Two Hong Kong tycoons asset were up for sales in the past few days to reduce debt which comes to about $8.4 Billion. Swire Pacific, owed by one of Hong Kong’s tycoon is selling his assets, the profits had already taken a hit after strict pandemic measures effectively shutting down travel and tourism in the financial hub.
The Hong Kong billionaire who also owns Cathay Pacific Airways, has become the second notable Hong Kong tycoon to announce plans to selling assets in efforts to reduce debt in the face of rising borrowing costs.
Asset selling deal
The Hong Kong tycoon announced late Wednesday it will sell its US beverages business to its controlling shareholder for $3.9 billion. The sale would lower one measure of the company’s indebtedness by more than one-third.
The asset selling deal came a day after the billionaire Cheng family announced a similarly structured $4.5 billion deal to buy a unit owned by builder New World Development Co. These asset sales of Hong Kong tycoons will reduce around $8.4 billion debt in Hong Kong.
In Hong Kong, which imports its monetary policy from the US due to a currency peg with the greenback, the one-month cost of interbank borrowing has jumped to about 5% from less than 1% a year ago.
“Both deals make a lot of sense,” said Willer Chen, senior analyst at Forsyth Barr Asia Ltd. The asset sales will generate capital to strengthen the companies’ balance sheets while sharpening their strategic focus, he said.
Investor reaction to the Hong Kong tycoons’ asset sales news was positive. The company’s stock price jumped as much as 8.2% Thursday in Hong Kong, the most since August, before paring gains to 5.2%. New World shares are trading below the level before the deal was announced Tuesday.
Context of assets selling
Under the agreement, Swire Coca Cola, USA will be sold to a wholly-owned subsidiary of John Swire & Sons. The US unit produces, sells and distributes Coca Cola and other beverages in 13 states across western US, will continue to do so. The conglomerate will still charge an annual management service fee from the US business. The sale is consistent with Swire Pacific’s focus on Greater China and Southeast Asia, the company said.
Hong Kong’s residential market is showing fresh signs of weakness.
Tourism, a big driver of retail sales remains lackluster. Visitor numbers from mainland China were just 54% of 2019 levels in April, according to the Hong Kong Tourism Board.
At the same time, higher borrowing costs are making it more expensive for companies to service their debts. New World, founded by the late billionaire Cheng Yu-Tung, is one of the most indebted Hong Kong developers among its larger peers, with a net debt-to-shareholder-equity ratio of about 47%. The company’s net gearing would decrease to around 42% after the deal.
Other Asian could follow
Other conglomerates may follow the moves by New World and Swire, Chen said, adding that smaller property developers with low valuations may also consider privatization amid weak market sentiment.
Swire Pacific’s planned sale also reflects the company’s priority on building up its Asian business. Last year, the company agreed to buy Coca Cola Co.’s bottling operations in Vietnam and Cambodia for about HK$1 billion, marking its first foray into the Southeast Asian beverages market.
The group’s management will retain its Coca Cola franchises in China, which contributes about half of its revenue from the beverages business, Hong Kong, Taiwan, Cambodia and Vietnam, as per analysts.
Net proceeds from the asset sale will mostly be used to expand the conglomerate’s core property and beverages businesses, as well as investing in health care in China and Southeast Asia, said Citigroup Inc. analysts including George Choi.
Swire Pacific, one of the last remaining British trading houses in Hong Kong, has been increasingly looking at China for growth. Last year, it committed $15 billion over the following decade to develop its property and health-care businesses in the country.
