Quek’s battle for Guoco

Quek’s battle for Guoco
Business & Markets 2013
Written by Ben Shane Lim of theedgemalaysia.com
Monday, 15 April 2013 10:22


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KUALA LUMPUR: The delay in issuing the response document by Guoco Group Ltd could prove costly for billionaire Tan Sri Quek Leng Chan’s (pic) HK$8.25 billion (RM3.22 billion) privatisation bid for the group.

The response document which details information on Guoco and recommendations from independent members of the board was initially supposed to be despatched on Jan 2 but it has been delayed to April 30.

In light of his failed attempt to privatise Hong Leong Capital Bhd (HLCap), would the tycoon consider raising his offer on Guoco?
Quek’s failed attempt to take HLCap private has revealed that his plans are not fool-proof and minority shareholders have the power to turn down unsatisfactory offers.

Just like HLCap before the privatisation fell through, Guoco has been trading above the offer price of HK$88, averaging about HK$93.80 since the privatisation was announced on Dec 12 last year. Guoco’s share price closed at HK$95 last Friday.

To top it off, Guoco has also posted much healthier earnings. For the first half ended Dec 31, 2012, the group recorded a net profit of HK$3.34 billion compared to a net loss of HK$2.60 billion in the previous year.

The results were 150% better than the immediate preceding half-year’s net profit of RM1.3 billion ended June 30, 2012.

The improved results were due to the group’s principal investment business which posted a net gain of HK$2.93 billion, mostly from unrealised gains on trading financial assets following the recovery of the financial markets during the period.

The group’s trading financial assets amounted to HK$13.45 billion as at Dec 31, 2012, in addition to its cash pile of HK$11.60 billion against HK$34.14 billion in borrowings.

Similar to HLCap, Guoco has a very small free float. Quek alone has a 71.52% stake in Guoco through his related companies. Together with parties acting in concert, he holds 74.47% of Guoco leaving 25.53% of the independent votes to decide on the offer.

However, for the privatisation to go through, Quek will need to get 90% of shareholders to accept his offer of HK$88 per share.

When HONG LEONG FINANCIAL GROUP BHD [] (HLFG) attempted to take HLCap private, it already owned more than 80%. However, that proved to be its Achilles heel. It would only take dissenting minorities with a stake of 2.1% to block the exercise. Excluding HLFG, HLCap’s top 30 shareholders had a combined stake of 4.78% in HLCap. Therefore, it requires relatively few individuals to block the exercise.

In Guoco, it would only take a dissenting minority of 2.55% to block the exercise and there are at least two shareholders with the power.

First Eagle Investment Management LLC has a 7% stake and Artisan Partners Holdings LP has 4.97% in Guoco. Even the next five biggest shareholders have combined holdings of 2.8%, enough to prevent the privatisation deal.

Although Quek’s offer of HK$88 per share is a 25% premium over the last traded price prior to the takeover bid, it may not be attractive enough for minorities to part with their shares in the diversified conglomerate.

Based on the latest earnings figures, that offer values Guoco at 6.16 times earnings and 0.59 times its net assets of HK$149.18 per share.

Guoco holds a wide variety of businesses, ranging from banking to gaming to property development, one reason why the offer of HK$88 may not reflect the intrinsic value of the group.

Guoco’s banking operations include HLFG, which controls, Hong Leong bank, the fourth largest bank in Malaysia and by extension, HLCap.

The group also boasts a 15% stake in Bank of East Asia (BEA). BEA is a small but well-regarded family-owned financial institution, which holds a 23.5% stake in AFFIN HOLDINGS BHD [].

Under its gaming arm, Guoco Group has a 74.5% stake in UK-listed The Rank Group plc via Singapore-listed Guoco Leisure Ltd. The Rank Group boasts 150 gaming outlets in Britian, Spain, and Belgium, with over 22.4 million annual customer visits.

Its principal market is in Britain where it operates the Grosvenor Casinos, 35 of them, as well as Mecca Bingo which has 103 clubs.

Closer to home, Guoco’s property development arms are Singapore-listed GuocoLand Ltd and Bursa Malaysia-listed GuocoLand Bhd.
For these assets, HK$88 per share would be a steal for Quek given that analysts are valuing Guoco at between HK$95 and HK$105 per share. However, with the share price above the offer price, it looks like investors are aware of Guoco’s value as well.



This article first appeared in The Edge Financial Daily, on April 15, 2013.