On 24th February 2020, Wheelock, Wharf Holdings and Wharf REIC were all suspended from trading pending an announcement. Wheelock announced that the Woo family is proposing to privatize the company via (1) distribution of 1 Wharf Holdings share and 1 Wharf REIC share to every 1 Wheelock share and (2) a cash offer of HK$12 per share.
This news resulted in Wharf Holdings’ share price tumbling 18.1% from HK$19.70 to HK$16.14 at the lowest closing. In this article, we wanted to share our thoughts on this matter and the share price tumbling.
Unlocking Wheelock’s Value
Through this restructuring, Wheelock is able to unlock value for its minority shareholders due to the holding company discount on Wheelock due to its stake in Wharf Holdings and Wharf REIC.
Such a cross holding structure allowed the Woo family to enjoy majority control over the whole group’s business; however, the issue is the deep discount applied on the remaining property assets within Wheelock.
If we remove 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. This can be easily calculated since all 3 companies – Wheelock, Wharf Holdings and Wharf REIC are listed companies with stock ticker HK:0020, HK:0004 and HK:1997 respectively.
As seen, due to the holding company discount, the market assigned a negative value to the remaining property assets within Wheelock. Thus, with such a restructuring, value is being unlocked for Wheelock shareholders, where the Woo family is offering HK$12 for the remaining property assets within Wheelock and returning all Wharf Holdings and Wharf REIC shares to shareholders.
Through this restructuring, it would allow shareholders to have a better control of the cashflows coming in from Wharf Holdings and Wharf REIC. This is because, Wheelock receives approximately HK$5 billion to HK$6 billion a year in dividends from Wharf Holdings and Wharf REIC but only distributes out approximately HK$3 billion to HK$4 billion in dividends a year. Wheelock’s incoming cashflow of HK$5 billion to HK$6 billion does not include the cashflow they make from their other remaining property assets within the company. Therefore, through this restructuring, it would allow Wheelock shareholders to have direct access to the cashflow from Wharf Holdings and Wharf REIC. Furthermore, if they wish, shareholders would be able to sell off Wharf Holdings and Wharf REIC that they receive in the future as well.
Wharf Holdings Share Price Tumbling
If such a restructuring unlocks value for Wheelock shareholders, why would Wharf Holdings’ share price decline so drastically?
The reason in my opinion would be because the market has always been hoping for Wheelock to acquire Wharf Holdings given Wharf’s cheap valuations. Therefore, with such a corporate action by Wheelock, many investors who were buying Wharf Holding for that privatization story would want to be dumping the shares since the story is no longer in play.
Thinking Through It Rationally
Now, let’s take one step back and think through it rationally.
With this news, does it have any real impact on Wharf Holdings’ businesses?
Does this tumbling in share price reflect a change in fundamentals of Wharf Holdings?
If the answer is no to both questions above, perhaps this tumble is actually an investment opportunity for long-term investors.
This restructuring at Wheelock has no real impact on Wharf Holdings’ business but more of a corporate move to unlock value for Wheelock shareholders and improve cashflows. While the story of a privatization of Wharf Holdings may no longer exist, the fundamentals of Wharf Holdings is still intact. Hence, in my opinion, this news of restructuring only affects Wharf Holdings’ share price but has no material impact on Wharf Holdings’ businesses.
For those interested, I have written my investment thesis on Wharf Holdings for my InvestingNook ValueScreener members previously. If you are interested in finding out more on this investment case study writeup or more first hand and in-depth stock ideas, check out our ValueScreener below, where we share monthly stock screeners and ideas!
The information provided by InvestingNook serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.
Disclaimer: The Author has vested interest in Wharf Holdings at the time of writing.