23 October 2016
New World Development, led by its chairman Henry Cheng, is making a fresh attempt to privatize its China property unit. Photo: HKEJ
New World Development, led by its chairman Henry Cheng, is making a fresh attempt to privatize its China property unit. Photo: HKEJ

New World deal raises new questions

A new year, a new deal!

But for New World Development (00017.HK), the gambit doesn’t seem to be working too well.

The blue chip developer has announced a fresh privatization bid for mainland unit New World China Land (00917.HK), putting its shares under pressure.

In Wednesday morning trade, New World Development was down more than 4 percent as investors felt that the US$2.77 billion price tag for the Chinese unit was a bit too hefty.

The deal was seen loaded in favor of the shareholders of New World China, something that was evident from a sharp spike in the share price of the mainland property arm.

After resuming trade, New World China surged more than 20 percent to as high as HK$7.56, a level not seen since July 26, 1999.

The Chinese property arm was listed on the Hong Kong bourse on July 16, 1999 after pricing its IPO at HK$9.5.

Following the listing, the counter has never stayed above water, prompting the parent company to launch a privatization bid.

In March 2014, New World Development announced a HK$18.6 billion offer for the shares it does not own in the mainland unit, but the latter’s minority shareholders rejected the plan in June that year.

Now, the company has revived the bid with a sweetened proposal, offering HK$7.80 per New World China share in a deal worth about HK$21.4 billion. 

New World Development shareholders have quite a few concerns regarding the new plan.

In contrast to the mega restructuring of Li Ka-shing flagships Hutchison and CK Property that was proposed at the beginning of last year, the New World initiative does not look like a win-win deal.

Apart from a huge HK$18 billion bridging loan that New World Development had to secure from HSBC in order to launch the privatization offer, a bigger question for the shareholders is: why now?

Meanwhile, there is the bigger question of the valuation.

In December 2011, New World China proposed a two-for-one rights issue at a price of just HK$1.49. Given that, what is the logic of buying out the firm at more than five times the price five years later, the parent company’s shareholders are asking.

Observers also point out the share price of rival developer Shui On Land (00272.HK), which is owned by tycoon Vincent Lo Hong-shui, remains at the same level as it was about five years ago.

Even the best mainland property firms haven’t managed a 500 percent share price appreciation in the last five years.

New World China Land, along with parent New World Development, completed the sale of four parcels of land to Evergrande Real Estate (03333.HK) for HK$16 billion last month.

Some New World Development shareholders, meanwhile, cannot help wondering why the privatization deal did not come much earlier.

The company can argue that it did make an attempt in 2014 at a lower offer price of HK$6.8 per New World China share, but the plan had to be aborted due to a veto by the latter’s shareholders.

Given the experience in 2014, New World Development is now proposing to privatize the China unit through a general offer instead of its previous scheme of arrangement plan.

As for the benefits to New World Development shareholders, the company said the privatization deal would end a non-competition clause between the two firms.

The unit has been given higher valuation as China’s property market has matured, it said.

The deal “will help accelerate the replication between the PRC and HK markets of successful concepts such as the K11 art mall and further strengthen the New World brand image in the two core markets,” it added.

But looking at share price performance Wednesday, it is certain investors are not too convinced, and that New World still has a lot of explaining to do on the pricey acquisition.

Until the shareholder concerns are addressed, the blue-chip developer will continue to be traded at a discount to its asset value — a management discount, as some might put it.

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EJ Insight writer

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