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Investors Respond to Lane Crawford's Results
|Offer value for 100% of the Company:||1,334||1,850||$16.36|
|Less: value of share portfolio at 4-Jun-99||(501)||(501)||($4.43)|
|Less: estimated value of property, 31-Mar-99||(916)||(916)||($8.10)|
|Price (RECEIVED) for privatising
Net Retail Assets and brand:
Obviously the same figures apply proportionately to the 25% minority shareholders. If Lane Crawford were to sell its stock portfolio and distribute the proceeds, the dividend would be about $4.43 per A-Share and $0.443 per B-Share. If the privatisation does not proceed, then we urge the Company to do this. In the interim results the Company said that it was "virtually debt-free with net surplus cash" and clearly if the funds were needed then they would not have been playing the stock market.
Lane Crawford states in its results that "Apart from the Central Store at Lane Crawford House which is owned by the Group, all the other three stores are operated at leased premises". This is true. One is at Pacific Place, owned by Swire Pacific, and the other two are at Ocean Terminal and Times Square, owned by Lane Crawford's sister company Wharf.
The company continued that it "faces lease renewal risks for its store operations. Consequently the results... would to a large extent depend on the renewal lease terms secured from landlords upon tenancy expiry". It said "when stores and other retail outlets are set up at new locations, substantial capital expenditures would be required".
Is this some kind of threat? Reading between the lines, are they implying that, if we don't agree to privatisation, then Wharf will be difficult when the leases come up for renewal? We hope not - these are connected transactions between two related companies which must be done on arm's length, at fair and reasonable terms. In any case, since Wheelock owns more of Lane Crawford (75%) than it does of Wharf (48%) it would be against Wheelock's own interests to make life difficult for the retailer.
We don't know when the lease on Pacific Place expires, but the two Wharf leases both expire on 30-Nov-2002 so it will not be an issue for over 3 years. Besides, market rentals have fallen due to the poor retail market demand, so it should be possible to negotiate better terms when leases renew, either at Wharf or by moving elsewhere. On the other hand, if asking rents are picking up then that will only be because retail sales are improving, which will be good for future profits.
Lane Crawford points out that it has spent HK$262m on capital expenditure in the last 5 years. That's no surprise - capital assets are depreciated each year through the income statement. Shareholders should not misunderstand this figure - you don't charge capital expenditure directly to profit and loss account. That's because the money is spent on assets which generate future income. Capital expenditure is a good thing when done well.
Some of the last 5 years' expenditure relates to the failed Singapore store, and some more relates to the Maison Mode store in Shanghai.
That's the problem - the sums don't add up. Wheelock is offering $11.80 per A-Share for something worth $16.36, and its getting readily saleable assets in the form of property and shares worth $12.53.
Yes, the retail market is bad, but when the economy recovers people will start shopping. Wheelock has just started shopping early, and we share their optimism.
The Company pours as much doom and gloom as possible into its statement. When a controlling shareholder is trying to privatise a company, it makes sense to make things look as bad as possible, to encourage shareholders to get out. Frankly the only surprise in this announcement is that the figures did not contain more provisions and that the property was not valued lower.
Our intention remains to vote against this transaction, and as we have more than 10% of the public B-Shares, it will not proceed without our support.
Readers will know that the author used to work for Wheelock. We know them to be reasonable people. In 1993, Wharf (Holdings), controlled by Wheelock, increased its offer for Harbour Centre Development from $9.00 to $10.50 per share. Shareholders narrowly voted against the transaction.
This shows that the group is open to reasoned debate, and we hope that when they have had time to consider shareholders' views then they will do the honourable thing and increase their offer to a level which is fair and holds the possibility of success.
© Webb-site.com, 1999
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