What is behind the restructuring of CKI and Power Assets?

September 08, 2015 18:53
Li Ka-shing (center) has engineered a merger of CK Infrastructure, chaired by Victor Li (left) and Power Assets, chaired by Canning Fok Kin-ning (right). Photo: HKEJ

Cheung Kong Infrastructure Holdings Ltd. (01038.HK) hit a low point seven years ago, on June 10, 2008.

Li Ka-shing's infrastructure arm, under his eldest son, Victor Li Tzar-kuoi, was kicked out of the Hang Seng Index because of its low market capitalization and overlap with affiliate Power Assets Holdings Ltd. (00006.HK).

But that has not deterred the younger Li’s ambitions.

In fact, the company has managed to double in size, taking advantage of the deregulation of utilities worldwide and softness in the pricing of European assets to make more acquisitions.

Now CKI is headed back into the Hang Seng Index with Tuesday's proposed merger with Power Assets.

In a share swap, CKI will offer 1.04 shares for each Power Assets share, a premium of about 1 per cent to the latter's closing price.

CKI is paying HK$86.3 billion (US$11.1 billion) for the 61.13 per cent of Power Assets it does not already own.

To sweeten the deal, CKI offered to pay out a one-time HK$5 dividend per share pending the approval of the merger, knowing that the shareholders of Power Assets may no longer enjoy the high dividend yield to which they are accustomed.

The deal will not only create a new and larger entity, which will be renamed CK Infrastructure, but also mark the end of Power Assets, formerly known as Hongkong Electric, a firm the elder Li acquired in 1982.

He spun off its local electricity monopoly into HK Electric Investments Ltd. (02638.HK) last year.

CK Hutchison will own 49.19 per cent of CK Infrastructure, compared with 75.67 percent at present.

The merger is the second blockbuster transaction proposed by the Li family this year after CK Hutchison privatized Hutchison Whampoa and spun off CK Properties in June.

A merger of the infrastructure and utility arms was the subject of speculation immediately after the parent group's restructuring.

On Friday, UBS issued a report on the merger and rated each of the two stocks a buy.

UBS said the Li family will get closer to a significant cash pile that has been accumulating on Power Assets’ balance sheet and remove the need for CKI to raise money through debt or new equity to continue its campaign of mergers and acquisitions.

It also said the deal would simplify the management structure at a time when the management team is not getting any younger.

But it seems Li Ka-shing, at age 87, has been busy shuffling his assets to pave the way for the emergence of three bigger CK flagships – CK Hutchison for his telecom, retail and other lines of business, CK Properties for real estate and now CK Infrastructure for his increasingly global infrastructure plays.

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EJ Insight writer