Goldin Properties Holdings merger arb

Goldin Properties Holdings is a Hong Kong listed property developer that focuses on the high-end property market in China. The CEO, who owns 64.4% of the outstanding shares, is trying to take the company private and is offering HK$9.00/share. With the shares currently trading at HK$8.28 there is a decent spread of 8.7% left that implies that the market is skeptical about this deal going through, although the CEO has financing in place and is offering a fair premium.

The privatization is being done using a tender offer that opened yesterday, and will close the 10th of May (unless extended). One risk factor is that not enough people will tender their shares since 90% of the minority shareholder need to tender their to make the offer unconditional. Since there are always people who are too lazy to tender, not aware that they can tender their shares or have their shares with a broker that frustrates the process this poses a small risk. It also doesn’t help though that the company doesn’t have large institutional owners. So there might be many small retail shareholders who might not tender for one reason or another. But usually enough people will tender in a case like this, and it helps that Goldin Properties has a US$3.8 billion market cap, so it’s a deal that will get some media attention.

The biggest reason for the spread is probably that this is a stock with a bit of history. It managed to make some headlines in 2015, first after climbing in almost a straight line from less than HK$5/share to almost HK$30/share in almost two months, and then giving most of the gains away in just one day. Certainly weird, but as far as I can tell not because of nefarious actions from the company itself. Just some unhealthy speculation from investors in Hong Kong:

So I guess this merger is a little bit more hairy than most the Chinese mergers I’m involved in, but I don’t see any big risks here and with a spread of 8.7% I think it’s worth a gamble.

Disclosure

Author is long Goldin Properties Holdings

13 thoughts on “Goldin Properties Holdings merger arb

  1. Jacob

    This analysis is not up to your usual standard!

    “…as far as I can tell not because of nefarious actions from the company itself. Just some unhealthy speculation…”

    “So I guess this merger is a little bit more hairy than most…I don’t see any big risks here.”

    The “big risk” here is obvious: that the company itself was involved in propping up the share price before, that this is just a further example of doing the same, and that the assets are in fact worth far less than $9, and that the transaction will never close. Now, I don’t know if that’s actually the case or not, but it seems the downside case here is quite a bit more than 8.7%. Without any diligence on the underlying assets, you’re right to call it a gamble!

    Reply
    1. Jacob

      Just to add: Pan first proposed this transaction 18 months ago, and while it does seem more serious now that there’s a circular, the whole thing looks a bit like a shell game. This was a reverse merger btw. There’s a partially completed disposal to a related party, whose share price has been lagging, the 2 financing partners are not disclosed and the credit line terms are nowhere in the circular, and it’s not immediately obvious what the motivation is for the transaction. Why pay a premium to appraised NAV for the minority stake in an entity you already control?

      Maybe you luck out and this is the favored entity within a group, but “hm, seems like a rich spread” isn’t much of a thesis.

      Reply
  2. JG

    I tend to agree with Jacob here:

    Also note that the shareholder base (besides Pan) probably does not consist of ‘many retail investors’ at all. The SFC issued a warning in June 2015 that a small group of 13 shareholders besides Pan controls ~31% of shares. Excluding those, the public float at that time was only 4.84%.

    http://www.sfc.hk/web/EN/files/ENF/HighCon/e00283150608.pdf

    Also note that in one of his other listed companies (goldin Financial) a similar pattern can be found. 98.5% is in hands of a selected group of individuals. Same goes for another of his companies, Gold-finance, with has ~95% in hands of a select group.

    http://www.sfc.hk/web/EN/files/ENF/HighCon/e01462161004.pdf
    http://www.sfc.hk/web/EN/files/ENF/HighCon/e00530150313.pdf

    You can ask yourself why this man listed these companies in the first place (assuming share ownership was similar at time of listing), and indeed as Jacob says, why he would take them private at prices above NAV. If you want to dig a little deeper, look at how profit was earned in Goldin financial. I read ina bloomberg article that most of 2015 profit was from marking up the value on the balance sheet of a building under construction, but have not checked it further.

    I have absolutely no idea how to handicap this, and even more due to all of the above, I am not going to try…
    The only thesis I can think of to warrant taking a position is that in case you don’t think he has anything to do with potential manipulation of stock prices, than there is not really a logical argument to go through this filing exercise, and thus he must be serious.

    The question then remains if he would be able to secure the vote. And this brings you to the point that 1) if you think his offer is overvaluing the company, based on NAV, or the 30x revenue number, or the 50x trailing PE (reasons these 13 people would vote yes), it would not make a lot of sense for himself to take the company you already control private. and 2) if the price is fair, and you don’t know these 13 people, there is a reasonable probability that 1 or 2 will block the deal if they like to. Obviously this goes for every deal, but in most deals the outcome is not dependent on obtaining approval from 11 of those 13 individuals (assuming they hold 2.5% each)

    Some articles:

    https://www.bloomberg.com/news/articles/2016-02-02/billionaire-pan-s-goldin-properties-extends-decline-on-msci-move
    https://www.bloomberg.com/news/articles/2015-05-21/goldin-s-pan-just-lost-billions-and-he-doesn-t-care-a-bit
    http://economictimes.indiatimes.com/markets/stocks/news/a-9800-stock-increase-exposes-hong-kongs-billionaires-on-paper/articleshow/58234167.cms

    Reply
  3. pietje

    I have to agree that, regardless of whether your conclusion is right or not, the analysis here is a bit shallower than usual.

    Reply
  4. pietje

    For example, at the very least you could have discussed of insiders / major shareholders.

    That said, filing a 218 page circular for a tender offer to prop up the shareprice so your buddies can sell stock to unsuspecting investors is an extremely convoluted way to scam investors (especially in China there should be an easier way) and is also very likely to attract regulatory attention.

    Also, this company is involved in some impressive construction projects:

    http://www.dailymail.co.uk/news/peoplesdaily/article-3229351/The-longest-cane-Earth-China-s-walking-stick-building-reached-highest-point-second-tallest-structure-world.html
    http://www.slate.com/articles/news_and_politics/roads/2015/08/polo_in_china_at_a_club_in_tianjin_the_1_percent_see_the_sport_of_kings.html

    So I think valuing this company on trailing revenue / earnings doesn’t really make sense and there is an argument to be made that the financial statements do not reflect the value of these projects and that that is why the tender offer was launched.

    That said, there are some issues here (property sales to related parties, suspicious price action, etc.) and it is definitely more hairy than other deals. However, an 9% spread in 3 months compensates for a lot.

    Reply
    1. Alpha Vulture Post author

      Yeah, I’m also wondering about the scam angle. I can sort of imagine that propping up the share price itself can be a goal, if for example you have pledged your shares to take out a big loan. Doing a tender offer with such sort deadlines seems to be a bit stupid then though since it also puts a very near term deadline on the scam, and the impact on the price also hasn’t been that material. But of course you never know exactly what is going on behind the scenes.

      Reply
  5. Jacob

    If this works out for the arb it will presumably be because this is an indirect way of compensating the large holders for something else. As JG noted, if there are only 13 holders, perhaps this is a mechanism to transfer funds to them, or perhaps they are affiliated with the financing parties and the real motivation here is to go private and avoid further scrutiny of an already questionable balance sheet. The cynical possibility here is that Pan may be willing to tolerate some slippage in cashing out minorities like yourself to accomplish that, especially if it’s less than 5% of the shareholder base. Personally I would want a lot more than 8.7% to take that chance, but it could work.

    Reply
    1. Alpha Vulture Post author

      Hmm yeah, I also don’t really believe in doing a going private transaction just to reward large holders for something else. Seems unnecessary inefficient. Going private to get out of the spotlight makes some sense to me though, and that might be going on here.

      The curious thing about going private transactions is that even for the most sketchy companies, that once there is a definite offer, all the (expensive) paperwork is done, the transactions are almost always completed. Even for companies that I don’t dare to own. But in the end I guess the only real reason to get this far in the process is when you have the actual intention of completing the deal.

      Reply
  6. Bram de Haas

    Just want to say I think the complaining about the short blog post is a bit impolite and perhaps counterproductive. Its a free blog. I’m reading this on a Saturday, no idea when it was written and finally its a time sensitive special situation. I’m grateful you flag these interesting situations and won’t be buying in blind so please keep them coming.

    At the same time I’m also grateful for the amazing color in the comments. Thanks for that as well.

    Reply

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