Wharf (Holdings) Ltd (HKSE: 0004.HK) recently saw its share price tumble nearly 22% to HK$15.40 per share (data as of 10 Mar) after Wheelock and Company Limited (HKSE: 0020.HK) announced a proposal to privatise the company on 24th Feb 2020.
The Woo family, Wheelock’s largest shareholder, is proposing to privatize the company via (1) distribution of 1 Wharf Holdings share and 1 Wharf Real Estate Investment Company (HKSE: 1997.HK) share to every 1 Wheelock share and (2) a cash offer of HK$12 per share.
Unlocking Wheelock’s Value
In the restructuring, Wheelock’s minority shareholders are offered a discount on the shares of Wharf Holdings and Wharf REIC. This discounted offer allows Wheelock shareholders to receive a higher value. Let’s take a closer look.
While such a cross holding structure will allow the Woo family to enjoy majority control over the whole group’s business, the issue is with the deep discount applied on the remaining property assets within Wheelock.
If we deduct the market value of Wheelock’s stake in Wharf Holdings and Wharf REIC from Wheelock’s market capitalization, this translates to a valuation of – HK$27 billion or – HK$13 per share on the remaining property assets within Wheelock.
Essentially this means that the market is giving a negative value to Wheelock’s remaining property assets (after deducting for Wharf Holdings and Wharf REIC’s property assets). The restructuring thus gives Wheelock shareholders a better value than what the market currently provides.
Better Cash Flow
This restructuring allows Wheelock shareholders to directly gain control of the cash flows from Wharf Holdings and Wharf REIC. Currently, Wheelock receives approximately HK$5 billion to HK$6 billion a year in dividends from Wharf Holdings and Wharf REIC, but only distributes approximately HK$3 billion to HK$4 billion in dividends a year.
Get Smart: Thinking Rationally
Now, let’s take one step back and think through this rationally.
Does this news have any real impact on Wharf Holdings’ businesses?
Does the fall in share price reflect a change in the fundamentals of Wharf Holdings?
If the answer is no to both questions above, perhaps this share price fall could be an investment opportunity for long-term investors.
It is my opinion that this restructuring at Wheelock has no real impact on Wharf Holdings’ business. It is a corporate move to unlock value for Wheelock shareholders and improve cash flows. The business fundamentals of Wharf Holdings remain intact.
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Disclaimer: Goh Tee Leng owns shares in Wharf Holdings.
An earlier version of this article first appeared on InvestingNook.
