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CMB buyout bid has shareholders swimming in sea of uncertainty

The recent hostile takeover bid for China Motor Bus (CMB) by two maverick investment bankers at Yu Ming Investments has left shareholders caught between the devil and the deep blue sea, according to analysts.

Ricky Tam, chairman of the Hong Kong Institute of Investors, said shareholders should reject offers being made on both sides and consider selling their holdings in CMB once they had benefited from the takeover speculation.

Investment bankers Peter Fung Yiu-fai and Tony Fung Wing-cheung have offered to buy out shareholders for a total of HK$90.60 per share over two years. They need to secure 51 per cent of the voting rights to succeed in their bid.

The offer breaks down to one HK cent per share at the outset and a further HK$43.71 per share in cash distribution after one year and HK$46.88 in bonds, which will mature on the second anniversary of the offer becoming unconditional. The bonds reflect the estimated value of CMB's property portfolio, its primary business since the company in 1998 lost the bus franchise that gave it a transport monopoly on Hong Kong Island. CMB has cash reserves of HK$2.21 billion.

CMB has recommended shareholders reject the offer. On Wednesday, management upped the ante by offering a special dividend of HK$18 per share to be paid on November 18 on condition that the hostile offer fell through and no others materialised.

The company also promised a 'more liberal dividend policy' in the future.

Mr Tam said: 'Two years is too far away [for shareholders to wait for payment]. [The second payment] will only be paid if [Yu Ming] disposes of the property, but I doubt they will. In the recent property environment that will not be easily done.'

However, he said management's offer was also not particularly alluring for investors, adding that past experience had shown that CMB management was not generous with minority shareholders.

'On the management side, they don't treat the small shareholders too good. They are mean and don't pay that much money. After recent pressure they have said they will pay HK$18 per share dividend and more in the future, but I doubt it. The management team is too old, they can't change.'

Mr Tam calculates CMB shares to be worth about HK$94 per share, or HK$46 in cash on hand and HK$47 per share as the net worth of its property assets.

He said two sides competing for control of the company should drive up the value of the illiquid stock, presenting small shareholders with a good opportunity to unload their holdings.

CMB shares closed at HK$69.75 on Friday. They were trading at about HK$66 at the beginning of April, before any takeover talk began - down from HK$88 in September 1997.

'I would recommend shareholders unload this share at about HK$75 to HK$80, when it will be trading at around 80-85 per cent of net asset value. That would be a good price to sell,' he said.

Shareholder activist David Webb, who does not own CMB stock, said corporate governance had always been a concern with the company, which is 42.45 per cent owned by the Ngan family and set out with the intention of operating a bus network.

'Shareholders will need to look at the Ngans versus the Fungs and at the relative quality of management. Neither are paragons of corporate governance, in my mind,' Mr Webb said.

Yu Ming Investments is listed in Hong Kong. Its principal activities are the holding of listed and unlisted securities. It has a market capitalisation of HK$380.51 million and showed a net loss of HK$86.6 million in the year to last December.

CMB has a market cap of HK$3.19 billion and declared a net profit of HK$259.8 million in the year to last June.

Graphic: cmb18gwz

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