HK Offers Control But No Ownership For SCA, Mengniu
Two new stories in the consumer space are offering an interesting look at the difficulty of taking over Hong Kong-listed companies, providing headaches for potential acquirers but also interesting opportunities for minority investors. The 2 cases involve dairy giant Mengniu (HKEx: 2319) and Swedish paper products company SCA (Stockholm: SCAA), which have each bought a controlling stake of their Hong Kong-listed targets rather than the taking outright ownership that both probably would have preferred. In the former case, Mengniu was aiming to buy raw milk supplier Yashili (HKEx: 1230), while SCA was aiming to buy tissue products maker Vinda (HKEx: 3331)
Hong Kong is different from many other stock markets in its relatively high threshold for takeovers, which requires that 90 percent of a company’s shareholders approve before that company can be acquired. Most other markets require a simple majority approval, which then automatically means that all shareholders must sell their stock at the acquisition price. The high Hong Kong threshold means that acquirers can often purchase controlling stakes of their targets through a tender procedure, but can’t take actual control since the 90 percent figure is hard to reach.
Let’s start with Mengniu, which announced its plan to purchase Yashili back in June in a deal valued at about $1.6 billion. (previous post) But only 89.82 percent of Yashili shareholders tendered their stock at the acquisition price, leaving Mengniu just short of the 90 percent it needed to force all remaining shareholders to sell their stock. Since it couldn’t perform an outright acquisition, Mengniu is now being forced to sell back some of Yashili’s stock into the market to maintain Hong Kong’s requirements for minimum share floats for publicly listed companies.
That requirement has created an opportunity for potential new investors who like the China dairy consolidation story represented by this deal. Singaporean sovereign wealth Temasek, China-focused private equity firm Hopu and 3 other institutional investors have seized the opportunity, buying 471 million Yashili shares being sold back into the market by Mengniu. (English article)
In a similar deal, Sweden’s SCA launched a takeover attempt for Vinda back in September, aiming to boost its 22 percent stake of one of China’s largest tissue sellers. SCA had offered to buy Vinda stock for HK$11 per share, representing a 35 percent premium over its average price during the 30 days before the bid. More than a month later, SCA has just announced that shares it purchased after its offer have boosted its stake in Vinda to about 60 percent, again giving it control but not ownership of the company.
The acquisition of controlling stakes in their acquisition targets is significant for both Mengniu and SCA, which can now consolidate financials from Yashili and Vinda into their own results. Both acquirers will also be able to nominate a majority of members to Yashili’s and Vinda’s boards, allowing them to treat those companies as subsidiaries and do some integration of operations. But both Yashili and Vinda will have to continue as independent, separately listed companies for now, meaning their management and board members will need to protect the rights of minority shareholders as well as those of their big new controlling stakeholder.
That kind of arrangement can provide attractive opportunities for both small investors and big institutional buyers. In the one case, Temasek and Hopu are getting exposure to not only Mengniu and Yashili through their investment, but also to the broader consolidation story in China’s dairy industry. Vinda offers a similar investment opportunity for minority stakeholders, and I wouldn’t be surprised to see some big institutional investors buy into the company in the next few months, providing some potential upside for its stock.
Bottom line: Hong Kong’s strict takeover rules that make it difficult to acquire companies are offering investment opportunities for buyers of Vinda and Yashili stock.
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