Temasek buys 25% stake in AS Watson for US$5.6bn

Strategic sale takes place after a series of investor meetings held by AS Watson parent Hutchison Whampoa.

Singapore’s state investment arm Temasek Holdings has agreed to buy a 24.95% stake in AS Watson for HK$44 billion (US$5.6 billion), parent company Hutchison Whampoa said on Friday.

The deal values Hutchison Whampoa's international retail and manufacturing arm at about HK$177 billion (US$22 billion) and sets a price benchmark for any future listing of AS Watson, one banker said.

The stake sale came to fruition after Hutchison Whampoa held a series of meetings earlier this month with investors in Asia, Europe and the US to test their interest and seek out potential cornerstone investors in AS Watson, which has more than 10,500 stores worldwide. It was during those meetings that Temasek expressed an interest in a much larger stake.

At a press event held at the Cheung Kong Centre in Hong Kong, where Hutchison Whampoa's billionaire owner Li Ka-shing and his son Victor Li were both present, the company explained the reasons for pursuing the stake sale instead of an initial public offering.

“What happened is [that] we had a strategic review…and the management team went around to investors to see if there is interest in [AS Watson],” Canning Fok, group managing director of Hutchison Whampoa told reporters. “One of the major investors at these presentations is Temasek. In the end, they like it so much they offer us 25% and Mr Li said, maybe one investor is better than IPO,” he said.

A listing for AS Watson is still on the cards, Hutchison Whampoa officials indicated, in Singapore and Hong Kong in two or three years time.

The strategic sale is the latest twist in a saga that began when AS Watson's supermarket chain ParknShop was put up for sale last year. That sale -- which attracted bidders such as CP Group and Carlyle -- was called off in October.

After a strategic review with advisors Goldman Sachs and Bank of America Merrill Lynch, Hutchison said the sale of ParknShop via a private market transaction “would not deliver maximum value" to shareholders.

Having not achieved the kind of valuations it was looking for through a private sale, Hutchison Whampoa hinted that it could potentially list AS Watson, the division that owns and operates ParknShop.

But the deal has now gone down the strategic route once again. Bank of America Merrill Lynch, DBS, Goldman Sachs and HSBC advised Hutchison on the sale to Temasek Holdings.

The stake sale will help Hutchison crystallise some of the value in AS Watson. About 70% of the net proceeds will be used to pay shareholders a special dividend of HK$7 per share and the rest will be used by Hutchison as working capital.

AS Watson's net profit before tax for the financial years ended December 2012 and December 2013 was about HK$8.8 billion and HK$10 billion, respectively. Hutchison currently trades at about 14 times its 2013 earnings while AS Watson was sold at about 22.6 times its earnings. 

The AS Watson deal concludes an active week for Temasek Holdings, whose unit offered to buy control of Singapore-listed Olam International a few days ago for $3.2 billion.

It also extends a busy year-to-date in Asian mergers & acquisitions. According to Dealogic, Asia ex Japan M&A volume has reached $111.5 billion so far in 2014, up 74% year-on-year.

The AS Watson stake sale was also the third largest Asia ex-Japan M&A deal in the retail sector.

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