Date
13 December 2017
Li Ka-shing has unveiled a major restructuring of his business empire, saying it will boost shareholder value. Photo: Bloomberg
Li Ka-shing has unveiled a major restructuring of his business empire, saying it will boost shareholder value. Photo: Bloomberg

What lies behind Li Ka-shing’s mega group restructuring?

What does Li Ka-shing’s latest move portend for his group flagships?

This is the question seizing the minds of stock analysts and investors as they try to figure out the rationale behind the tycoon’s landmark restructuring plan for his business empire.

The Hong Kong billionaire, known for his Midas touch, will combine and reorganize his flagship firms Cheung Hong (Holdings) and Hutchison Whampoa into two new companies through a complex transaction.

One of the new entities being created — CK Hutchison Holdings — will hold all the group’s non-property assets, which include ports, energy, utilities and retail businesses, while the other — CK Property — will hold the real-estate operations.

Under the deal, Cheung Kong and Hutchison Whampoa will be merged into a new holding company, which will be incorporated in the Cayman Islands.

Li said the deal will be transformational in terms of creating additional value for shareholders. 

The restructuring will help eliminate the discount that the market has typically applied to the group shares because of the tiered shareholding structure of the Li family stake, it was claimed.

But some Hutchison investors, who had in the past been drawn to the conglomerate more for its international assets, are concerned that they will effectively have to take more exposure to property through the new holding company.

Also, there is speculation if Li’s restructuring signals his expectations for some wider market developments.

This is because mega deals by Li in the past often spelt the end of a bull market run. Investors, for instance, remember how Li raised over HK$10 billion through a rights issue in 1987, just two months before a major Wall Street collapse.

Ten years later, Cheung Kong announced a major group restructuring deal that saw Cheung Kong selling Cheung Kong Infrastructure (CKI) to Hutchison Whampoa, which in turn sold HK Electric to CKI, completing the deal just before the 1997 handover of Hong Kong to Chinese rule.

Red chips and Hong Kong property prices went into a tizzy amid the handover worries before a painful Asian financial crisis came the year after.

Unlike what was expected for year 2007 following a meltdown in 1987 and 1997, Li was able to cash out from an A-shares fever and breezed through the global financial tsunami in 2008. As it turned out, the tsunami presented a golden opportunity to buy global assets.

Now Li, the magician, is striking again.

The current situation is very similar to 1997 when the property market was at a historic high and people were crazy about China stocks. And it is also a time when there is a flight to safety to the US dollar and Treasuries amid tumbling oil prices and currency woes in Russia and Japan. Even the mighty Chinese currency, the renminbi, got off to a weak start in the New Year.

How the year 2015 will turn out is still anyone’s guess but there is one thing that I am sure about: the reason why Cheung Kong has come up with such a deal now is because it wants to boost its control over Hutchison.

If Alibaba made Jack Ma, Hutchison made Li Ka-shing. Li became Hong Kong’s richest tycoon in 1979 when HSBC chose to sell a 22 percent stake in Hutchison to Cheung Kong. Li has not turned back since, as Hutchison became a one-of-its-kind fast growing international firm and an Asian GE.

Hutchison, the ports-to-telecoms conglomerate, was among the world’s first telecom operators to launch 3G services in Europe, contributing a significant chunk to Li’s assets.

Through the years, Cheung Kong had tried different ways raise its stake in the conglomerate. After doubling its stake to 45 percent, a group restructuring in 1997 allowed Cheung Kong to own over 50 per cent of Hutchison, which earned a record profit of HK$117.3 billion in 1999.

Prior to the latest restructuring, Li owns 43 percent of Cheung Kong, which in turn owns about 52 percent of Hutchison. In other words, Li owns an effective 22.3 percent in Hutchison. Assuming that the restructuring deal goes through, Li will own 30.15 percent in Cheung Kong Hutchison.

The “superman” may not have told his followers clearly as to which among his two flagships will offer more upside, but he has left enough clues on the table.

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BK/MY/RC

EJ Insight writer

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