28 October 2016
It's a smart move for CR Enterprise to get rid of its unprofitable businesses and focus on beer. Photo: HKEJ
It's a smart move for CR Enterprise to get rid of its unprofitable businesses and focus on beer. Photo: HKEJ

Why CR Enterprise restructuring is a wise move

Alcohol plays an essential role in Chinese business gatherings.

Idioms like “the third plenary session” and “the fifth plenary session” refer to mixtures of various alcoholic drinks involving liquor, wine and beer.

So, inexpensive beer plays a key role in the business world.

CR Enterprise (00291.HK) has announced a HK$28 billion deal to sell its loss-making non-beer retail and food businesses to its parent company, state-owned conglomerate China Resources (Holdings).

The listed unit will become a beer-focused business after the deal.

Is it a good move?

Established in 1992, CR Enterprise is one of the oldest red chips in Hong Kong.

The company is the flagship for its parent’s retail and consumer products. The group is focused on retail, beer, food and beverages and intends to become the world’s leading retail consumption conglomerate.

However, the mainland retail sector has been hurt badly by the rapid growth in online shopping and Beijing’s antigraft campaign.

CR Enterprise teamed up with British retailer Tesco in a joint venture in October 2013 in an attempt to cement its status as one of the leading retailers in the mainland.

However, the loss-making joint venture dragged down its overall earnings significantly.

CR Enterprise is trying to cast off some of the heavy burden by offloading its non-beer businesses to its parent firm, which will pay HK$13.58 billion (US$1.75 billion) in cash and the rest by way of a promissory note.

The company will pay a special cash dividend of HK$11.50 a share.

It will also offer HK$12.70 a share to buy back a maximum of 242 million shares, for a total price of HK$3.07 billion.

The listed unit’s earnings have been dragged down since the Tesco deal, and it posted its first loss last year.

The parent group claimed that it will take some time to integrate Tesco’s stores in China and has constantly pushed back the timing for turning the business around.

However, most small shareholders are short-sighted and care more about near-term benefits.

Most of them would opt to sell the stock, as they lack the patience to wait for the turnaround.

That is why the listed unit decided it’s time to throw the hot potato to the parent and focus on its beer business.

The shareholders will get not only a cash dividend but also a chance to exit by selling shares to the parent.

Taking over the loss-making businesses appears to be a bad deal for the parent.

However, the units are being sold at low valuations, and the parent could reap good profits if it has the resources and capability to turn the businesses around.

The deal looks like a win-win for both big and small shareholders.

However, the market capitalization of CR Enterprise might shrink after the deal, and it could be kicked off the list of blue-chip stocks.

This article appeared in the Hong Kong Economic Journal on April 24.

Translation by Julie Zhu

[Chinese version中文版]

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columnist of the Hong Kong Economic Journal

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