Who will be first to blink in SCMP delisting standoff?

May 12, 2014 14:14
SCMP Group could see its latest privatization attempt  derailed again. Photo: Bloomberg

It's a classic who-blinks-first standoff. For 16 months, it has quietly pitted SCMP Group honcho Robert Kuok and British fund manager Stephen Butt.

At issue is a 14 percent holding in Hong Kong's biggest English broadsheet by Butt who stands in the way of Kuok's plan to take the company private and delist it from the stock exchange.

With nearly 75 percent of the stock through his Kerry Media flagship, Kuok obviously holds the upper hand. The Malaysian tycoon, listed by Forbes as the world's 99th richest man with an estimated US$11.5 billion fortune, has a third-way option -- a general offer for all outstanding shares at a premium that would be hard to resist.

Estimates put the offer at close to HK$1 billion, assuming a 30 percent premium, making it a tantalizing proposition for Butt and his £20 billion (HK$262.7 billion) Silchester International Investors fund.

Butt is thought to be sitting on a considerable paper loss given SCMP's last closing price of HK$1.95, about 40 per cent of what the stock was worth 20 years ago. Silchester first disclosed an 11.6 per cent stake in SCMP in July 2003 with the purchase of 2.1 million shares at HK$3.05 each.

The stock has been suspended since February 2013 for inadequate public float.

Butt, 62, one of the highest paid British fund managers who pocketed a £34 million (HK$446 million) payout in 2013, founded Silchester in 1994, a few months after Kuok bought a controlling stake in SCMP from Rupert Murdoch’s News Corp.

The Briton owns 150 core stocks such as Henderson Land and Hysan Development, each with more than 5 per cent holding.

It is almost inconceivable that Butt remains deeply in love with a small-cap publisher that is past its prime as the world's most profitable newspaper and a blue-chip company. No longer does SCMP's operating margins and yields fit nicely with Silchester’s approach to long-term investment

But he knows SCMP's intrinsic value and where it lies. The publisher is not just a window for foreign readers to understand what is happening in China but also an indispensable media asset which Beijing would prefer to be in the hands of a handful of trusted tycoons.

There is also another hidden value -- the former TVB studio in Clear Water Bay which Kuok plans to redevelop into luxury apartments with Shaw Brothers. The site was stated as HK$1.5 billion but some estimates put its value at HK$3 billion.

Friday's announcement by SCMP Group regarding the proposed privatization was unambiguous: “Silchester indicated that it was not prepared to support or participate in any of the latest proposals until such time when the Company’s assets are transparently priced and fully valued.”

In December 2007, Kuok tried to privatize SCMP by offering HK$2.75 for each outstanding share after raising his stake to 45 percent. Silchester held out and Kuok eventually ended up with nearly 75 percent of the stock.

Two years later Kuok sold down his stake to three friendly banks including independent non-executive director David Li's Bank of East Asia in a four-year put option at HK$1.70. In 2013, Kuok exercised the option and SCMP Group has been suspended ever since.

It is clear Kuok wants to take the company private but he may find it awkward to offer other shareholders a significantly higher price than what he paid his buddy bankers.

SCMP must rely on its all-star board, whose members include financial heavyweights such as Ronald Arculli and former Goldman Sachs banker Frederick Hu Zuliu, to figure out how it will pay for a HK$1 billion privatization given its net cash of less than HK$400 million.

The writer is a shareholder of SCMP for more than five years.

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EJ Insight writer