What's prompting Hony Capital to pursue L&M Handbags?

May 31, 2016 18:10
Lenovo founder Liu Chuanzhi (center) may use an acquisition deal for Lee & Man Handbags to gain a backdoor listing for some assets. Photo: HKEJ

Last week we had reports that Digital China Holdings (00861.HK), a former unit of Lenovo Holdings (03396.HK), may have been targeted by Shenzhen-listed CRG Banking Equipment (002152.CN) for a hostile takeover.

Now we have news that a private-equity firm backed by Lenovo intends to acquire Lee & Man Handbags Holding Ltd. (L&M Handbags, 01488.HK), an entity spun off by chemical maker Lee & Man Holding (00746.HK) five years ago.

It is unclear whether the proposed acquisition will be a boon or nightmare for minority shareholders of L&M Handbags.

The handbag maker said in an exchange filing Monday that its controlling shareholders have agreed to sell their 50.03 percent stake to Hony Capital, a Beijing-based private-equity firm backed by Lenovo.

Hony made a cash offer of HK$487 million or HK$1.18 per share, marking a discount of 20.3 percent to L&M Handbags' closing price on May 26 prior to a trading halt or 18.1 percent discount to the average trading price in the five days prior to the suspension.

After the deal, Hony will become the biggest shareholder, while the Lee family members will hold no interest at all.

Upon completing the transaction, Hony will be required -- under Rule 26.1 of the Takeovers Code -- to make a mandatory unconditional cash offer for all the remaining issued shares of L&M Handbags at the same price of HK$1.18 per share.

This means that individual investors who may have bought the company stock at HK$1.48 per share on May 26 will suffer a 20 percent loss due to the privatization.

It is interesting to note that L&M Handbags' share price fell only 4 percent after trading resumed on Monday, closing at HK$1.42, nearly 20 percent higher than the offer price.

That shows that minority shareholders haven't dumped their shares in panic, and that some investors are still willing to buy the stock at a 20 percent premium from the market.

It's becoming obvious that Hony Capital is making the acquisition to get a backdoor listing for some assets.

However, the low offer price may not find favor with L&M Handbags' small shareholders, who could will block the deal.

L&M Handbags was spun off by its parent in 2011, but the new unit was still controlled by the Lee family.

The company posted unimpressive earnings after making its stock market debut. Net profit in the last three years stood at HK$72 million, HK$33 million and HK$10 million respectively.

The handbag maker has a market cap of HK$116 million, with a P/E multiple of 122 and P/B ratio of 4.3. Market observers have long considered it a potential "shell stock".

The Lee family sold some shares in September at HK$1.14 apiece and took a profit of HK$235 million. With the latest Hony Capital deal, the family will reap a total of over HK$720 million.

Minority shareholders of L&M Handbags want to know what assets Hony might inject into the newly acquired listed entity.

Hony holds a wide range of assets, including video platform PPTV, medical group Honghe Healthcare, movie production company Ningmeng, and PizzaExpress.

Given the likelihood of asset injection, L&M Handbags' small shareholders are waiting for the magic box to open and show up what's inside.

This article appeared in the Hong Kong Economic Journal on May 31.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal columnist