tse alt=Peter Woo Kwong-ching in his office in Tsim Sha Tsui on 6 August 2014. Photo: May Tse
Investors are worried landlords of office towers and shopping malls will suffer even lower rents going forward, as social instability and economic recession weighs on companies and consumers.
This is after the local retail and tourism industries were already brought to their knees by the coronavirus outbreak and an unprecedented anti-government movement that lasted for seven months since last June.
This translates into a gloomy outlook for Wharf Reic and Wharf, owners of commercial projects in Hong Kong and mainland China, according to Patrick Wong, a property analyst at Bloomberg Intelligence.
Meanwhile, parent company Wheelock is set to hold up better because it now develops primarily mass-market residential projects in the city, which is a bright spot in the market due to strong local demand, Wong said.
In addition, Wheelock also owns the third-largest residential land bank among peers in Hong Kong. "If investors view it from a long-term perspective, they will lose their exposure to Hong Kong's residential property if the plan is approved," said Wong. "That could be a concern."
A view of Times Square in Causeway Bay, located near one of the world's most expensive retail strips, Russell Street. Photo: SCMP alt=A view of Times Square in Causeway Bay, located near one of the world's most expensive retail strips, Russell Street. Photo: SCMP
Furthermore, the shareholding of Wheelock is highly fragmented " none of the minority shareholders holds more than a 5 per cent stake. This could make it hard for the Woo family to negotiate with big institutional investors before the voting to gain support, Everbright Sun Hung Kai's Wen said.
To be sure, investors still have plenty of reason to vote for the buyout, given the stock was trading at a high discount to its net asset value. In addition, they could also directly own a stake in the two subsidiaries and bypass the parent company's stock, said Jeff Yau, property analyst at DBS, who said the proposal is likely to succeed.
And if Wheelock succeeds in privatising through this special model, more developers could follow suit, Bloomberg Intelligence's Wong said.
Potential buyout targets include developer Henderson Land Development, which like Wheelock has a complicated subsidiary structure, and Kerry Properties, which is trading at an extremely low price-to-book ratio at about 0.3 times, he said.
Kerry Properties' Mantin Heights residential development in Ho Man Tin on 13 April 2018. Photo: Sandy Li alt=Kerry Properties' Mantin Heights residential development in Ho Man Tin on 13 April 2018. Photo: Sandy Li
But as with Wheelock, take-private offers can be highly controversial and a tough decision for minority shareholders.
If they support the offers, most will have to accept a certain level of investment loss and give up on the potential future upsides from business restructuring, industry conditions improvement and individual assets disposals.
If they reject the offers, they may risk getting stuck with a downward spiral of value erosion and increasing difficulty to sell their shares.
In Li & Fung's case, the buy-out offer of HK$1.25 was 150 per cent higher than the last traded price before the offer's announcement, but was unattractive considering the underlying assets' potential value. It was also 94 per cent lower than the peak.
SCMP Graphics alt=SCMP Graphics
While the company's supply chain services operations saw its operating profit halved to US$91 million last year from 2016, with revenue falling by a quarter, profit of its logistics business grew 54 per cent, revenue rose 29 per cent and staff count jumped 46 per cent.
The logistics business, in which Singapore sovereign fund manager agreed to buy a 21.7 per cent stake last June for US$300 million, was valued at US$1.38 billion. If its value has fallen by the same 17 per cent as the Hang Seng Index since that time, it would have a current value of US$1.1 billion.
The take-private offer price valued the entire Li & Fung at US$1.37 billion, which meant its supply chain and its wholesale businesses " which together contributed 41 per cent of its total core operating profit " were valued at only US$270 million.
Viewed from another angle, the offer price also valued the company's entire assets at not a lot higher than its cash pile at the end of last year of US$932 million, which was boosted last August by Temasek's cash injection into the logistics unit.
A view of the Victoria Harbour from Tsim Sha Tsui. Photo: May Tse alt=A view of the Victoria Harbour from Tsim Sha Tsui. Photo: May Tse
"Management said the privatisation will allow investors to have a chance to cash out. But in fact, it is cutting off the opportunities for small shareholders to enjoy the future growth of its logistics and other businesses," Danny Chan Chung-cheung, a shareholder of Li & Fung for 19 years, told the South China Morning Post, declining to disclose the size of his holdings.
"Our hearts are broken as we all felt betrayed by management who did not appreciate our trust and loyalty."
A consortium between controlling shareholder the Fung family " led by group chairman William Fung Kwok-lun and honorary chairman Victor Fung Kwok-king " and Singapore-based international logistics facilities investor GLP successfully bought minority shareholders out. Some 97.1 per cent of the shares on which votes were cast were in favour of the deal.
Following the delisting of Li & Fung's shares, a local newspaper reported that the company had notified several hundred merchandising in Hong Kong that they would be laid off.
"Covid-19 has dramatically impacted the global retail industry and this has affected Li & Fung's business volume," Li & Fung said in a statement. "As a result, we are unfortunately having to make adjustments to our staff levels. We cannot disclose further details as this information is confidential."
