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Slick trade

12 Jan 2015 By Una Galani

Cheap oil could be vital to Li Ka-shing keeping control of his empire. Asia’s richest man is selling a 6 percent stake in Husky Energy to his holding company as part of a broader shake-up. The move is vital to maintaining Li’s grip on his telecom, retail and property businesses. The recent fall in the oil price makes it harder for shareholders to object.

In an attempt to shrink a persistent stock market discount, Li is merging his main holding company, Cheung Kong, with its 50 percent owned subsidiary Hutchison Whampoa into a new company called CKH Holdings. The combined group will leverage up and spin off its property assets.

A straightforward swap would have reduced the Li family’s stake in the enlarged holding company to around 29 percent, from 43 percent today, according to Breakingviews calculations. Dropping below 30 percent would limit the family’s ability to control the business and prevent it from adding to its stake without making an offer to independent shareholders.

That’s where the Husky deal comes in. Li is exchanging a $1.3 billion equity stake in the Canadian energy group directly owned by his family for shares in the enlarged holding company. The extra equity lifts the family’s stake in CKH Holdings – and in the subsequent property spinoff – above the 30 percent threshold.

A few months ago, shareholders in Cheung Kong and Hutchison Whampoa might have baulked at accepting shares in Husky, which were then trading at a five-year high. But the collapse in the oil price since has knocked about a quarter off the value of Husky shares. The result is that Li has to part with a bigger stake in the Canadian group. However, it makes the trade look more attractive for independent investors who must approve the broader restructuring.

Investors added $5.4 billion to the value of Cheung Kong by midday on Jan. 12, shrinking the discount to the holding company’s book value to 13 percent, from 24 percent before the deal. It confirms that there is value to in restructuring Li’s empire. If the Husky swap helps him keep control, it will rank as one of the tycoon’s slickest trades.


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