Valuing the merged entity and gaining MTR minority shareholders' approval of the deal are key hurdles The prospects of merging Hong Kong's two railway companies will become clear in the second quarter at the latest as the government seeks to overcome a significant hurdle to the deal - putting a value on the merged entity. Although a joint feasibility study by the MTR Corp and Kowloon-Canton Railway Corp was submitted in September last year, it would take until March for the Environment, Transport and Works Bureau to finish reviewing the report, sources close to the government said yesterday. The government also had to plan a merger structure that would be acceptable to 360,000 MTR minority shareholders. 'The primary and biggest hurdle of the merger is working out a reasonable valuation of the KCRC,' one source said, as it involves the government selling the wholly owned KCRC to the partially privatised MTR. 'Other issues such as operation of the merged entity, fare levels and employees' rice bowls are not difficult to tackle in comparison.' The decision of MTR minority shareholders will be critical to a successful merger as the government is deemed a connected party under the listing rules and, therefore, not eligible to vote. A government spokesman said it was still evaluating the merger report pending a decision on whether to go ahead or not. She declined to give a timeframe on the issue. At a Legislative Council panel meeting tomorrow, Environment, Transport and Works Bureau chief Sarah Liao Sau-tung is due to update legislators on the latest progress of the merger study. Sources said backing the merger intensely was the bureau, which wanted to accomplish its mission of bringing fares down. 'The transport bureau wants to press ahead with the merger as soon as possible because it wants to materialise a unified fare adjustment regime for public transport and the Sha Tin-Central rail project,' one source said. The merger, first proposed in 2002 when the MTR lost its bid for the Sha Tin-Central rail link to the KCRC, has cast a long shadow over the MTR's privatisation, with the government putting plans to offload a second tranche of shares on hold pending a decision. According to Legislative Council papers issued earlier this week, discussions on the terms of the merger between the government and the MTR are proceeding. As well as taking up much of the transport bureau's time, the Financial Services and the Treasury Bureau, headed by Frederick Ma Si-hang, was working with its joint financial advisers, HSBC and Citibank, on the structure of the merger, the sources said. A recent study by public policy think-tank Civic Exchange estimated that a prerequisite to a commercially viable merger was for the government to write down at least half of KCRC's $60 billion net asset value and grant it property development rights. In response to concerns that the government may sell the KCRC at a substantial discount to obtain MTR minority shareholders' support, a senior MTR official said last month that the government would not be worse off as a result. 'The government wholly owns the KCRC and owns 76 per cent of the MTR. If it sells the KCRC to the MTR, it is still the biggest shareholder of both companies and it's just a matter of transferring the KCRC from one pocket to another.'