Power Assets Holdings is expecting its Hong Kong electricity unit to have a market capitalisation of between HK$48 billion and HK$63.4 billion ($6.2 billion to $8.2 billion) following the spin-off and separate listing on the Hong Kong stock exchange, according to an announcement.
The business, which is controlled by Li Ka-shing and is one of only two electricity producers in Hong Kong, will be sold to a business trust-like structure known in Hong Kong as a fixed single investment trust. That trust, under the name of HK Electric Investments, will then be selling units to investors through an initial public offering.
The plan is to sell between 50.1% and 70% of the trust, which based on the expected market cap, suggests a deal size of between $3.1 billion and $5.7 billion. Sources have earlier said the deal is likely to raise about $4 billion to $5 billion.
The final size will depend on the price per unit, which won’t be determined until closer to the launch of the deal, but the market cap will have to be at least HK$48 billion for the spin-off to proceed, Power Assets said in the announcement.
As per the current timetable, the IPO will hit the market in January, assuming that Power Assets’ existing shareholders approve the proposed spin-off at an extraordinary general meeting on January 6. According to the announcement, the listing date is scheduled for January 29.
HK Electric Investments will be the third fixed single investment trust to list in Hong Kong and the first with a focus on the power industry. The structure was pioneered by PCCW in November 2011 for the spin-off of its telecom assets and was copied by Great Eagle Holdings for the listing of three Hong Kong hotels in May this year.
Like business trusts, a fixed single investment trust is more flexible than a Reit (real estate investment trust) in terms of what kind of assets can be included and how much debt it can take on. And like both Reits and business trusts, it allows dividends to be paid from cash flow as opposed to from accounting profit, hence increasing the yield compared to a normal company.
Hong Kong doesn’t have regulations in place to list business trusts, but this structure allows issuers to list an almost identical vehicle within the framework of Hong Kong’s existing listing and takeover rules.
Power Assets’ Hong Kong electricity business is ideal for listing as a trust as it has stable revenues and a pre-determined permitted return on its capital investments within power generation, transmission and distribution under a so called “scheme of control”. The current scheme of control was entered into in January 2008 for a term of 10 years and can be extended by the government for a further five years until December 2023.
During this period, the permitted return is 9.99% per year with regard to its traditional power assets and 11% on its renewable power assets.
The trust will be paying 100% of its distributable profit as dividends and Power Assets said in the announcement that the distribution from the listing date until the end of 2014 is projected to be at least HK$3.2177 billion. Based on the indicated market cap, that translates into an annualised dividend yield of approximately 5.5% to 7.26% for 2014.
Yield plays haven’t been too popular with investors in the second half of this year after talk about tapering in the US sent interest rates and bond yield sharply higher and investors re-focused their attention on stocks offering higher growth.
But as long as these vehicles are backed by quality assets and the yields are attractive relative to the surrounding market, there should be enough buyers, observers say. At an expected deal size of at least $4 billion, HK Electric Investments can also be expected to be pretty liquid, which should add to the attraction.
Perhaps the more interesting issue is what will happen to Power Assets after the spin-off of the Hong Kong business, which accounted for 52% of its total assets at the end of June and 43% of the pre-tax profit in the first half. The company’s share price has fallen by about 11% since it first announced the spin-off plans in September and is currently at a 12-month low. However, it did gain 1.2% to HK$59.65 yesterday after announcing details of the plan.
Aside from the Hong Kong business, Power Assets also has power generation and distribution businesses in the UK, Australia, New Zealand, mainland China, Canada, Thailand and the Netherlands and going forward its focus will be on power-related projects outside Hong Kong.
The company’s global expansion in recent years was the key reason why it chose to change names to Power Assets in early 2011. It was previously known as Hongkong Electric.
The proceeds received from the sale of assets to the trust will provide it with “the financial strength to seek acquisitions in the global power sector” and Power Assets said in the announcement that it is currently studying and assessing a number of potential investment opportunities.
It said that it expects to receive at least HK$55.7 billion from the sale of the assets and make a gain of approximately HK$53 billion.
At least 10% of the IPO will be set aside for Power Assets’ existing shareholders through an assured entitlement. Cheung Kong Infrastructure Holdings, which is the largest shareholder with a 38.9% stake, has said that it will vote for the spin-off at the EGM but hasn’t commented on whether it intends to subscribe for its entitlement in the IPO.
The power generation assets that will be taken over by the trust comprise one power plant on Hong Kong’s Lamma Island that runs on a combination of coal and natural gas and has an installed capacity of 3,737 megawatt. The plant also includes a wind turbine station and a solar power project with a combined capacity of 1.8 megawatt.
As of September this year, it provided electricity to approximately 568,000 customers on Hong Kong Island and on Lamma.
Goldman Sachs and HSBC are joint sponsors for the IPO.