Li Ka-shing sweetens the terms for Cheung Kong Infrastructure’s merger with Power Assets. Chances are he won’t have to sweeten again.
Tycoon Li Ka-shing at a news conference in Hong Kong Jan. 9. Mr. Li sweetened the terms for CKI’s merger with Power Assets. PHOTO: VINCENT YU/ASSOCIATED PRESS
By ABHEEK BHATTACHARYA
Oct. 7, 2015 10:53 p.m. ET
Li Ka-shing’s minority shareholders have gotten him to blink once. Ironically, that may hurt their chances of staring the Hong Kong tycoon down a second time.
Mr. Li’s Cheung Kong Infrastructure, or CKI, said late Wednesday that it would improve the terms at which it is buying out another of Mr. Li’s units, Power Assets. It says it is doing so after receiving feedback from Power shareholders.
The latter had strong reasons to grumble. They were receiving 1.04 CKI shares for each of their own, which reflected the average ratio of the stock prices the five days before the deal was announced in early September. This was conveniently the lowest ratio since CKI began trading in 1996.
The new ratio of 1.066 is still 9% lower than the pre-deal average at which the two stocks traded just this year alone. Each Power share should be worth 1.16 CKI shares, CLSA estimated a month ago.
Mr. Li will also raise by 50% the special dividend that CKI and Power shareholders get upon completion of the merger. But this is a poisoned chalice.
The total $3.77 billion payout will essentially come from the $7.5 billion net cash that Power investors anyway have a claim to. Plus, CKI originally pitched the deal as a way to deploy Power’s cash hoard for Mr. Li’s European acquisitions, a goal toward which now there are fewer resources left.
CKI says the new ratio isn’t final. This theoretically makes a second shareholder revolt possible.
Yet, practically, the room for more activism suddenly got complicated. Pleased that CKI is unlocking Power’s cash to pay out more dividends, as well as boosting the share swap, some shareholders sent Power shares up 1.4% Thursday morning even though the broader market was down.
The stock is now nearly 9% above the pre-deal price. This means that if Power’s minority shareholders voted down the deal for the sake of forcing a ratio 11% higher than the original, using CLSA’s ideal swap ratio, they’d be losing 9% in appreciation.
It’s a close call. Besides affecting some individuals’ sense of opportunity cost, this could color how proxy advisers react. During Mr. Li’s last big merger in January, Institutional Shareholder Services argued in favor of the transaction despite the low share-swap ratio, partly because the alternative was sacrificing big stock-price gains. Many mutual funds follow ISS’s advice.
Perhaps Power shareholders will find solace in the broader victory. They have gotten as consummate a deal maker as Mr. Li to yield. As he continues restructuring his empire, this is an important lesson for other potential activists.
Write to Abheek Bhattacharya atabheek.bhattacharya@wsj.com
http://www.wsj.com/articles/a-hong-kong-billionaire-blinks-is-it-enough-to-seal-a-deal-1444272815
