(Reuters) -New World Development (NWD) is set to bag as much as HK$21.78 billion ($2.78 billion) from the sale of a construction subsidiary to its major shareholder, in a buyout deal that would help it cut debt and pay a special dividend.
Chow Tai Fook Enterprises (CTFE), which holds about 45.2% of NWD shares, has offered to buy roughly 97% of NWS Holdings stock for up to HK$35.47 billion ($4.53 billion), the parties said in a joint statement.
Hong Kong developers enjoyed decades of lucrative returns in one of the world's most expensive property markets, but have had to contend with falling sales and rent in recent years both at home and in mainland China as well as rising interest rates.
To improve portfolios, both New World Development and NWS Holdings have been disposing billions of dollars non-core assets. The pair said the latest deal will sharpen NWD's focus on property development and investment, while NWS will enjoy greater financial flexibility.
"This is a deal that makes all parties happy," Raymond Cheng, head of Hong Kong research at CGS-CIMB Securities, told Reuters, saying the offer's 10% discount to the target's price-to-book value is reasonable for both buyer and seller.
CTFE unit Century Acquisition has offered to buy all NWS Holding shares not owned by CTFE's ultimate parent Chow Tai Fook Holding (CTFH) or other group subsidiaries for HK$9.15 each - a 14.5% premium to NWS shares' last price of HK$7.99 prior to its share trade halt on Friday pending the announcement.
That would make the deal Hong Kong's largest since private equity firm EQT paid $7.4 billion for local peer BPEA in March last year, Dealogic data showed.
NWS Holdings stock price jumped 11.4% to close at HK$8.9 on Tuesday, its highest since May 2021. NWD shares closed up 0.8%, having surged as much as 10% during the trading session.
NWS' core business includes construction, toll roads and insurance with operations predominantly in Hong Kong and mainland China. It is currently 60.9% owned by New World Development.
On completion of deal, New World Development intends to a declare special dividend of HK$4 billion, or HK$1.59 per share. It will use rest of the proceeds to repay debt.
The deal will also lower New World Development's net gearing ratio - measured by consolidated net debt to total equity - to around 42% from 47% based on 2022 earnings, the companies said.
"It's not a one-way deal; it's about how to crystalise value for NWD and CTFH," Cheng said, adding New World Development would become a pure real estate firm with asset exposure to the Greater Bay Area.
Century will look to "proactively optimise the NWS Group's business and asset portfolio" and expects NWS to continue disposing non-core assets, the statement showed.
($1 = 7.8305 Hong Kong dollars)
(Reporting by Harish Sridharan in Bengaluru, Roxanne Liu in Beijing and Clare Jim in Hong Kong; Additional reporting by Scott Murdoch in Sydney; Editing by Jamie Freed and Christopher Cushing)