Asian tycoons look to spin off underperforming businesses

October 14, 2013 9:42 am

Asian tycoons look to spin off underperforming businesses

By Paul J Davies

One is a tall, suave francophone African living in London; the other a small, Octogenarian multi-billionaire from Hong Kong. They look to have little in common, but Tidjane Thiam, who runs UK-based life insurer Prudential, and Li Ka-shing, the patriarch of the Cheung Kong and Hutchison Whampoa empire, are both acting under the influence of the same number – the price to book multiple that answers the question of whether, or not, they should spin off sections of their companies.Right now, Mr Thiam has little or nothing to offer investors by saying yes, while Mr Li is looking to say yes in a number of different ways – and in Asia he is not alone.

Firstly, Mr Li is jumping on to the trusts bandwagon. Investors clamouring for yield have spent half the year snapping up real estate and business trusts in Asia. There was a break over the summer after Ben Bernanke, Federal Reserve chairman, began the talk of tapering, but now trusts are back.

Mr Li’s empire hopes to list its Hong Kong electricity supply business for up to $5bn as a trust. This will offer investors a yield of about 6.5 per cent – a ripper in a zero-rate world. New World Development, the property-led conglomerate of another wealthy Hong Kong family, is also spinning off a trust, this time a handful of hotels worth about $1bn.

But Mr Li’s Hutchison has gone beyond the vogue for trusts and has put its local supermarket group, ParknShop, on the block for $3bn-$4bn. Anything else with a limited growth outlook could follow. However, this is not necessarily about selling Hong Kong, it is more that Mr Li is looking to ditch the ballast weighing down Hutchison’s share price. Investors just do not value its varied collection of businesses as a group.

Hutchison trades at a 40 per cent discount to net asset value per share right now – or a price to book multiple of 0.6 times. This is not the worst they have been. Towards the end of 2008, they were at a more than 55 per cent discount to NAV, but after recovering fairly well into the autumn of 2010, they have drifted lower since. The shares remain way below their average level of a 17 per cent discount seen over the past 20 years, according to CLSA.

It’s a similar story at New World Developments. Its shares hit their recent nadir in late 2011 at a discount of more than 75 per cent, but at nearly 50 per cent below NAV today, it too remains below its historical average, according to CLSA.

For Prudential, the world is precisely the other way up. In 2011, when the group’s shares were languishing at their lowest price to book multiple since the depths of the financial crisis, Mr Thiam fired up Project Redgrave. This was the complex regulatory cleaving of the younger, faster growing Asian business from the lumbering old UK with-profits fund that had long provided the start-up capital to Asia.

In the aftermath of the Pru’s failed takeover attempt of AIA, some investors and analysts were gunning for a break-up of the UK group. So, when Redgrave finally crossed the line this year and the split was done, the talk of a separate listing for Pru Asia came back with a vengeance.

But there is no gain for investors in doing this now. They already value the Asia business very highly and have pushed Pru’s share price to more than three times book value. This is a higher multiple than Asian investors give to AIA, which trades at just over twice book value.

Asian investors are thus unlikely to get a chance to own Pru Asia soon. But should they be encouraged by Mr Li’s actions into thinking that large conglomerates, which traditionally trade at some discount, have had their day?

In Singapore last year, Fraser and Neave, an amalgamation of property, beer and soft drinks got taken apart by a corporate raid. Its stock had been languishing at a discount of between 70 and 80 per cent to book.

The great conglomerates of the UK and US were similarly taken apart in the 1970s and 1980s as growing institutional investors in maturing capital markets helped create conditions conducive to corporate raiders.

Sadly for investors this seems unlikely in Asia for two reasons. Firstly, Mr Li and his fellow tycoons maintain effective control over their groups through large shareholdings. Secondly, they are not like the old men of industry who built Anglo-Saxon conglomerates, they are traders. As the value of their conglomerate portfolios waxes and wanes, they will remain their own corporate raiders whenever the discount gets too big.