We've read a lot about how a San Francisco-based hedge fund, Passport Capital, is preying on the Lai Sun empire. The fund has spent more than HK$400 million accumulating 28 per cent of the core company, eSun Holdings, only 8 per cent short of the Lam family's own holding. Last week, it successfully killed a placement by the company that would have diluted its holding.
So what is going to happen with the HK$3 billion empire? I don't have an insider view but a look at another recent play by Passport is quite telling. It happened on the Toronto Stock Exchange where many small and sleepy mining firms are listed. Among them is WGI Heavy Minerals, which has been losing money for three consecutive years. Its share price had dropped from a C$11 (HK$68.50) peak to 70 Canadian cents while the Toronto Composite Index posted a 50 per cent return in the same five years.
In April last year, Passport announced that it owned 13.1 per cent of WGI and had therefore become its largest shareholder. On June 3, its founder and sole managing executive John Burbank sent a circular to every shareholder criticising the management for being 'complacent about operational underperformance', earning 'excessively high compensation' and 'preoccupied with its own interests than with those of shareholders'. Passport demanded 'a complete change of leadership', in order 'to unlock the value that exists', proposing a replacement of the board by its nominee.
WGI rebuked Passport's criticism but within 10 days it announced the sale of a major asset and the payment of a special dividend. Passport maintained its pressure by questioning why a higher bid was not accepted. Naturally, WGI's share price rebounded significantly.
In the end, Passport did not get any seat on the board. However, it pledged to continue to keep a close watch on WGI's performance. But before the end of the year, it sold most of its WGI holdings. A rough estimate put its return at about 40 per cent.
Media company eSun is significantly bigger than WGI in terms of market capitalisation. But drawing cues from the WGI case, one can easily see why it has been a target.