ESR buyout showcases depths of Hong Kong misery
28/05/2024 06:00
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Anshuman Daga
SINGAPORE, May 27 (Reuters Breakingviews) - Even by Hong
Kong standards, real estate fund manager ESR 1821.HK is having
a rough time. A potential buyout looks well-timed, but backers
like Canada's OMERS Administration can push for a high premium.
The $6.3 billion ESR manages real estate assets including
data centres and warehouses across mainland China, Japan, South
Korea, Australia, Singapore and elsewhere. At the time of its
stock market debut five years ago, e-commerce - particularly in
China - was booming, making ESR's new economy logistics assets
hot property. But its stock is down 60% from a 2021 peak and 30%
since the start of last year. Over the same period, the Hang
Seng .HSI has fallen one third and 5% respectively.
One reason is the China discount, despite ESR's geographic
reach. Another is the company's complex business and lack of
peers in Hong Kong. In 2021, ESR bought ARA Asset Management in
a $5.2 billion deal, giving it a huge portfolio of commercial
and retail properties. That added to ESR's already complicated
business: on top of developing properties, it also raises
external capital to co-invest in funds and real estate
investment trusts. Rising interest rates and debt costs have
hurt ESR too.
The company is taking steps to revamp its business,
including selling up to $2 billion-worth of assets to refocus on
logistics and pay down debt. ESR reckons that its moves can help
bring down its net-debt-to-assets ratio to the low 20% range in
the medium term, from over 30% last year. Encouragingly, ESR's
fund management EBITDA and its assets under management both
increased last year.
Against this backdrop, a consortium including U.S.-based
private investment firms Starwood Capital and Sixth Street
Partners proposed in late April to take it private. Financial
details were not disclosed, but the buyer group will probably
offer a 20% to 30% premium to the stock's undisturbed price of
HK$8.35, Reuters reported, citing sources. Existing investors
including Warburg Pincus also have an option to roll their
shares into the delisted entity.
At a 30% premium, that implies an enterprise value of nearly
$11 billion, or some 9 times forecast EBITDA, per LSEG. That's
well below peers such as Australia's Goodman Group's GMG.AX 26
times and the 15 times for Singapore's Capitaland Investment
CAPN.SI . ESR's long-suffering shareholders can ask for more.
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CONTEXT NEWS
ESR, a Hong Kong-listed real estate fund manager with $156
billion of assets under management, said on May 13 that a group
of investors had proposed to take it private.
ESR, which also manages commercial properties and real
estate investment trusts, said a consortium including U.S.-based
private investment firm Starwood Capital and investor Sixth
Street Partners made a non-binding, conditional proposal on
April 25 for a potential privatisation. The company did not
disclose financial details.
Existing investors would have the option to take up the cash
offer or roll their shares into the future private company, ESR
said. The company's co-founders, who hold a combined 7% stake
and Warburg Pincus, which owns 14%, are "welcoming" of the
indicative bid, according to the company.
ESR shares closed up 26% at HK$12.6 on May 14 and have since
declined to HK$11.7.
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Graphics: ESR trades at low valuations https://reut.rs/3VcykLh
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(Editing by Robyn Mak and Katrina Hamlin)
((For previous columns by the author, Reuters customers can
click on DAGA/
anshuman.daga@thomsonreuters.com; Reuters Messaging:
anshuman.daga.thomsonreuters.com@reuters.net))