New World Development is offered a buyout of its infrastructure arm

New World Development is one of the big players in Hong Kong's property market.

New World Development is offered a buyout of its infrastructure arm
A general view shows residential apartment blocks in Hong Kong, China, June 29, 2019. Reuters/Thomas Peter/File Photo

The backstory: New World Development is one of the big players in Hong Kong's property market. This company was founded by billionaire Cheng Yu-Tung, and now his son Henry Cheng is the chairman, with his grandson Adrian Cheng as the CEO. New World has got its hands in areas like construction, insurance and hotels. By the end of last year, the company's total assets were valued at HK$621.9 billion (US$79.4 billion).

But New World has been dealing with a debt burden compared to its competitors. Its net debt-to-shareholder-equity ratio is around 47%, making New World one of the most indebted developers in Hong Kong. And to make matters worse, sales and rents are taking a hit both in Hong Kong and mainland China while interest rates keep going up.

More recently: In the first half of this year, New World’s underlying profit dropped by 14% to HK$3.36 billion (US$429 million). But the company came up with a plan to tackle its debt head-on. It's all about optimizing capital expenditures, selling off non-core assets and hitting the reset button on dividends.

The development: Now, New World is about to get a big cash injection of HK$21.8 billion (US$2.78 billion). How? Well, it has an offer to sell its construction subsidiary to its major shareholder, Chow Tai Fook Enterprises (CTFE), which is owned by the billionaire Cheng family. CTFE already owns about 45.2% of New World shares, and now it wants to acquire nearly 97% of NWS Holdings (New World’s infrastructure arm) stock for up to HK$35.47 billion (US$4.53 billion). Just so you know, NWS is mainly involved in construction, toll roads and insurance, primarily in Hong Kong and mainland China, and it's currently 60.9% owned by New World. Hong Kong hasn't seen a deal this big since EQT, a private equity firm, dropped US$7.4 billion to buy Baring Private Equity Asia last year.

Here's the nitty-gritty – CTFE's subsidiary, Century Acquisition, is offering to snatch up all the remaining NWS Holdings shares it doesn’t already own at a price of HK$9.15 (around US$1.2) per share. If this mega-deal is sealed, New World has a special treat for its shareholders – a dividend of HK$4 billion (US$510.7 million), which comes out to HK$1.59 (US$0.20) per share. The rest of the money will be used to pay off the company's debts and reduce its net debt-to-shareholder-equity ratio from 47% to around 42%.

Key comments:

"This is a deal that makes all parties happy," said Raymond Cheng, head of Hong Kong research at CGS-CIMB Securities, to Reuters, saying the offer's 10% discount to the target's price-to-book value is reasonable for both buyer and seller.

“The ultimate beneficiary is New World Development,” said Louis Tse, managing director at brokerage firm Wealthy Securities Ltd. “The point is the interest rate is going to get higher and higher, and New World has quite a bit of debt to repay.”

“The deal should strengthen NWD’s cash flow position and give NWD more flexibility around refinancing,” said Jefferies LLC analyst Sam Wong. However, the loss of profit and dividend from NWS will take time for the remaining businesses to offset, and the reduction in gearing will be less than expected after the payout of the special dividend, he said. “I wouldn’t call this a super sexy deal.”