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Blackstone’s acquisition of SOHO China: Pan Shiyi cashed in nearly 20 billion, the stock price soared 25% at the opening
Source; Time Finance
Original Chen Shiai
On June 16, SOHO China announced that Blackstone (NYSE: BX) issued a comprehensive takeover offer to invest in SOHO China in order to obtain a controlling stake in SOHO China. The offer price is HK$5 per share and the highest cash consideration for the offer is approximately 23.658 billion. Hong Kong dollar (approximately RMB 19.5 billion). After the transaction is completed, SOHO China’s existing controlling shareholder will retain a 9% stake, and SOHO China will continue to be listed on the Hong Kong Stock Exchange.
SOHO China had previously issued a suspension announcement on June 15. Before the suspension, SOHO China’s stock price rose for 9 consecutive trading days, an increase of 58.33%, and the stock price hit a new high this year. On June 17, after the stock resumed trading, the opening rose by 25.26%. As of the close, it rose 21.05% to close at 4.6 Hong Kong dollars per share, with a total market value of 23.918 billion Hong Kong dollars.
IPG China Chief Economist Bai Wenxi told Time Finance that the acquisition of SOHO China by Blackstone is a win-win situation, and it is a good thing for Pan Shiyi, SOHO China, Blackstone and China’s commercial real estate. Haitong International Research Report also believes that SOHO China’s offer price of HK$5 per share will provide investors with a good opportunity to leave the market, as the price is higher than SOHO China’s asset valuation (32% higher than the previous closing price of HK$3.8) The premium is also a 37% discount to SOHO China’s net asset value per share of HK$7.96, indicating that the plan may provide a “win-win” situation.
Regarding the continued listing of SOHO China on the Hong Kong Stock Exchange, which is concerned by the market, Bai Wenxi said that Pan Shiyi is mainly cashing out and privatization is just to reduce the cost of holding. If he can cash out without privatization, whether he is privatized or not is not his concern.
SOHO China responded to Time Finance and said that everything is subject to the announcement.
The acquisition has long been rumored
This is not the first time Blackstone has expressed its intention to acquire.
As early as March 2020, there was news that Blackstone was negotiating with SOHO China on privatization-related matters. The purchase price was HK$6 per share, and the overall value of the transaction was approximately US$4 billion.
However, in August 2020, SOHO China stated that it had terminated the earlier privatization offer because it did not reach a consensus. Compared with the $4 billion transaction consideration that Blackstone first offered a year ago, the purchase price is 24% cheaper.
Regarding the failure of the previous tender offer, Zhang Dawei, the chief analyst of Centaline Property, told Time Finance that Blackstone had previously chosen to acquire SOHO China because the core of the domestic office building valuation was severely undervalued. After the epidemic, office rents were lowered and the previous valuation depressions were gone.
According to data provided by Colliers International, the vacancy rate of Beijing’s office buildings in 2020 is as high as 19.4%, a record high in the past ten years. He said, “Based on the performance of net absorption in the fourth quarter, overall market demand is rebounding strongly and has basically returned to the level before the epidemic. We expect this level of demand to continue in 2021, but due to the pressure of high supply in the overall market , The market vacancy rate will continue to rise. If the demand release falls short of expectations, the market vacancy rate may further exceed 25%.”
Not only is office vacancy rate rising, office rents are also falling. According to a report released by Jones Lang LaSalle, as of the end of 2020, Beijing’s Grade A office rents fell for the eighth consecutive quarter, down 2.6% from the previous quarter and 7.9% year-on-year.
The situation in Shanghai is not optimistic. In 2020, the total supply of Shanghai’s office market will be 1.185 million square meters, and the vacancy rate will be 22.7%, setting a new 10-year high. The average rent was RMB 7.64 per square meter per day, and the rent decreased by 10.7% year-on-year.
With the success of this acquisition, Zhang Dawei said that the market for office buildings has not changed. For Pan Shiyi’s retention of 9% of SOHO China’s equity, Zhang Dawei believes that it may be a request for cooperation. There are also views that the retention of part of the equity may be due to non-commercial factors.
Last year’s net profit plummeted by nearly 60%
In fact, since 2014, SOHO China has opened an asset selling model.
According to the annual report, SOHO China has only 9 office buildings in hand, all in Beijing and Shanghai, namely Wangjing SOHO, Guanghua Road SOHO Phase 2, Chaoyangmen SOHO, Qianmen Street, Lize SOHO, and the Bund SOHO and SOHO in Shanghai. Fuxing Square, Gubei SOHO and SOHO Tianshan Square.
SOHO China’s operating performance is also declining year by year. Pan Shiyi, as one of the real estate leaders who participated in the Chinese real estate market earlier, SOHO China listed on the Hong Kong Stock Exchange in 2007 and raised US$1.9 billion, creating Asia’s largest commercial real estate company IPO. In 2010, SOHO China’s sales of a Galaxy SOHO reached RMB 14.423 billion, and revenue reached RMB 18.423 billion that year, surpassing residential developers such as Longfor Group and Sunac China. At the same time, its ROE is higher than that of Vanke.
By 2020, SOHO China will achieve revenue of 2.192 billion yuan, a year-on-year increase of 19%. Among them, rental income is 1.537 billion yuan, down 16% year-on-year, and property sales income is 654 million yuan. While revenue increased, SOHO China’s operating costs also increased from approximately 337 million yuan in 2019 to 801 million yuan in 2020, an increase of 137.7%. In addition, the net profit of SOHO China’s return to parent company fell precipitously in 2020, a year-on-year decrease of 59.77% to 535 million yuan, reaching the lowest level since 2008.
It is worth noting that, according to Pan Shiyi’s previous disclosure, even in Beijing, the rate of return on self-owned properties worth about 7.8 billion yuan is only 3%. According to data from SOHO China’s annual report, the average borrowing cost of SOHO China is about 4.7%. This means that the rental return on some of the company’s self-owned properties can’t keep up with bank loan interest.
The main change is that in 2012, SOHO China, which originally focused on “bulk sales”, announced the transition from “bulk sales” to “self-holding”, and its main source of income has also changed from selling properties to rent collection.
Bai Wenxi said that the core problem of SOHO China is that cash flow cannot cover operating costs and capital costs, which leads to the inability to establish and continue the domestic business model of purely commercial real estate self-holding and operating businesses. So since 2014, SOHO China has sold properties many times to balance cash flow.
4 trillion international giants take over
Blackstone is one of the most important alternative investment institutions in the world, with strong competitive advantages in mergers and acquisitions, real estate investment, and corporate operations. As of the first quarter of 2021, Blackstone’s assets under management reached US$648.8 billion (approximately RMB 4,214.2 billion).
Blackstone has been actively investing in Chinese real estate. According to incomplete statistics, since 2008, Blackstone has invested close to 30 billion yuan in the Chinese real estate market, covering office buildings, shopping malls and complexes.
Half a month ago (June 3), Blackstone just announced a $3 billion acquisitionOceanwide HoldingsSubsidiary of the United States International Data Group (IDG). At the end of 2020, Blackstone announced that its Blackstone Real Estate Opportunity Fund will acquire the largest urban logistics park in the Guangdong-Hong Kong-Macao Greater Bay Area from R&F Properties for US$1.1 billion (approximately RMB 7.1 billion).
SOHO China stated in the announcement that Blackstone plans to maintain SOHO China’s existing main business and management, and plans to use the company’s resources to expand in China where appropriate.
After the offer is completed, Blackstone plans to conduct a detailed strategic review of the company to formulate business plans and strategies for the company’s future business development, and determine appropriate or desirable measures to optimize and rationalize the company’s business activities and asset portfolio.
If the acquisition of SOHO China is finally successfully completed, this will be the largest real estate investment in the Chinese market by Blackstone in history.
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