IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

Arun has over 15 years’ experience covering the Technology sector. During this time, he has worked with technology start-ups and as an equity analyst in investment banks and independent research firms. He was formerly a Technology Analyst for Canaccord Genuity, Altium Securities, Espirito Santo Investment Bank, Noble Group and Clear Capital. He has a dual Master’s degree in Financial Engineering and Industrial and Operations Engineering from the University of Michigan. He obtained his Bachelor’s degree in Mechanical Engineering from the Indian Institute of Technology, Bombay. He is also a CFA charterholder.

IPOs and Catalysts/Events

Will the Chinese Government Rescue Soho China (Potential Write Down of Assets)?

SOHO China: After Many False Starts, Finally an Offer?

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<p><a href="https://www.smartkarma.com/entities/soho-china-ltd" target="_blank" data-smartkarma-citation="entities:4123:1" rel="noopener">Soho China Ltd (410 HK)</a> is a real estate company controlled by power couple Pan Shiyi and Zhang Xin. As a reminder on 16 June, SOHO China announced a pre-conditional voluntary conditional cash offer from <a href="https://www.smartkarma.com/entities/blackstone-group-inc" target="_blank" data-smartkarma-citation="entities:27166:1" rel="noopener">Blackstone Group (BX US)</a>. The offer of HK$5.00 in cash per share is a 31.6% premium over the closing price of HK$3.80 per share on the last trading day (11 June prior to the trading halt). The offer is conditional on the offeror holding more than 50% of the voting rights. The offer will meet the 50+% acceptance threshold as the offeror has secured irrevocables from Pan Shiyi and Zhang Xin representing 54.93% of the outstanding shares.</p><p>In <a href="https://www.smartkarma.com/insights/soho-china-blackstone-makes-its-offer" target="_blank" data-smartkarma-citation="insights:53191" rel="noopener">SOHO China: Blackstone Makes Its Offer</a>, we stated that Blackstone has driven a hard bargain and secured the irrecovables from Pan Shiyi and Zhang Xin at a relatively good price. Notably, Blackstone’s offer price of HK$5.00 per share is 17% below last year’s rumoured privatisation price of HK$6.00 per share. The lower price likely explains Blackstone’s move to pursue a conditional voluntary offer rather than privatisation via a scheme. While not a knockout offer, we concluded that the offer will resonate with some shareholders. </p><p>However, since the announcement of the offer, the spread has widened from 9% on the first trading day after the deal announcement to 21% at the last close price of HK$4.12. The high spread is due to concerns that the key pre-condition, which is approval by SAMR under the PRC anti-monopoly law, will not be forthcoming. Blackstone has made its submission to SAMR.  </p><div class="content-highlight"><p>We continue to think that the pre-condition will be satisfied as SOHO China will remain a listed entity, Pan Shiyi and Zhang Xin will continue to retain a meaningful holding, Blackstone has prior experience in closing Chinese real estate deals and SOHO China is a relatively small player in a fragmented commercial property market in China. Based on a deal break price of HK$2.45 per share, the deal probability has reached an all-time low of 65% at the last close price of HK$4.12. An 80% deal probability would imply a price of HK$4.50 per share and an 11% gross spread, which we view as reasonable.</p></div>

Soho China Ltd (410 HK) is a real estate company controlled by power couple Pan Shiyi and Zhang Xin. As a reminder on 16 June, SOHO China announced a pre-conditional voluntary conditional cash offer from Blackstone Group (BX US). The offer of HK$5.00 in cash per share is a 31.6% premium over the closing price of HK$3.80 per share on the last trading day (11 June prior to the trading halt). The offer is conditional on the offeror holding more than 50% of the voting rights. The offer will meet the 50+% acceptance threshold as the offeror has secured irrevocables from Pan Shiyi and Zhang Xin representing 54.93% of the outstanding shares.In SOHO China: Blackstone Makes Its Offer, we stated that Blackstone has driven a hard bargain and secured the irrecovables from Pan Shiyi and Zhang Xin at a relatively good price. Notably, Blackstone’s offer price of HK$5.00 per share is 17% below last year’s rumoured privatisation price of HK$6.00 per share. The lower price likely explains Blackstone’s move to pursue a conditional voluntary offer rather than privatisation via a scheme. While not a knockout offer, we concluded that the offer will resonate with some shareholders. However, since the announcement of the offer, the spread has widened from 9% on the first trading day after the deal announcement to 21% at the last close price of HK$4.12. The high spread is due to concerns that the key pre-condition, which is approval by SAMR under the PRC anti-monopoly law, will not be forthcoming. Blackstone has made its submission to SAMR.  We continue to think that the pre-condition will be satisfied as SOHO China will remain a listed entity, Pan Shiyi and Zhang Xin will continue to retain a meaningful holding, Blackstone has prior experience in closing Chinese real estate deals and SOHO China is a relatively small player in a fragmented commercial property market in China. Based on a deal break price of HK$2.45 per share, the deal probability has reached an all-time low of 65% at the last close price of HK$4.12. An 80% deal probability would imply a price of HK$4.50 per share and an 11% gross spread, which we view as reasonable.

Soho China

SOHO China’s Offer Spread Risk/Reward