Henderson's Painted Corner

In an announcement that is worth only slightly more than the cost of printing it, Henderson Land has increased its privatisation offer for Henderson Investment by 3.4%, to $7.60 per share, and made this their final offer. Now the choice is quite simple, and we recommend readers to vote against the transaction.

Henderson's Painted Corner
3rd December 2002

Well there's just no escape. Webb-site.com disappeared to Australia for a long weekend, and came back this morning to a torrent of e-mails and voice-mails complaining that Henderson Land has shot itself in the foot.

Following our earlier criticism and Templeton's objection to the proposed privatisation of Henderson Investment Ltd (HI, 0097), a number of other institutional investors made contact with us and some also complained to the offeror directly. None of the institutions we spoke to was in favour of the first offer, and unsurprisingly, nobody we have spoken to today is happy with the increased offer.

In an announcement dated 29-Nov-02, Henderson Land Development Co Ltd (HLD, 0012) increased its offer by 3.4% from $7.35 per share to $7.60 per share "having taken into consideration the views of various [HI] shareholders".

That still falls a long way short of our estimate of fair value of the underlying assets of $12.26 per share. OK, we never expected that a Hong Kong company would offer fair value, but at least somewhere in the middle (reflecting a minority discount) would have made sense to most investors.

The most that can be said about the new offer is that it now reflects the market price of the 36.42% shares in The Hongkong and China Gas Co Ltd (HKCG, 0003) which closed on 29-Nov-02 at $10.30 per share, valuing HI's interest at $7.58 per share. That's not saying much, because unlike market participants, HI is not just a minority shareholder in HKCG, but has a controlling stake, and there would be some premium for control if the stake in HKCG (or the 75% stake in HI itself) were ever sold.

Apart from that, if the offer succeeds, HLD will be getting the remaining HK$4.68 per share of assets for free, for an overall 38% discount to fair value. Based on the 747m HI shares not held by HLD, that adds up to some $3.50bn of assets for free, or around $2.03 per HLD share.

Since the offer was announced on 5-Nov-02, and up to 29-Nov-02, HLD shares have risen 10.4% from $25.10 to $27.70, and the Hang Seng Property Sub-Index has risen 6.9% from 11,599 to 12,404, not least because of the Government's package of nine measures to boost the residential property market. So HLD's puny 3.4% offer increase is in fact less than the increase in the property index since it's first offer.

In a corner

Unfortunately, HLD has now painted itself into a corner by making a "no increase statement". Under Rule 18.3 of the Takeover Code, only in "wholly exceptional circumstances" will the offeror be allowed to increase the offer price (HLD has reserved the right to amend the other terms of its proposal). The main such circumstances would be a competing bid situation, which is highly unlikely given that HLD owns 73.5% of HI, so any such bid would require its consent. So in effect, the offer price is final.

This leaves HI shareholders with a simple choice: either vote against this deep-discount privatisation offer, or receive $7.60 per share and give HLD $3.5bn of asset value for free. It only takes 2.49% of the company (which is one tenth of the free float of 24.87%) to block this deal. There's a very good reason for that rule - in these situations, it is practically impossible to prove whether any "independent" shareholders are actually acting in some way for the offeror, so the rules are structured to make it harder to squeeze out genuinely independent shareholders.

Prior to the increased offer, Webb-site.com had indications from holders of 2.5% of the company that they were opposed to the first offer, with the Tracker Fund yet to make a decision (will they ever?) in respect of its 1%, and the remaining 21.4% in unknown hands. It seems very unlikely that people who thought $7.35 was unfair enough to vote against the deal, will be leaping for joy at $7.60. It is puzzling that HLD bothered to make an increase at all, since the odds of success cannot be much greater at $7.60 than they were at $7.35.

HLD has given one hint to its somewhat bizarre behaviour - apparently its offer, at a total price of $5.68bn, is entirely debt financed. HLD Vice-Chairman Colin Lam was quoted by a local Sunday newspaper as saying:

Sure it is. What's good for HLD is bad for HI. Read between the lines. Banks will only lend at those kind of rates if they have plenty of collateral - in this case, we reckon the loan-to-value ratio on the investment is about 62%. It appears that HLD was only willing to increase its offer to the extent that the bankers would pay for it. In fact, with HKCG shares yielding 3.1%, this will more than cover the cost of the 2.5% loan. In addition, at the end of last year HI had 1.8m sq ft of rental property which returned $607m of gross rental income. HI also owns two hotels in HK and profitable mainland toll-bridge and toll-road joint ventures.

If the offer fails, then under Rule 31.1 of the Takeover Code, HLD cannot make another offer for 12 months after the date of failure. By making such a paltry increase and a "no increase" statement, HLD may have killed its own deal.

The downside

The short-term share price downside if the deal is blocked may not be that great due to three factors since the first offer was announced:

HLD Shareholders take note

If you are an HLD shareholder and are sitting there smugly looking at the $3.5bn enhancement to HLD's asset value that this deal could bring, then wipe that smile off your face. Hasn't it occurred to you that you are also a minority shareholder in a Henderson group company? If the group treats one company's minority this way, there is every reason to suppose that it would treat minorities in HLD and all the other group companies with the same attitude. First law of Hong Kong pyramids: the future corporate governance of any company is only as good as the weakest link in the group. If Mr Lee, who owns 65% of HLD, were ever to privatise the rest, you would only see a fraction of its fair value.

The next few weeks will be interesting - hedge funds who bought the stock hoping for an increase have got it, and may sell out. Investors who believe in the long-term fundamental value of their holdings will stay in and vote against, able to tolerate some short-term downside in the share price if the deal is blocked. If they sell now, then they will be increasing the probability of the deal succeeding and clearly don't believe in the upside.

HLD, which should know the prospects of HI better than anyone, has chosen this time to make the offer. If you sell out, you are betting against them. Vote this one down and set an example to any other tycoon contemplating a low-ball bid for your minority holdings.

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