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Last week Hong Kong tycoon Li Ka-shing announced plans to re-organize and streamline his sprawling empire to unlock value and enhance corporate transparency.
This week, he is back again with an acquisition and equity fundraising that underscores the focus his new conglomerate, Cheung Kong Hutchison Holdings (CKH Holdings), will take.
An upsized $600 million top up placement by Cheung Kong Infrastructure (CKI) was completed after the market’s close on Tuesday, with proceeds being used to part fund the acquisition of Britain’s Eversholt Rail from its three private equity owners.
This purchase, which has an enterprise value of £2.5 billion, was announced earlier the same day and will be a joint acquisition with Cheung Kong Holdings. Together the two deals symbolise Li’s diversification away from the Hong Kong property sector, which made his name and fortune and towards global infrastructure assets - the pivot of recent M&A activity.
Sources close to the placement said this re-calibration was the main reason why one US-based fund opted to increase its stake in CKI and take up more than two-thirds of the equity offering.
It also enabled the deal to be upsized from 69 million to 80 million shares and priced towards the tight end of its marketed range. Final pricing came at HK$58 per share, a 4.4% discount to the stock’s HK$60.70 close.
The deal had initially been marketed on a range of HK$56.60 to HK$58.60, equating to a discount of 3.46% to 6.75%. Pricing was largely driven by the level the unnamed fund was happy to buy stock at.
Sources close to the deal say the fund purchased 2.6% of the company’s enlarged share capital, but will remain below the 5% disclosure threshold. In total, CKI sold 3.3% of its enlarged share capital under the lead management of Deutsche Bank, JP Morgan and Morgan Stanley.
A further 100 funds also participated in the order book, with final allocations for the remaining paper split about 70% Asia, 20% US and 10% Europe.
Overall, the deal amounted to 61 trading days, but the stock may not come under much short-term trading pressure given how much of the paper has been locked away.
CKI becomes the crown jewel of Li’s new conglomerate
On Tuesday, CKI closed down 0.08%, but has performed well since the beginning of the year, rising 6.7% since January 1. By comparison, the Hang Seng Index (HIS) is almost flat over the same period.
On a one-year basis, the stock is up 30.5% compared to a 3.9% rise in the HSI and is currently valued at 14 times 2015 earnings.
Prior to the restructuring, CKI’s parent Hutchison Whampoa and sister company Cheung Kong Holdings, were trading at historically high discounts of roughly 40% to net asset value (NAV).
Analysts believe this will now close and have been uniformly positive about the re-organization. Credit Suisse, for example, believes the gap will narrow to about 20%.
CKI is also likely to form the most valuable part of the new conglomerate. On a stand-alone basis, it will account for about 21% of CKH’s NAV, just below AS Watson on roughly 25%.
However, when stakes owned by Hutchison Whampoa are thrown into the mix, infrastructure and energy assets will account for about 40% of the new conglomerate’s NAV. Investors will, therefore, be keen to see if the group decides to streamline its corporate structure further and inject them into CKI.
So far, the group has said that five jointly held infrastructure assets will be consolidated under CKH for accounting purposes, although they will still be cross owned by CKI.
They comprise Northumbria Water, Wales and West Utilities, Envestra, ParknFly and AVR Energy. Most are recent acquisitions from 2013 and 2014.
Eversholt valued at similar level to recent M&A deals
The new Eversholt Rail deal has a similar structure to its most immediate predecessors. Terms comprise an enterprise value of £2.5 billion of which roughly £1.5 billion is debt and £1 billion will be paid to the group’s current owners, 3i Infrastructure plc, Morgan Stanley Infrastructure Partners and STAR Capital Partners.
In a press release, 3i said it should net proceeds of £358 million for its 33.3% stake. This represents a 48% premium to the £240.8 million valuation it assigned the stake as recently as September and more than double the £160.3 million valuation it assigned last March.
Pricing has been struck at about 9.5 times EV/Ebitda based on the annualized £262 million Ebitda Eversholt recorded in its June 2014 compliance certificate. No other UK rolling stock leasing companies are listed, but train and bus groups such as Stagecoach, FirstGroup and Arriva trade at lower multiples in the low to mid single digits.
However, 9.5 times is in line with the levels CKI has recently paid for other recent M&A transactions.
Last summer, it paid $320 million to buy Canadian off-airport parking company Park’N Fly on an EV/Ebitda valuation in the low to mid teens.
It also scooped up Australian natural gas distributor Envestra for A$2.4 billion at about 11 to 12 times EV/Ebitda.
Credit Suisse says that 99% of the group’s incremental earnings have came from acquisitions between 2009 and 2013. Indeed, one of the reasons the stock has performed so well is because investors view it as both a growth and dividend play.
The group’s M&A activity is driven by a search for infrastructure related assets that can generate a return on investment of at least 8% to 12%.
“They have appetite for new investments,” Cindy Huang, an analyst at S&P said. “The merger and spinoff transaction is going ahead but in the meantime it is business as usual.
“We don’t think their strategy will change,” she added, “And we know they have appetite for infrastructure and there is consolidation in European telecoms.”
Eversholt Rail owns close to 28% of the UK's passenger train fleet. Its 3,500 passenger vehicles, predominantly electric trains, are leased to 11 train operating companies. In addition, Eversholt also owns a fleet of freight locomotives although these account for less than 10% of its NAV.
It was one of three rolling stock companies formed when British Rail was privatized and was in the hands of HSBC from 1997 to 2010 before being bought by its current owners. The consortium acquired it in 2010 in a deal that valued Eversholt's gross assets at about £2.1 billion.
Eversholt also issued three long-dated public bonds totaling £1.1 billion in December 2010 and March 2011.
During the financial year ended December, Eversholt posted a net profit of £52.4 million.
Royal Bank of Canada advised Cheung Kong Infrastructure and Cheung Kong Holdings. RBC also previously advised Cheung Kong Infrastructure on its acquisition of Northumbrian Water.
Cheung Kong Infrastructure and Cheung Kong Holdings started negotiations for the company in mid-November. At the time there had been expectations of an auction process, but in the end the deal was struck on a bilateral basis.
Both Cheung Kong companies were keen to make sure the acquisition went through having previously lost out on the bidding for rolling stock company Porterbrook Rail.
Citigroup, Macquarie and Rothschild advised the selling consortium of STAR Capital Partners, 3i Infrastructure plc and Morgan Stanley Infrastructure Partners.
The deal is expected to close in March pending clearance from the European Commission under EU merger rules.
