Hong Kong’s New World Development has offered to take its New World China Land unit private for HK$18.6 billion (US$2.4 billion) in an effort to gain greater flexibility in managing the China property business.
New World Development is offering HK$6.80 per share to existing shareholders of New World China, a 32% premium over Tuesday’s closing price of HK$5.14, according to a joint statement on Friday. It is also a 53.7% premium over the average closing price for the 30 days prior to Tuesday’s close.
Trading for both companies’ shares has been suspended since Tuesday but resumed Friday. New World Development shares closed at HK$8.27 on Friday, while New World China shares finished the day’s trading at HK$6.63.
New World China will apply to withdraw its shares from the Hong Kong Exchange after April 16, according to the terms. The deal is subject to a shareholder vote.
To fund the transaction, New World Development will conduct a rights issue, offering 2.26 billion rights shares at HK$6.20 each, which will net the company HK$13.3 billion to HK$13.9 billion.
The remainder of the take-private deal will be financed through a credit facility.
Should the take-private deal fails to materialise, the proceeds of the rights issue will be used to fund existing ventures, including land bank expansion.
New World Development management have spent the past few years focusing on the Hong Kong side of the business and managed to boost sales, branding and the overall quality of the properties, a source familiar with the deal told FinanceAsia. Now, the company aims to tackle China.
But investor sentiment on the mainland is waning amid concerns over a growing debt crisis, a trend that’s likely to continue for the foreseeable future, particularly after the country reported its first-ever bond default last week after a series of near misses.
And this sour outlook makes it difficult to raise capital from equity markets. Over the past six months, New World China shares traded at a low of HK$3.69 and HK$5.14, averaging HK$4.09. Shares are up 35% so far this year to March 11.
“[But] due to the low liquidity of New World China Land shares and the significant discount to the net asset value per share ... the public equity capital market does not provide ... a viable funding alternative,” the companies' statement said.
By privatising its Chinese unit, New World Development – which boasts a larger balance sheet and access to more competitive financing terms – will be able to fund New World China’s property development projects.
“The parent has a lower cost of funding and better access to capital markets. There’s no reason to have a separately-listed company,” the source said, arguing that as two separately-listed companies, there are constraints. “It makes it operationally less flexible. After the privatisation, the current management team can have more control over the China [division].”
New World China also has to pay more to take out a loan – some 140 to 150 basis points higher than its parent, the source added.
Operationally, New World China’s business is solid, the person argued, pointing to a 51% gross margin and solid interim results. The company announced earnings on February 25, reporting an 82% year-on-year increase in revenues to HK$11.88 billion for the six months ending December 31.
“Yet, if you look at the discount to NAV, it’s humungous. Even at a premium, they’re still buying at a discount,” the person said.
While New World China needs capital for future projects, it will also seek to maximise returns in its current projects, the person added.
It currently owns 38 major development projects, located in 25 cities, and includes residential communities, serviced apartments, villas, hotels and offices.
New World Development, meanwhile, said last month its first-half net profit dropped 54.6% from the same period the year before, on a sharp fall in revaluation gains.
HSBC was the sole advisor on the deal.