New World to buy out its China retail unit in HK$934.5 million privatisation plan
New World will offer HK$2 per share to buy out its retail unit, less than half the 2007 IPO price of the department store operator.
New World Development, the holding company of the Cheng family, one of the wealthiest in Hong Kong, will buy out a retail unit that operates department stores in mainland China in a HK$934.5 million (US$119.90 million) privatisation plan.
New World Development will offer HK$2 per share to buy the 27.7 per cent of New World Department Store China that it does not already own, according to a statement to the Hong Kong stock exchange. Shares of the retail operator jumped 43 per cent to HK$1.90 in Hong Kong trading, while New World Development was unchanged at HK$10.78.
The privatisation comes at an optimal time, as the retailer’s stock price has fallen by more than 65 per cent since its initial public stock offering in 2007, according to Alvin Cheung Chi-wai, associate director at Prudential Brokerage.
“It’s a typical example for listed companies to spin off their assets at high valuations during boom time and privatise them” during the downturn of the stock’s price, Cheung said.
The retailer, which owns New World stores across 22 cities in mainland China and is 72.3 per cent owned by New World Development, debuted on the Hong Kong bourse in 2007 at HK$5.80 per share. New World Development was established by the late Cheng Yu-tong in 1970, and has businesses in infrastructure, hotels, property and transport.
“In addition, the traditional retail business has been hit by the rapid growth of online shopping in the mainland and profit margin was significantly squeezed by competition,” he said.
Jonas Kan, head of property research at Daiwa Capital Markets, said the privatisation of the mainland department store could offer greater flexibility for the majority shareholder to revamp its business.
If New World Development “wants to retreat from the mainland retail market, it should sell down its stake instead of buying out the shares it does not own”, he said.
The company will be delisted from the Hong Kong stock exchange and become a private company wholly owned by New World, if 90 per cent of minority shareholders accept the offer. Otherwise, the buyout offer will lapse.
New World Development believes the privatisation plan is necessary because it wants to change the strategy of the department store unit.
“China’s retail space has experienced unprecedented challenges in recent years, particularly from the rapidly growing e-commerce platforms, as well as the influx of large format shopping malls, which revolutionised the shopping habits of Chinese consumers significantly,” the company said in a stock exchange filing.
The offer price was attractive enough to gain investors’ support for the privatisation plan, said Ben Kwong Man-bun, a director of KGI Asia.
“It’s not easy to make a profit these days from department stores,” Kwong said. “The privatisation will allow New World to easily change its strategy. Reducing the number of listed entities in the New World group will cut its costs and enhance operating efficiency, which would benefit the group as a whole.”