In a complex deal, Chinese property developer SPG Land plans to reduce its debt with the sale of a 60% stake to leading Chinese state-owned property firm Greenland Holding, and raise cash from the disposal of its 50% interest in Shanghai’s Peninsula hotel.
Greenland, through its wholly-owned subsidiary Gluon Xima, will pay HK$3 billion ($387 million) for new shares in SPG for a 60% holding. Prior to the sale David Wang, SPG’s departing chairman, will pay HK$1.3 billion ($168 million) for the Shanghai-based developer’s 50% stake in the Peninsula hotel, according to a filing to the Hong Kong stock exchange late on Wednesday.
The purchase by Greenland, one of China’s largest developers, should strengthen SPG’s operations and financial position, including reducing its net gearing ratio to 49% from 120%, said a person familiar with the transaction.
If approved, the deal would be the biggest ever acquisition of a controlling stake in a Hong Kong-listed PRC property developer.
The issue of new shares means that SPG can avoid making a mandatory general offer to minority shareholders. The company will pay a special cash dividend of HK$1.275 a share, and issue four bonus shares for each share in order to maintain a 25% public float. After payment of the special dividend, the company will have HK$2.94 billion to pay back loans and make property investments.
The proposed transaction needs approval from shareholders and regulators. Both SPG and Greenland expect the transaction to be completed within 90 days.
HSBC was the sole advisor on the transaction. Separately, its loan division provided the funding for Greenland’s purchase, which was an additional reason for the structure of the deal. A general mandatory offer would have required the mainland company to show that it had sufficient cash offshore to pay for the SPG stake.
Shareholders can choose to receive ordinary shares or non-voting convertible preference shares (CPS). Wang will take CPS only so that the public float of the company, which will be called Greenland Hong Kong Holding Ltd., remains above 25%. CPS will also be issued to Greenland, so that it will own 60% of ordinary shares on a fully diluted basis.
The sale of the 50% stake in the Peninsula hotel to Wang means that a pre-emption right held by Hong Kong Shanghai Hotels, the owner of the other 50%, cannot be exercised. A clause in the joint venture agreement allows the hotel group, owned by the Kadoorie family, to buy SPG’s stake at a 20% discount to market value if Wang’s holding in SPG falls to below 50%. On a fully-diluted basis, his stake in Greenland Hong Kong Holding would fall to 28.7%.
SPG’s share price almost doubled in value yesterday in response to the news, closing at HK$7.30.
Although SPG’s share price rose to HK$3.82 on 18 April, the day before trading was suspended, the average price in recent months was about HK$2.50, said a person familiar with the transaction.
After the payment of the special dividend and the sale of the Peninsula, based on a HK$2.50 share price, the company would trade at a multiple of one times book value, said the person. That ratio would be a significant discount to developers similar to Greenland, such as China Overseas Land and China Resources, which trade at price-to-multiples of close to two times.
The price of SPG’s existing $200 million bond issue also jumped in value, and was quoted at 114 yesterday. The notes, which pay a 13.5% coupon, mature in April 2016, but are expected to be called next year and refinanced at a lower rate. Last year, investors agreed to modify the issue’s covenants, allowing the firm to make asset sales.
Both Moody's Investors Service and Standard & Poor’s placed SPG Land’s ratings under review for possible upgrade, yesterday.
“In our view, Greenland's credit profile is much stronger than that of SPG Land. SPG Land is likely to gain significant support from Greenland if it becomes the sole listed offshore platform of Greenland,” said S&P.
SPG has been vulnerable to attempts by the Chinese authorities to dampen speculative demand for high-end residential properties.
Greenland, headquartered in Shanghai, is a leading developer in the China real estate market, with projects in over 70 cities across 25 provinces. It is wholly-owned by the State-owned Assets Supervision and Administration Commission of Shanghai Municipal Government.
Moody's says that the investment by Greenland, a firm with “broader investment experience and stronger financial capacity than SPG Land, will help improve the latter's operations and push its development capabilities to the next level”.