Power Assets Holdings (00006.HK) is seeking to raise as much as US$5 billion by spinning off its Hong Kong electricity arm through an initial public offering (IPO). If the deal goes through, it would mark the biggest IPO in Hong Kong since AIA group went public in October 2010 to raise US$20.4 billion. Experts generally consider the move as being value accretive.
Power Assets and Cheung Kong Infrastructure (00001.HK), which owns percent of the electricity producer, would be able to realize higher value from the Hong Kong power business, which currently generates stable but low returns amid a low-interest rate environment, Citigroup noted, adding that the move will generate substantial cash to finance future acquisitions.
J.P. Morgan believes a special dividend is possible after the spinoff, to help CKI lower its gearing.
The proposed spinoff comes as the importance of the Hong Kong operation to Power Assets, formerly known as Hongkong Electric Holdings Ltd., has been steadily decreasing.
According to Power Assets’ latest filings, earnings from operations in Hong Kong amounted to HK$1.74 billion (US$284 million) in the first half this year, accounting for only 36.5 percent of total earnings, down from 69 percent in 2009.
The narrowing contribution from Hong Kong reflects both the city’s saturated market and the government’s move to limit the permitted rate of return to 9.99 percent since 2009, from up to 15 percent before.
With assets all around the world including the United Kingdom, Australia, China, New Zealand, Thailand, Canada and the Netherlands, the group’s earnings from power businesses outside Hong Kong have growth from approximately HK$700 million in 2007 to HK$ 5.1 billion last year.
In its latest acquisition in June this year, the company bought 20 percent stake in AVR Afvalverwerking BV, the largest energy-from-waste company in Netherlands.
Hong Kong government will review the returns regime for power producers in the next few years. There are expectations that the permitted rate of return will be lowered further. Also, Hong Kong’s slowing population growth will limit the upside of the business.
Power Assets is going to list the utilities business under a trust. Once the operation is listed, the company will hold between 30 percent and 49.9 percent of the new entity, according to regulatory filings.
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