Why Hong Kong won when Li Ka-shing lost

The decision of the minority investors of Power Assets Holdings to reject the revised takeover offer from Cheung Kong Infrastructure is a good step for shareholder rights.

For the past year Hong Kong billionaire Li Ka-shing has embarked on a massive restructuring of his two sprawling conglomerates Cheung Kong and Hutchison Whampoa, to turn them into tidier corporate structures. Along the way he has faced relatively little real opposition to these plans from minority shareholders.

Until, that is, Li tried to subsume Power Assets Holdings into his new corporate structure.

On Tuesday, minority shareholders of the Hong Kong-based utility company voted against an increased offer from Cheung Kong Infrastructure to buy the 61% of the company that it doesn't already own for $12.4 billion.

The offer consisted of a 1.066 stock swap into CKI shares for each Power Assets share, plus a cash sweetener of HK$7.50. It marked the second time shareholders rejected the advances of the group; back in September they rejected an initial $11.6 billion bid.

There were signs of a potential revolt weeks ago.

When the new share conversion rate was announced in early October some analysts slammed it for still being too miserly. Simon Lee, an analyst at Morgan Stanley, said 1.15 to 1.2 CKI shares for every Power Assets share would have been fairer. Minority investors evidently agreed.

CKI is not the only Hong Kong company to recently feel the sting of minority shareholders. Another example was Paul Singer, owner of Elliot Management Corporation, a US hedge fund.

In February Singer complained loudly about the plans of Bank of East Asia, in which Elliot Management is invested, to privately place HK$6.6 billion of shares with Japan’s Sumitomo Mitsui Banking Corporation, thereby raising its stake in BEA to 17.5%.

BEA claimed the sale was to bolster its capital ratios under Basel III requirements. Singer contended the bank had plenty of capital and accused the board of seeking to place shares with a friendly party to cement management control with the Li family (unrelated to Li Ka-shing), which only owned around 15% of its shares.

Getting active

Singer ruffled feathers and ultimately failed in his arguments. BEA sold the placement to SMBC in March.

But he was right to speak up. So were Power Assets’s investors.

Many of the largest companies listed in Hong Kong are family-controlled or the subsidiaries of Chinese state-owned companies. These entities claim to value minority shareholder rights, yet they sometimes seem to pursue business decisions that best suit their own interests, not those of their minor partners. All too often minority investors have been supine parties to such actions.

Li Ka-shing, for example, is renowned for being smart and a shrewd buyer of assets, and is backed by possibly the best management team in Asia. Yet his foray into the mobile sector with 3 Group was extremely expensive and took almost eight years to become profitable (it finally did so in 2010). The money invested into 3 Group may well have offered more value to the minority shareholders of Hutchison Whampoa, owner of the mobile company, by being used elsewhere.

Additionally, the management of Hutchison Whampoa have been accused in the past of being too greedy when it came to issuing public equity for their telecommunications assets.

Ultimately, a publicly listed business is meant to operate in the interests of all shareholders, not just some – even if they establish and run it. The decision by Power Assets’s investors and by Singer, in the case of BEA, to oppose the wishes of company-owning families is good for Hong Kong’s stock market because it will encourage publicly listed companies to engage in better corporate governance and responsible decision-making.

CKI, for example, wants to fully acquire Power Assets because it possesses some good businesses and a HK$67.8 billion ($8.8 billion) cash pile. Acquiring it in full would give Li’s son, Victor Li Tzar-Kuo, who is chairman of CKI, more firepower to conduct more acquisitions.

But CKI should be willing to pay its fellow owners of Power Assets a commensurate price to gain these advantages. They are under no obligation to sell their shares and should expect to get as much as possible in return for them.

Li was reminded of that yesterday. Other tycoons – and their smaller share partners – should take note. 

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