Li Ka-shing sweetens bid for Power Assets

It may take more than an enhanced dividend and improved share-swap ratio to win shareholder approval for the $12.4b merger, a deal tied to the reorganisation of Li's businesses.

Li Ka-shing’s Cheung Kong Infrastructure (CKI) sweetened its offer to buy the 61.13% of Power Assets Holdings (PAH) it doesn’t already own, as it steps up efforts to ensure minority investors will approve the proposed merger.

The merger of the two Hong Kong-listed companies is Li’s latest manoeuver in the reorganisation of his business empire to release value, following the high-profile restructuring of his flagship Hutchison Whampoa and Cheung Kong Holdings in January.

The reshuffle put the Hong Kong tycoon's property assets into a newly created firm, Cheung Kong Property Holdings, while his non-property assets including ports, energy, infrastructure, telecoms and retail units belong to CK Hutchison.

In a statement late on Wednesday, CKI, the infrastructure arm of Li’s business empire, proposed an  increase of the share-swap ratio by 2.5%, meaning CKI will pay 1.066 CKI shares for every Power Assets stock not already owned by Li’s companies, up from 1.04 on September 8 when the deal was announced.

Under the new proposal CKI/PAH will raise the special dividend to CKI shareholders from HK$5 to HK$7.5 per share, provided the merger proceeds.

A successful merger will give CKI Chairman Victor Li Tzar-Kuo access to PAH’s HK$67.8 billion ($8.8 billion) cash hoard and consolidate holdings in 11 projects globally, providing the elder son of the octogenarian Li with a sufficient war chest to make more acquisitions overseas.

One lump or two?

The sweetened deal has its detractors, however, and some analysts say the swap ratio is unattractive and therefore incapable of winning PAH shareholders' approval of a deal.

“We are disappointed with the modest hike,” Simon Lee, an analyst at Morgan Stanley wrote in a research note on October 7. “We consider a conversion ratio of 1.15 to 1.2x (CKI shares) to be a fairer range.”

Hong Kong-traded shares of CKI fell 0.07% to finish at HK$69.05 on Thursday, while PAH shares advanced 1.45% to HK$73.7. The city’s benchmark Hang Seng Index slid 0.71%.

Rajesh Panjwani, an equity analyst with CLSA, said the new offer exposed the deficiency of the original proposal. “it confirms that they (CKI) got investors feedback that a deal is unlikely (to get done) at 1.04," he wrote in a note.

 “The bump up in the ratio should leave investors with no doubt that the deal is strategically important to the CK group and getting it done is more important than sticking to a particular merger ratio,” said Panjwani. “While a higher dividend may please retail shareholders, it does not really help PAH shareholders as higher dividends would bring down the share price accordingly.”

A detailed timetable for the newly tabled deal will be outlined in a document issued to CKI and PAH shareholders on October 20.

The merger is expected to be completed by early next year, according to the new proposal.

HSBC is CKI's financial advisor on the merger.

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