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How to Stand Up to a Hong Kong Billionaire
Power Assets minority investors are in a formidable position to get tycoon Li Ka-shing to up his offer
By ABHEEK BHATTACHARYA

Nov. 10, 2015 11:08 p.m. ET


Hong Kong tycoon Li Ka-shing should be crying at his latest merger party.

Proxy advisers Institutional Shareholder Services and Glass Lewis have recommended in recent days that minority shareholders in Mr. Li’s Power Assets vote down a merger with controlling shareholder Cheung Kong Infrastructure , or CKI. These advisers’ sway should force Mr. Li to change course and augment his offer for the second time. And if he decides instead to pull the deal, Power shareholders may still benefit.

Both proxy advisers complain that Mr. Li is being stingy. Even after he sweetened the original offer last month, CKI’s plan to exchange 1.066 of its shares for each of Power’s remains one of the lowest share-swap ratios in the companies’ public history. ISS reckons a “fair exchange ratio” is roughly between 1.1 and 1.2 times.

Mutual funds listen to ISS. Earlier this year, its disapproval helped sink CKI’s attempt to get Power to buy its debt. ISS also helped persuade a significant number of minority shareholders to vote against the re-election of a director this year at Mr. Li’s holding company, says research firm Churchill Capital, though that rebellion failed. To vote down the current deal requires just 10% of minority shareholders.

Mr. Li has good reason to want this deal done. CKI needs Power’s $7.5 billion in net cash to fund acquisition strategy. CKI’s net debt, at 7.25 times earnings before interest, tax, depreciation and amortization, is stretching its balance sheet. Plus, Mr. Li may want to funnel Power’s cash to CK Hutchison, his holding company that takes the lead on European acquisitions.


Chances are Mr. Li will accede to demands. Power shares trade at 1.076 times CKI’s, implying investors expect some bump. Increasing the ratio to 1.15—the midpoint of ISS’ range—would send Power’s stock up nearly 7%, assuming CKI shares are steady.



If Mr. Li does nothing and effectively kills the deal, Power shares will fall, but not necessarily to the pre-deal price, which would be a 10% drop. Nine of Power’s Australian, British and Hong Kong utility peers rallied an average 5.7% in this period, so investors shouldn’t think the merger announcement single-handedly drove up Power shares.

In this scenario, CKI will still covet Power’s cash. One way to get it out would be to have Power pay a large dividend, which would push Power shares back up. Either way, Power shareholders have a chance to show the Hong Kong tycoon that he can’t always get the best bargain.

Write to Abheek Bhattacharya at abheek.bhattacharya@wsj.com