New | Tough decision for minority shareholders of Li Ka-shing-controlled CKI and Power Assets
Minority shareholders of Power Assets face tough choice between a merger with parent Cheung Kong Infrastructure (CKI) or reject the proposal and take the risk it may see its share price languish if no new acquisitions materialise
Minority shareholders of Power Assets will be subjected to a hard choice between a possibly value-creating merger with parent Cheung Kong Infrastructure (CKI) at a less than desirable shares exchange ratio, or reject the proposal and take the risk the firm may continue to sit on its huge cash pile and see its share price languish if no new acquisitions materialise.
Either way, billionaire tycoon Li Ka-shing and his family, who control both companies under his flagship CK Hutchison Holdings, will be in the drivers’ seat when it comes to Power Assets’ future direction. The vote is scheduled for Tuesday.
CKI early September proposed to swap all the Power Assets shares it did not already own, with new shares to be issued by CKI. The proposed swap ratio was 1.04 CKI shares for each Power Assets share.
The ratio was raised to 1.066 about a month later as investors complained the offer was near the low end of the around 1.05 to 1.35 range since December 2013 when Power Assets announced it is selling its stake in its Hong Kong power business and separately list on the stock market.
The proposed special dividend - essentially financed by Power Assets’ cash pile and payable to all CKI shareholders post-merger - has also been raised to HK$7.5 a share from HK$5.
After multiple stake disposals in the Hong Kong business, Power Assets has amassed a cash pile of HK$68 billion at the end of June. It said it would pursue acquisitions in the global energy industry.
But in the 18 months after the spin-off, only one HK$4.7 billion acquisition of a 27.5 per cent stake in Australian gas distributor Envestra came up.
Power Assets chairman Canning Fok Kin-ning told shareholders if it had not spent most of the HK$68 billion two years after the spin-off, it may pay a special dividend. But it has no obligation to do so.
Power Assets’ independent financial adviser Platinum Securities said in the merger offer’s shareholders document, the merger would broaden Power Assets’ investment scope and opportunities from energy to the wider infrastructure sector.
It also said the 1.066 merger exchange ratio - close to the ratio of the average closing prices of the two firms in the 30 trading days prior to the merger proposal’s announcement - are “fair and reasonable.”
It said it is in line with the number of trading days chosen as the basis for the determination of the exchange ratios in two previous merger cases.
The precedents were the takeover by Cheung Kong Holdings - now known as CK Hutchison - of Hutchison Whampoa, and the merger of train makers CSR Corp and CNR Corp.
But ISS and Glass Lewis, which provides corporate governance advice to fund managers, both issued reports advising them to vote against the merger offer.
Glass Lewis said “even a modest broadening of the look-back to a still-recent three-month period suggests the offer is less than compelling,” adding the analytical methodologies used by Platinum was “questionable or misleading.”
The exchange ratio based on the average closing price in the 90 days prior to the merger’s announcement was 1.1, and that of 180 days prior was 1.13, according to Glass Lewis.
It also said Power Assets has not provided “substantive disclosure” on the extent its board has seriously considered alter native transactions, before determining that the proposed merger represented “the most attractive strategic alternative available.”
Based on its own estimated fair values of CKI and Power Assets’ assets, ISS said a fair exchange ratio would be between 1.09 and 1.2, while the median analysts target prices on the two firms implies a fair exchange ratio of 1.13.
“There are material conflicts of interest inherent in this merger and the governance structures of CKI and Power Assets are not sufficiently robust to ensure that the transactions were reviewed as independently and objectively as minority shareholders might hope,” it said.
Power Assets should consider distributing its cash solely to its shareholders if it does not merge with CKI, and continue to leverage CKI’s contractual obligation to refer opportunities to invest in power projects to Power Assets, it added.
CK Hutchison owns 75.7 per cent of CKI, which in turn owns 38.9 per cent of Power Assets. Through HK Electric Investments, Power Assets has a 33.4 per cent stake in Hongkong Electric, down from 100 per cent before the spin-off.
Most of CKI and Power Assets’ independent directors have served on their boards for over nine years, many of them serve currently on multiple firms within CK Hutchison, and five executive and non-independent non-executive directors hold board positions at both CKI and Power Assets.
Citi head of Asia utilities research Pierre Lau wrote in a note the merger will unlikely be approved by Power Assets’ shareholders, adding if it is voted down, Power Assets’ share price may fall 3 per cent - the amount of outperformance over other Hong Kong-based utility firms since the merger proposal was announced.
Daiwa Capital Markets’ analysts, who first wrote about the possibility of a merger between the two firms back in July, said CKI’s offer is fair and Power Assets shares may see a “27 per cent value destruction” if the merger is rejected.
Approval for the merger requires “yes” votes representing more than 50 per cent of shares owned by CKI’s independent shareholders and more than 75 per cent of the shares owned by Power Assets’ independent shareholders.
The proposal will be rejected if it attracts more than 10 per cent “no” votes from Power Assets’ independent shareholders. If the merger proposal is voted down, CKI is not allowed under Hong Kong securities regulations to launch another merger offer with Power Assets within 12 months.
