By P.R. Venkat and Prudence Ho
Singapore's Temasek Holdings Pte. Ltd. is making one of its
biggest-ever overseas bets, by buying a multibillion-dollar
strategic stake in Hong Kong tycoon Li Ka-shing's retail
flagship.
The Singapore state investment company is planning to spend $44
billion Hong Kong dollars ($5.7 billion) for a quarter of
billionaire Li's A.S. Watson Co, which owns Superdrug in the U.K.
and the ParknShop supermarket chain, pushing back plans for a $6
billion Hong Kong and London IPO of the drugstore-to-supermarket
chain.
Temasek's 24.95% acquisition of a stake in Watson values Mr.
Li's retail business at HK$177 billion ($22.8 billion).
Hutchison Whampoa Ltd., Watson's Hong Kong-listed parent, said
in a filing selling the stake to Temasek "will allow the group to
partially unlock the value of its A.S. Watson group of businesses
and set an important valuation benchmark for the group's remaining
interests."
Hutchison, through which Mr. Li also owns ports and energy
assets globally, said the Singapore state firm and the Hong Kong
firm will "work together towards listing (Watson) at a suitable
time."
But, in a news conference after announcing the acquisition by
Temasek of the Watson's stake, the 85-year-old Mr. Li said he hopes
to list the retail firm in Hong Kong and Singapore in two to three
years. An IPO this year is "unlikely," he said.
"One investor is better than an IPO," Hutchison Managing
Director Canning Fok told the media briefing of the stake purchase
by Temasek, which The Wall Street Journal reported earlier.
The acquisition by Temasek values Watson at 23.7 times forecast
earnings, according to people familiar with the situation, slightly
less to its only listed regional peer, Dairy Farm International
Holdings Ltd., the Singapore-listed retail unit of Asian
conglomerate Jardine Matheson Holdings Ltd. On average, analysts
have valued Watson at HK$208 billion, meaning the Singapore state
firm paid a 10% discount for the stake in Watson. "The HK$177
billion valuation of A.S. Watson is lower than the street estimate
as well," Credit Suisse analysts said in a note after the sale to
Temasek was announced.
Hutchison announced it was embarking on a strategic review of
Watson in October last year, after bids for Watson's supermarket
chain, ParknShop, failed to receive the $3 billion to $4 billion
price tag it sought. Last month, Mr. Li, who is Asia's richest man,
said a listing of Watson in Hong Kong and a second venue was in the
works. Bankers have been preparing Watson until even Thursday for
Hong Kong-London IPO, with a secondary Singapore listing slated for
further down the line. "We concluded this deal very quickly," Mr.
Li said at the briefing announcing the Temasek acquisition.
Buying such a strategic stake in Watson would fit into Temasek's
strategy of raising its exposure to companies benefiting from the
consumer boom in emerging as well as developed markets. Temasek
owns almost a fifth of London-based emerging-markets bank Standard
Chartered PLC as well as stakes in Spanish oil-and-gas company
Repsol SA, has a stake in Indonesian hypermarket operator PT
Matahari Putra Prima, and is in the process of buying out Singapore
cocoa-to-soybean trader Olam International.
"The consumer retail sector is a good proxy to growing middle
income populations and transforming economies. This is very much
part of our investment themes as we shape Temasek's portfolio for
the long term," Temasek's head of investment group, Chia Song Hwee,
said in a statement.
Mr. Li, meanwhile, gets a strategic shareholder in Temasek that
doesn't tend to get involved in daily operations and could be a
source of long-term capital. Nicknamed "Superman" in his Hong Kong
hometown for his investing acumen, Mr. Li has more commonly gone
the IPO route when selling down investments in Asia, apart from the
aborted ParknShop sale. In January he raised $3.11 billion through
an IPO of his Hong Kong electricity assets. In 2011, in a Singapore
listing of his port assets he raised $5.5 billion.
On the acquisition front, Mr. Li has been more focused on
Europe. He has bought a U.K. electricity distribution network, a
Dutch waste management firm, and telecom assets in Austria in
recent years.
Established in 1974, Temasek manages a portfolio of $170 billion
and owns controlling stakes in some of Singapore's biggest
corporations, including Singapore Airlines Ltd. and Singapore
Telecommunications Ltd., Southeast Asia's largest telecom company.
It also has significant holdings in banks, including 18% of
Standard Chartered and 29% of Singapore's DBS Group Holdings Ltd.
Some of the biggest investments the company made were during the
financial crisis of 2008 during which it invested billions of
dollars to buy help out Western banks such as Barclays PLC and
Merrill Lynch Co., now Bank of America Merrill Lynch. Temasek
divested those stakes in 2009.
Watson plans to open more than 1,200 new stores globally this
year. Hutchison said that once the deal is completed, the proceeds
would be used to pay a special dividend of HK$7 a share to its
shareholders, with the rest for its general working capital needs.
As of the end of last year, Watson had around 10,500 stores in 25
markets across Europe, Greater China and Southeast Asia. Last year,
Watson reported an 11% increase in earnings before interest
expenses and other finance costs, tax, depreciation and
amortization. The total rose to HK14.2 billion ($1.8 billion),
driven by new store openings.
Write to P.R. Venkat at venkat.pr@wsj.com and Prudence Ho at
prudence.ho@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires