Tender Offer of NWS Holdings
On 26 June, Chow Tai Fook Enterprises (CTFE, “the Offeror”) (the direct shareholdings of CTFE, its subsidiaries and connected persons are collectively referred to as "Mr. Cheng Family" hereafter) announced a tender offer of NWS Holdings shares for each NWS Offer share of HKD 9.15. This represents a premium of about 15% to 42% over the past six months, but a discount of about 17.4% to the net asset value per share, which is much lower than the share price before COVID-19. The Offer is not attractive.
The Offer is made by CTFE, a private company of Mr. Cheng’s Family, instead of NWS’s major shareholder, New World Development ("NWD"). NWD would dispose of its 60.9% NWS shares to CTFE through the Offer, at a total consideration of HKD 21.8 billion. Amongst the proceeds, HKD 4 billion will be distributed to NWD shareholders as a special dividend. NWS shareholders will have the right to choose whether to sell their NWS shares to the Offeror at HKD 9.15 per share.
(The following is for reference only. All details are subject to the Company’s Announcements, Bond Offering Circular, the Companies Act and the Hong Kong Code on Takeovers and Mergers)
The Offer Should be Treated as A Standard Offer
It is worth adding that the NWS Offer can be considered as a standard offer, instead of a real privatisation scheme. A privatisation scheme is broadly defined as either an acquisition agreement or a general offer. An acquisition agreement is a scheme of arrangement under the Code on Takeovers and Mergers and is subject to the court proceedings. A general offer is a tender offer bid by the offeror to shareholders with a minimum acceptance amount of 90%. Once the Offeror successfully acquired 90% of the disinterested shares, the Offeror could compulsorily acquire the shares from the remaining shareholders at the same offer price for the purpose of privatisation.
There is no minimum acceptance amount in the Offer, which therefore can be considered as a standard offer. Indeed, privatisation is one of the potential outcomes of the Offer, if the vast majority of disinterested shareholders (broadly defined as “minority shareholders”, the NWS shareholders other than Mr. Cheng Family and NWD) accepted the Offer (see Table 2).
Table 1: NWS’s Current Shareholding Structure
|
Shareholder Name |
No. of NWS Shares |
% of Total NWS Shares |
|
CTFE & its Subsidiaries (A) |
Around 120 million |
3.0% |
|
Direct Shareholding of Affiliated Persons, such as Mr. Cheng Family (B) |
Around 45 million |
1.1% |
|
New World Development (c) |
Around 2.38 billion |
60.9% |
|
Offeror and Offeror Concert Parties (A+B+C) |
Around 2.54 billion |
65.1% |
|
Holders of Disinterested NWS Shares (minority shareholders) |
Around 1.37 billion |
34.9% |
|
Total |
Around 3.91 billion |
100% |
|
Sources: Company’s Announcements, iFAST Compilations Data as of 27 June 2023 |
||
Table 2: Ongoing Development after Tender Offer
|
Mr. Cheng Family’s Equity Stake after Tender Offer (corresponding threshold) |
Lower than 75% (equivalent to less than 28% minority shareholders accept the Offer) |
Higher than 75% but lower than 95% (equivalent to higher than 28% but less than 86% minority shareholders accept the Offer) |
Higher than 95% |
|
Acceptance of Minority Shareholders |
/ |
/ |
Higher than 90% |
|
Impact |
/ |
According to the Listing Rules, unless the company seeks waivers from HKEX, otherwise its shares could be suspended for trading |
According to the Companies Act and Hong Kong Code on Takeovers and Mergers, Mr. Cheng Family could give a notice of compulsory acquisition to the remaining NWS Shareholders, with the price same as the tender offer price |
|
Potential Outcome |
NWS maintains its listing status |
The company / the Offeror |
Privatisation |
|
Sources: Company’s Announcements, HKEX, Companies Act, Hong Kong Code on Takeovers and Mergers and iFAST Compilations Data as of 27 June 2023 |
|||
NWS’s Minority Shareholders Might Face the Prisoner's Dilemma
NWS’s minority shareholders might face the "prisoner's dilemma", which means that maximizing personal interests does not mean maximizing the group interests. If we assume that there are two investors with influences in the market: Investor A and Investor B, each holding 15% of NWS shares. If any of them does not accept the Offer, NWS will maintain its listing status. This will lead to the following result (see Table 3).
Table 3: NWS Minority
Shareholders’ Prisoner’s Dilemma
|
|
Investors A Not Accept the Offer |
Investors A Accept the Offer |
|
Investors B Not Accept the Offer |
|
|
|
Investors B Accept the Offer
|
|
|
|
Sources: Company’s Announcements, iFAST Compilations Data as of 27 June 2023 |
||
Impact of Transaction on NWS Bonds should be Neutral
Whether NWS is privatised or not will not affect the connected transaction between NWD and Mr. Cheng Family. For NWD, the NWS Offer is a one-off opportunity to liquidate NWS shares. Whether it is approved or not is not subject to the willingness of NWS minority shareholders. Instead, the NWD’s shareholders have the right to object to the transaction (Mr. Cheng Family is a connected person to the transaction and cannot vote to approve the transaction).
Given the special dividend incentive provided by NWD (around HKD 1.59 per share) and the lower threshold to pass the vote (only 50% or more of the remaining shareholders are required), we believe that it is not difficult for NWD to pass the transaction.
Following the announcement, the NWD’s medium- to long-term bonds rose by around $2 to $4. The bond market reacted positively to the transaction.
Based on the Offeror’s assessment, NWD’s net gearing ratio (perpetual debt as equity) will drop from 47% to 42% upon completion of the transaction. However, if we consider the perpetual debt as debt and separate the NWS balance sheet from NWD’s consolidated statement, NWD’s adjusted net gearing ratio would only drop slightly from 80% to 77% upon completion of the transaction. The ratio would rise back to 81% after the distribution of HKD 4 billion special dividend, which would not have a deleveraging effect as expected (see Table 4).
Table 4: NWD’s Adjusted Net Gearing Ratio
|
NWD |
NWS |
NWD (Assume the completion of the transaction) |
NWD (Assume the completion of the transaction and distribution of special dividends) |
|
|
Total Debt (including Perpetual Debt) (HKD billion) |
239.1 |
33.7 |
205.4 |
205.4 |
|
Total Cash (HKD billion) |
56.7 |
17.7 |
60.8 |
56.8 |
|
Total Equity (HKD billion) |
227.9 |
39.7 |
188.2 |
184.2 |
|
Adjusted Net Gearing Ratio (%) |
80% |
40% |
77% |
81% |
|
Sources: Company’s Announcements, iFAST Compilations Data as of 31 December 2022 |
||||
Moreover, upon completion of the transaction, NWD will lose at least HKD 3 billion in operating profit each year, which will have a negative impact on NWD’s long-term operating performance. NWD will be transformed from a conglomerate to a near pure real estate business. Then, it will be more vulnerable to the environments of the Hong Kong and Chinese real estate markets.
However, the transaction does result in a significant increase in New World's available cash and reduces the default risk on the short- to medium-term bonds. Overall, the credit impact of the transaction on NWS should be neutral.
If investors are interested in NWD bonds, they might consider "NWDEVL 5.875% 16JUN2027 CORP (USD)" and "NWDEVL 3.800% 21May2029 Corp (HKD)", with the yield to maturity of about 6.9%.
Transaction might make NWS Bonds More Attractive
The transaction might trigger a change in control of NWS. If Mr. Cheng family acquires all or substantially all of NWS shares (defined as 75% or more), the holders of NWS bonds (vanilla bonds) might be able to sell the bonds back to the issuer earlier under a change of control (which is still arguable). Besides, under the terms of the perpetual bond, the issuer might have to call the perpetual bond compulsorily in such circumstances.
Given NWS's sufficient cash position and stable business segments, together with CTFE’s support, NWS has the ability to redeem all the bonds at one time. It is also true that the holders of vanilla bonds could choose not to exercise the change of control put, then the impact of the transaction on NWS bonds is trivial.
Investors may consider the bond, "NWSZF 4.250% 27Jun2029 Corp (USD)", with the price at around $85. If the change of control clause is triggered, investors could sell the bonds back to the issuer to get the price spread of around $15, which is quite attractive. Even if Mr. Cheng Family does not end up getting all or substantially all ownerships of NWS, or if the change of control clause is not triggered, the bond still offers a yield to maturity of up to 7.3%.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position and the analyst who produced this report holds a NIL position in the abovementioned securities.
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