It came as little surprise that Jardines decided to buy back its own stock yesterday. For anyone who follows the company, the move was entirely in character.
On the surface the move looks like a great victory for minority shareholders. The monies from the sale of its stake in investment bank Flemings are being given back to shareholders – as opposed to invested by Jardines’ management. The record of the company management in making investments has not always been good, so many shareholders will have slept easier last night.
However, the underlying motive behind the buyback is far simpler. It is part of the ongoing privatization of the group – a move designed to retain the Keswick family’s control over the conglomerate.
An obsession with control
The Keswicks control Jardines via a complex cross-shareholding structure, a Singapore listing and incorporation in Bermuda. The family owns no more than 10% of the firm. Meanwhile the cross-shareholding – devised in the 1980s – allows the family to control Jardine Matheson via Jardine Strategic and vice-versa thanks to the way in which each has the majority vote in electing the board of the other. The majority of Jardine Matheson and Jardine Strategic board members thus sit on both boards, and Henry Keswick is chairman of both.
When the cross-shareholding was first devised – in 1986 – Jardine Strategic held 26% of Jardine Matheson and Jardine Matheson held 49% of Jardine Strategic. In reaction to feisty minority shareholders, Jardine has been buying back its own stock from the market at a quickening pace. By April 1 the cross shareholdings stood at 38% and 61% respectively. By July 31 they stood at 40.2% and 66% respectively.
This is a creeping privatization – the two group companies are taking more and more of the listed shares of each out of the public market – and this has reached its apogee with the new share buyback.
Devils in the details
On announcing the buyback, Jardine said it will return up to $908 million to shareholders - if they accept. This represents 20.4% of Jardine Matheson’s stock. If fully subscribed that will take Jardine Strategic’s stake in Jardine Matheson up to about 60%. Just as importantly, the Keswick family’s stake in the Princely Hong will rise by 20%.
The buyback will be funded by the cash and shares obtained from Chase for Jardine's interest in UK merchant bank Flemings and also by an increase in debt. The latter is something the group has been averse to since its experiences with ultra-high gearing in 1982. However, the increase in gearing is quite prudent – it goes from 11% to 20%.
The move makes Jardines impregnable. If we compare the previous structure with the Death Star in Star Wars, the new move has shut off the tiny cargo hole that Luke Skywalker used to destroy the giant spaceship at the film’s climax and weaken the power of the Empire.
Will this improve the stock price performance or the employees’ ability to convert their share options? Probably not. Apart from Jardines’ poor operating margins, the smaller free float and the ever-weakening possibility of a takeover (with a premium), it makes the stock look less and less attractive.
What next?
HongkongLand is the only remaining weak spot. Jardine Strategic owns 34% of the property company. In theory, an aggressive bidder could still take it over if it made a generous market tender for the remaining 66% that is listed in Singapore. It would then be able to reconstitute the board at the next AGM and take control.
This begs the question: how much would Jardines’ gearing have to go up to gain another 17% of Hongkong Land - to make the Jardine stake 51% ? It is hard to say, but analysts believe that such a move would force Jardines to add as much as $2 billion to $3 billion to their debt profile - with a resulting explosion in gearing. Failing that, maybe the best thing for the Keswicks to do would be to relist Hongkong Land in Hong Kong – a move which would see the company's market cap double at the very least – and make the process of buying 66% very expensive indeed.
