Disney deal raises queries on who has more say in park
The government welcomes the Walt Disney Company's injection of funds into Hongkong International Theme Parks. This helps pave the way for further development and financial arrangements of Hong Kong Disneyland.
Tourism Commission spokesman, SCMP, October 1, 2008
Excuse me. With my limited business and financial sense, I have problems understanding why the government would 'welcome' Disney's taking up of the Hong Kong theme park's HK$3.3 billion commercial loan.
Imagine the two of us setting up a tiny store on a street corner selling different kinds of potato chips. Bored with the chips-only menu, people are not coming back. While we discuss adding juice and fishball noodles to our menu to attract customers, bankers are pounding on the doors asking for an early repayment of their money.
You offer to lend the store money to pay the bankers off. Will I jump at it and kiss you? No, because Adam Smith says there is no free lunch and you will definitely ask for a bigger say in the business.
The government did not say what Disney had asked for in return. As in other Disney-related matters in the past 10 years, it had kept the latest terms in a box.
Their spin doctors are only saying that Disney is providing 'cheaper finance', i.e. charging the theme park 1.5 percentage points more than the interest rate banks impose to lend funds to one another.
On the surface, it doesn't sound a bad deal. Under the old loan agreement, the rate charged by banks will be at least 25 basis points higher, without taking into account the latest credit crunch and the penalty charge for failing to meet some business targets and therefore breaching the loan terms.
What really matters are the intangibles. I have not been privy to the closed-door meetings and confidential papers. But given that Disney is a listed company that has to maximise its shareholders' interest, it would be surprising if it did not ask for things in return.
First is the creditor's right. Among them are the priority right to Hong Kong Disneyland's cash flow and an overriding say on the park's cash flow, dividend payments and expenditure. This allows Disney to dip into the park's large pool of entrance fees in the form of loan repayments, instead of waiting for the remote chance of profit sharing.
Second is the shareholder's right. The Hong Kong government and Disney own 57 and 43 per cent of the park respectively. Disney may ask the government to surrender certain rights as a majority owner even when there is no change in the percentage of ownership. How about a determining vote that allows Disney a veto on crucial matters?
In short, it is almost beyond doubt that Disney has gained more say in the park both as a shareholder and a creditor. This makes empty open promises by senior government officials to win a bigger say in the park, whose weak management has not only hurt public coffers with poor attendance but also the city's image with earlier scenes of scuffles between mainland visitors and security guards.
Government officials are understood to have fought against this option until the very last moment. Yet, as the clock ticked, other options closed one after the other.
Refinancing had been an alternative. But according to several bankers, it has become too expensive, financially and politically.
The market meltdown and credit crunch have pushed rates up. For your reference, a second-tier corporate listed on the local exchange is now being asked to pay a minimum of 1.75 percentage points above the interbank rate, instead of the 50 basis point spread it had been enjoying last year.
And here we are talking about a theme park that has missed various performance targets and has yet to table a turnaround formula.
Only some form of government guarantee can provide enough comfort to the risk-adverse bankers nowadays. It is, however, beyond discussion given the deafening criticism that the park has already attracted.
(The natural question is when the park's financing problem surfaced more than 18 months ago, what stopped the government from getting refinancing when banks were flooded with liquidity?)
Another option is for the government to take up its share of the debt, which is about HK$1.8 billion. Number-wise, that's peanuts, but politically, it would be unpalatable.
It will ignite a new round of criticism and perhaps be more politically damaging, providing an excuse for legislators to press for more details on the agreement between Disney and the government that has been kept a top secret so far.
Let us not forget Chief Executive Donald Tsang Yam-kuen was the financial secretary when Hong Kong signed the Disney deal in 1999.
So there isn't really much choice left but to accept a deal that will further weaken our bargaining power as the Hong Kong theme park is talking of further expansion.
How can anyone with the interest of Hong Kong at heart 'welcome' this? Dear officials, please tell me I have been wrong.