Socam deal neatly illustrates the tycoon ethic in action

PUBLISHED : Wednesday, 08 April, 2009, 12:00am
UPDATED : Wednesday, 08 April, 2009, 12:00am

Once, when asked the secret of his astounding business success, the late Saudi billionaire entrepreneur Sulieman Olayan replied: 'It's simple. I always take care that everyone I deal with makes a profit too. That way, they keep coming back for more - and I get rich.'

Mr Olayan's philosophy could hardly be more different from the opportunistic tactics of Hong Kong's asset-trading tycoons, to whom 'Buy low, sell high' is always the cardinal rule.

That approach, or rather its mirror 'Sell high, buy low' was on display yesterday, as Shui On Construction and Materials (Socam), a company controlled by cement and property baron Vincent Lo Hong-sui, offered to buy out the minority shareholders of part-owned associate China Central Properties, and take the company private.

China Central is an investment company which specialises in buying into distressed and part-completed property developments on the mainland. Owned 43 per cent by Socam, it was listed in 2007 on London's Alternative Investment Market (AIM) in an initial public offering that raised ?51 million (HK$1.74 billion) from a group of minority investors composed mainly of hedge funds.

Since then, it has all been down hill. Although the company performed reasonably well in 2008, earning a net profit of US$15.69 million and ending the year with a cash pile of US$255 million and only US$33.5 million in short-term debt, the share price still collapsed. Last month, it slumped to a low of ?.21, down 79 per cent per cent from the initial share offer price (see the first chart below).

Enter Mr Lo with yesterday's offer. Socam is proposing to buy out China Central's minority shareholders either with an all-stock offer of 0.95 Socam shares for each China Central share held, or with a mixed stock-and-cash deal in which China Central investors will get 0.45 Socam shares and ?.28 in cash. It is also offering to cancel China Central's convertible bonds at 90 per cent of their face value.

On the surface, the offer appears generous. Based on market prices immediately before news emerged that an offer was in the pipeline, the all-stock proposal values China Central shares at ?.67, or a 117 per cent premium to the share price on AIM. Meanwhile, the mixed offer values China Central at ?.61, a still handsome 98 per cent premium.

Some investors are enthusiastic. Socam claims its proposal has the support of around half of the minority shareholders.

But not everyone is happy. In fact, some of China Central's minority shareholders are furious. Steve Wang at Spinnaker Capital Group, China Central's largest minority shareholder with a 16 per cent stake, argues that Socam's proposal is a lousy deal.

He points out that after yesterday's price movements, the deal's pricing values China Central at a sizable 58 per cent discount to the company's net asset value at the end of 2008.

Moreover, he questions whether exchanging stock in a company with an enviable net positive cash position for shares in Socam, which has HK$3.45 billion of bank loans maturing this year and held just HK$617 million of spare cash at the end of 2008, is such a sensible move.

It would be far better, he says, to leave China Central alone to take advantage of its strong cash position to snap up emerging investment opportunities in the mainland property market.

It's hard to feel any sympathy for hedge funds, but Mr Wang does have a point. Given the prevailing sell high, buy low ethos, you have to wonder why anyone who wasn't desperate would want to sell when a tycoon is buying, or vice versa.

Unlike the saintly Olayan, Hong Kong tycoons seldom make a point of ensuring that their business counterparts also come out of a deal in profit.